Why and How Firms Become Multinational Enterprises - Coursework Example

Why and How Firms Become Multinational Enterprises Introduction “The MNE has been one of the foremost economic, political, and social influences in the world economy for many decades” (Brewer & Young, 1998) With such words, the authors reflect the awe and respect, at times fear, that multinational enterprises inspire not only among their competitors who operate in a domestic capacity, but also society and the state in general. This is due to the overreaching socio-economic influence of the MNE in the course of the conduct of its business, its ascendancy over the authority of states, and the protection it is given international institutions and treaties. This paper shall treat on the manner by which a firm becomes a multinational enterprise, and the reasons and motivations for such firm to do so. Definition of Multinational Enterprises The OECD defines multinational enterprises as “companies or other entities that are established in more than one country and so linked that they may co-ordinate their operations in various ways” (OECDS, 2008, p.12) It is the most common way among several by which foreign direct investments are transmitted outward by the home country, or invested inward into the host country. At times multinational firms are described in terms of equity proportion; some jurisdictions peg a multinational as one whose voting rights are 10% owned and controlled by a foreign entity; other dispensations say 50%. The OECD definition is thus an interesting one in that it specified no ownership proportion, but stresses the operational link among internationally engaged organizations in different countries. These internationally engaged firms are systematically different from those domestically oriented; they are as a rule larger and have a more complex organizational structure and processes. Multinationals are thus more complex to manage (Yeaple, 2009). How Firms Become Multinational Enterprises A multinational enterprise (MNE) is, simply put, a business organization the operations of which spans different countries and is intricately linked to its subsidiaries or other subsidiaries of the same mother firm. Therefore, what then makes a firm into an MNE is the nature of its activities, that its activities are geographically expanded across borders under a common ownership. There are times when a stage of the firm’s operations is intended to be performed in another country, for any number of reasons such as greater cost-effectiveness or locating closer to raw material or human resources. But rather than outsourcing that stage of operations to another, domestic, firm, the company instead sets up its own subsidiary or unit in that country to perform that stage of the operations. There are several ways how a company can internationalize its operations: By incorporating a wholly owned subsidiary or company By acquiring shares in an associated enterprise By merger or acquisition of an unrelated enterprise By participating in an equity joint venture with another investor In all these methods, a substantial amount of long-term funds is committed in the productive activity, which infusion is called the foreign direct investment, or FDI. Forms of foreign direct investment, one of which is in the form of multinational organizations, are major conduits of international technology transfer (Keller & Yeaple, 2005). In Appendix “A” at the end of this paper is a table of comparative information on the various modes by which a firm may enter into a foreign market. Multinational enterprises, the most direct and common form, is located at the last entry, under direct investment. The corporate link between parents and subsidiaries, and between peers subsidiaries, have been the topic of interest for academic studies on the MNE. Corporate link is that element in an MNE system that is concerned with the strength and extent to which a focal subsidiary is linked to its corporate members via a sharing of strategic resources and activities. With the increasingly global economic environment, the establishment of corporate links becomes a vital consideration in the decision of a firm to embark on international operations as a multinational enterprise (Luo & Zhao, 2004). Why Firms Choose to become Multinationals The question to be answered makes the assumption that the multinational enterprise does not start out as an MNE, but as a domestic corporation constituted according to the corporate laws of the home country. The choice to become a multinational enterprise is a deliberate, strategic move, to take advantage of some benefit that the new form may provide. The purposes of multinational operations include the productive