Management of Multinational Corporations Mamun

Management of Multinational CorporationLecture- 1

Market: Market consists of buyer, seller & products. It is a medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange.

Market Share: Market share is the ratio of firm’s sale to industry sales. Market share is calculated by taking the company's sales over the period and dividing it by the total sales of the industry over the same period.

Industry: An industry is a group of manufacturers or businesses that produce a particular kind of goods or services. Industry consists of those who sales similar kind of products.

Firm: Firm is one unit of the industry. Firm is a business organization, such as a corporation, (limited liability) company or partnership. Firms are typically associated with business organizations that practice law, but the term can be used for a wide variety or business operation units. It has the ownership and controlling entity of the production process. Multinational is a firm.

Factory: A building or group of buildings where goods are manufactured or assembled chiefly by machine.

Corporation: Corporation is a large company or group of companies authorized to act as a single entity and recognized as such in law. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.

Company: A voluntary association formed and organized to carry on a business. Types of companies include sole proprietorship, partnership, limited liability, corporation, and public limited company.

Trade: (the action of buying and selling goods and services) Trade is a basic economic concept that involves multiple parties participating in the voluntary negotiation and then the exchange of one's goods and services for desired goods and services that someone else possesses. Trade is the act or process of buying, selling, or exchanging commodities, at either wholesale or retail, within a country or between countries: domestic trade; foreign trade.

Commerce: (the activity of buying and selling, especially on a large scale) Commerce is an interchange of goods or commodities, especially on a large scale between different countries (foreign commerce) or between different parts of the same country (domestic commerce) trade; business. Social relations, especially the exchange of views, attitudes, etc.

Business: (commercial activity) Business is an organization or economic system where goods and services are exchanged for one another or for money.

Economics: Economics is a social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. It is the branch of knowledge concerned with the production, consumption, and transfer of wealth.

Close Substitute: Substitute goods are two goods that could be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise. Therefore, substitutes have a

positive cross elasticity of demand. If two goods are close substitutes, there will be a high cross elasticity of demand. Example, if price of Sainsburys flour increases 10%, demand for Hovis flour may increase 20%. Therefore, the cross elasticity of demand is +2.0

Cross Elasticity of Demand: Cross Elasticity of Demand An economic concept that measures the responsiveness in the quantity demand of one good when a change in price takes place in another good.

Globalization: The broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations.

International Trade: The exchange of goods or services along international borders. This type of trade allows for a greater competition and more competitive pricing in the market.

International Business: All commercial transactions—including sales, investments, and transportation—that take place between two or more countries

Export-Import: Merchandise exports & imports- Merchandise exports are tangible products or goods sent out of a country. Merchandise imports are goods brought into a country. They are sometimes called visible exports & imports. They are usually a country’s common international economic transaction. The term export & import frequently apply to merchandise, not to a service.

Service exports & imports- The company or individual receiving payment is making a service export. The company or individual paying is making a service import. It generates non product international earnings. Services are recently been the fastest growth sector for international trade.

Portfolio Investment: Foreign portfolio investment (FPI) does not provide the investor with direct ownership of financial assets, and thus no direct management of a company. This type of investment is relatively liquid, depending on the volatility of the market invested in.

Foreign Direct Investment (FDI): Foreign Direct Investment (or FDI) is an investment made by a company or entity based in one country, into a company or entity based in another country. FDI provide the investor with direct ownership of financial assets and control.

Shares: A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common shares and preferred shares.

Securities: A security is a financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value. The company or entity that issues the security is known as the issuer.

Stocks: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the

common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.

Profit: A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business. Calculated as:

Dividend: A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.

Retained Earnings: Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet. The formula calculates retained earnings by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders: Retained Earnings (RE) = Beginning RE + Net Income - Dividends

Licensing: This term refers to a written agreement entered into by the contractual owner of a property or activity giving permission to another to use that property or engage in an activity in relation to that property. The property involved in a licensing agreement can be real, personal or intellectual. Almost always, there will be some consideration exchanged between the licensor and the licensee.

Franchising: A franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business's (the franchiser) proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the business's name. In exchange for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing fees.

Management Contract: Agreement between investors or owners of a project, and a management company hired for coordinating and overseeing a contract. It spells out the conditions and duration of the agreement, and the method of computing management fees.

Turnkey Operations: A deal where a company takes all responsibility for constructing, fitting and staffing a building (such as a school, hospital or factory) so that it is completely ready for the purchaser to take over.

Countertrade: International trade in which goods are exchanged for other goods, rather than for hard currency. Countertrade can be classified into three broad categories - barter, counterpurchase and offset.

Multinational Enterprises (MNEs): Multinational enterprises take a global approach to markets and production or have operations in more than one country. Value added activities, cross-border transactions are involved in multinational enterprises. Sometimes they are referred to as:

Multinational Corporations (MNCs) Multinational Companies (MNCs)

Transnational Companies (TNCs)

Multinational Organizations: Multinational organizations are profit based & non-profit based. Non-profit based multinational organizations are called N.G.O.s.

Multinational Corporations: A multinational corporation (MNC) or multinational enterprise is an organization that owns or controls production of goods or services in one or more countries other than their home country. It can also be referred as an international corporation, a "transnational corporation", or a stateless corporation. Multinational corporations are

1. International Company2. Multi-domestic Company/Corporations3. Global Corporation (Standardized Product)4. Transnational Corporations5. World Company (World companies don’t believe in host believe in home & host countries, ex-

Nestle)

International Orientation of Multinational Corporations:1. Ethnocentric: International Company2. Polycentric: Multi-domestic Company/Corporations3. Geocentric: Global Corporation

Transnational Corporations: Transnational corporations combines both polycentric & geocentric orientations. Transnational corporations (TNCs) are incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates. A transnational, or multinational, corporation has its headquarters in one country and operates wholly or partially owned subsidiaries in one or more other countries.

Lecture- 2

Stages of Internationalization:

Ten (10) Incoterms:1. EXW (Ex-Works)2. FOB (Free on Board)3. FCA (Free Carrier)4. FAS (Free Alongside Ship)5. CFR (Cost and Freight)6. CPT (Carriage Paid To)7. CIP (Carriage and Insurance Paid To)8. DAT (Delivery at Terminal)9. DAP (Delivery at Place)10. DDP (Delivery Duty Paid)

Measurement of the degree of foreign involvement

Q) According to World Investment Report (WIR) 1997 by United Nations (UN)Year MNCs No. of SubsidiariesWIR 1997 45,500 2.77 lakhWIR 2009 85,000 8 lakh

Why this high growth of MNCs? Justify your answer.

Answer: The high growth of MNCs occurs because of globalization. Factors in increased globalization are:

1. Increase in and expansion of technology2. Liberalization of cross-border trade and resource movements3. Development of services that support international business4. Growing consumer pressures5. Increased global competition

(i) Purely Domestic Company (PDC)

(ii) PDC doing indirect/direct export, franchising/licensing

(iii) International Company

(iv) Multinationa/Global

(v) Transnational Corporations

6. Changing political situations7. Expanded cross-national cooperation

Reasons that firms engage in International Business are1. Expanding Sales2. Acquiring Resources3. To diversify or Minimizing Risks

Trans-nationalization Index:The Transnationality Index (TNI) is a means of ranking multinational corporations that is employed by economists and politicians. It is calculated as the arithmetic mean of the following three ratios (where "foreign" means outside of the corporation's home country)

Foreign Assets/Total Assets (the ratio of foreign assets to total assets) Foreign Sales/Total Sales (the ratio of foreign sales to total sales) Foreign Employment/Total Employment (the ratio of foreign employment to total employment)

The Transnationality Index was developed by the United Nations Conference on Trade and Development. Multinational corporations are also ranked by the amount of foreign assets that they own. However, the TNI ranking can differ markedly from this.*Case Study 1: The Rise and Fall of British Sports carQ.1) Give another title of the case.Answer: The Cost of Complacency

Q.2) What lessons can a manager learn from this case?Answer: 1. Managers should not be complacent. They should not refuse to acknowledge that they may face potential competitive threats. 2. They need to invest in technology to maintain efficient production method. 3. In spite of heavy demand they need to improve the quality and reliability of their products. 4. When changes are necessary they should tend to approach it superficially. 5. In case of monopoly market they must try to find their weaknesses. 6. Quick try to develop new products may cause poorly designed and under engineered product with numerous flaws and weaknesses when hitting the market. 7. To keep focus on their market and in tune with their customers.

Q.3) If you were a British executive today, would you consider re-entering the sports car market? Why or why not?Answer: No. I wouldn’t consider re-entering the sports car market.

*Term paper & Presentation Topic- Continental Profile of MNCs

1. Number, size and industry wise distribution of companies within a contract2. A brief profile of socio-economic, demographic, and cultural profile of a continent3. Major features of American, Europeans, Japanese, NIC companies, MNCs, and companies from developing countries.

Common to each group: List country wise names of 10 companies under the continent you have chosen. Market groups and business opportunities within a continent. Continent and country wise list of companies operations in Bangladesh.

Lecture 3

(* Hong kong- Belgium- Luxembourg- Trinidad and Tobago are the most transnationalized countries)

Environment of MNCs

Economic Factor+ Cultural Factor + Social Factor + Technological Factor + Demographic Factor= Total Environment

Risks faced by MNCs:

Internal (Company) Domestic (Country)

Foreign Global

Internationa Business/MNCs

Political Risks of Global Business

Issues of sovereignty, different political philosophers, and nationalism are manifest in a host of governmental actions that enhance the risks of global business. Risks can range from confiscation, the harshest, to many lesser but still significant government rules and regulations such as exchange controls, import restrictions, and price controls that directly affect the performance of business activities. Although not always officially blessed initially, social or political activist groups can provoke governments into action that proves harmful to a business. Of all the political risks, the most costly are those actions that result in a transfer of equity from the company to the government, with or without adequate compensation.

The most political risk is confiscation, that is, the seizing of a company’s assets without payment. The two most notable recent confiscations of U.S. property occurred when Fidel Castro became the leader in Cuba and later when the Shah of Iran was over thrown the Helms-Barton Act is part of a continuing embargo against Cuba as retaliation for the confiscation of U.S. asset in Cuba. The United States also has imposed an embargo against trade with Iran.

Less drastic but still severe, is expropriation, which requires some reimbursement for the government-seized investment. A third type of risk is domestication, which occurs when host countries take steps to transfer foreign investments to national control and ownership through a series of government decrees. Governments seek to domesticate foreign-held assets by mandating

A transfer of ownership in part or totally to nationals The promotion of a large number of nationals to higher levels of management Greater decision-making powers resting with nationals A greater number of component products locally produced Specific export regulations designed to dictate participation in world markets

A combination of all of these mandates are issued over a period of time, and eventually control is shifted to nationals. The ultimate goal of domestication is to force foreign investors to share more of the ownership and management with nationals than was the case before domestication.

A change in government attitudes, policies, economic plans or philosophy concerning the role of foreign investment in national economic and social goals is behind the decision to confiscate, expropriate, or domesticate existing foreign assets. Risks of confiscation and expropriation have lessened over the last decade because experience has shown that few of desired benefits materialize after government takeover. Rather than a quick answer to economic development, expropriation and nationalization have often led to nationalized business that were inefficient, technologically weak, and noncompetitive in world markets. Today, countries that are concerned that foreign investments may not be in harmony with social and economic goals often require prospective investors to agree to share ownership, use local content, enter the labor and management agreements, and share participation in export sales as a conclusion of entry.

Economic Risks

Even though political risks, international companies are still confronted with a variety of economic risks that often occur with little warning. To conserve scarce foreign exchange, to raise revenue, or to retaliate against unfair trade practices, are the real or imagined reasons for economical restraints.

Exchange Controls Local Content Laws Import Restrictions Tax Controls Price Controls Labor Problems

Violence. Although not usually government initiated, violence is another related risk for multinational companies to consider in assessing the political vulnerability of their activities.

Cyber Terrorism. New on the horizon is cyber terrorism. Although it is infancy, the internet is the medium of terrorist attack by foreign and domestic antagonists wishing to inflict damage to a company with little chance of being caught.

Process of Minimizing the Risks:

Good Corporate Citizenship. A company is advised to remember the followings:

It is a guest in the country and should act accordingly The profits of the enterprise are not solely the company’s, the local national employees and the

economy of the country should also benefit It should train its executives and their families to act appropriately in the foreign environment The company should try to contribute to the country’s economy and culture with worthwhile

public projects Although English is an accepted language overseas, a fluency in the local language goes far in

making sales and cementing good public relations

In addition to corporate activities focused on the social and economic goals of the host country and good corporate citizenship. MNCs can use other strategies to minimize political vulnerability and risks.

Joint Ventures. Typically less susceptible to political harassment, joint ventures can be with locals and other third-country multinational companies in both cases, a company’s financial exposure is limited. A joint venture with locals helps minimize anti MNC feelings, and a venture with another MNC adds the additional bargaining power of a third country.

Expanding the Investment Base. Including several investors and banks in financing an investment in the host country is another strategy. Thus the company has the advantage of engaging the power of the banks whenever any kind of government takeover or harassment is threatened.

Marketing and Distribution. Controlling distribution in market outside the country can be used effectively if an investment should be expropriated the expropriating country would lose access to world markets. This has proved especially for MNCs in the extractive industries.

Licensing. A strategy that some firms find eliminates almost all risks is to license technology for a fee. Licensing can be effective in situations where the technology is unique and the risk is high.

Planned Domestication. It can be effective in forecasting or minimizing the effect of a total takeover. Where an investment is being domesticated by the host country, the most effective long range solution is planned phasing out, that is, planned domestication.

Assessment of Risks:

MNCs asses risk reactively rather than investing in predictions. Moreover, risk can be analyzed either subjectively or objectively. Rummel and Heenan (1978) describe techniques such as

Grand Tour: Grand tour usually involve dispatching a company delegations to inspect the local surroundings and meet with local officials. However, the delegates receives only selective information and miss the whole picture.

Old Hands: The old hand method involves the judgments of “experts”-educators, diplomats, and other business persons- and relies on external sources of information.

Delphie Technique: Delphie Technique, using internal and external sources (or a combination of both), identify selective elements of the political environment and judge their importance. This approach requires accuracy and comprehensiveness, well-reasoned and timely opinions, and sound judgment.

Quantifiable Method: Quantifiable methods predict trends, describe relationship, identify indicators, develop typologies, and analyze events.

Rummel and Heenan suggests a combined approach and emphasize the importance of intuition and sensitivity. They propose four criteria for analyzing risk:

Domestic Instability (amount of turmoil, rebellion) Foreign Climate (measured by events such as diplomatic expulsion) Political Climate (reflected in swings from left-wing to right-wing regimes) Economic Climate (the degree of government intervention, GNP, inflation, and external debt

levels)

Kobrin (1981) proposes a typology of assessment techniques based on structure (explicitness or implicitness of model) and systemization (formalization of methodology). Subjective (implicit) models of political risk are unstructured, whereas objective (explicit) models are considered structured. Systemization can mean anything from general impressions to sophisticated complete analysis; an unstructured, systemized approach would be based on intuition and implicit assumptions regarding an event’s impact on operations or managerial contingencies.

An example of a systemized, unstructured approach is BERI (Business Environmental Risk Index), a computer program combining a highly general scan of information, and Economic, Social, and Political Analysis (ESP), used in Latin America, as developed by the chemical industry. In both the methodologies are formalized but the models are implicit, that is, not conceptually derived in terms of the predicted impact of events.

Example of systemized structured approaches are the World Political Risk Forecast, a systemized structured approach based on a deductive model. Another method, ASPRO/SPAIR (developed by shell oil) uses an inductive model in which experts estimate the values of variable factors affecting the business climate. This method, however, is particularly costly and time consuming.

BERI is useful for general preliminary scan (to assess macro risk) whereas ASPRO/SPAIR should be used for micro risk assessment (i.e. industry specific)

Lecture 4

Organizational Structures of Multinationals:

Organizational Structure- Organization is defined by the formal structure, co-ordination and control systems, and the organization culture. It is the formal arrangement of roles, responsibilities and relationships within an organization. It is a powerful tool to implement strategy.

Vertical Differentiation (Centralization and Decentralization): The issue of determining where in the hierarchy, the authority to make decisions stand. In short we can say vertical differentiation is location of decision making. Centralization is the degree to which high level managers, usually above the country level, make strategic decisions and pass them over to lower levels for implementation. Decisions made at foreign subsidiary level are considered decentralized, and those made at HQ are considered to be centralized.

Horizontal Differentiation (Subunits): Horizontal differentiation is the way a company designs its formal structure to perform some specific functions like to specify the set of organizational tasks, divide these tasks into jobs, departments, subsidiaries, and divisions to get the work done.

Types of Organizational Structures:

Organizationsal Architecture

Organizational Structure

Horizaontal Differetiation

Vertical Differentiation

Co-ordination Mechanism

People

Process

Control & Incentives

Organizational Culture

Functional Structure- In this structure specialized jobs are grouped according to traditional business functions. The global functional design calls for a firm to create departments or divisions that have worldwide responsibility for the common organizational functions—finance, operations, marketing, R&D, and human resources management.

Functional Structure

Aera (Geographic)

Division Structure

Product Divison Structure

Customer Divison Structure

Matrix Division Structure Hybrid Product

Area (Geographic) Division Structure- The global area design organizes the firm’s activities around specific areas or regions of the world. These are used when foreign operations are large and not dominated by a single country or region.

Advantages- Useful when managers can gain economics of scale on a regional rather than on global basis.Disadvantages- Firm may sacrifice cost efficiencies

• Diffusion of technology is slowed• Design unsuitable for rapid technological change• Duplication of resources• Coordination across areas is expensive

Product Division Structure- The global product design assigns worldwide responsibility for specific products or product groups to separate operating divisions within a firm.

Related Products Unrelated ProductsM- Form H- Form

Multidivisional Holding

Fig: Samsung’s Global Product Design

Customer Division Structure- The global customer design is used when a firm serves different customers or customer groups, each with specific needs calling for special expertise or attention.

Matrix Division Structure- A global matrix design, the most complex of designs, is the result of superimposing one form of organization design on top of an existing, different form.

Hybrid Design Structure- Most firms create a hybrid design, rather than pure design, that best suits their purposes, given the firms’ size, strategy, technology, environment, and culture, and blends elements of all the designs discussed.

Co-ordination in the Global Organization:Coordination is the process of linking and integrating functions and activities of different groups, units, or divisions.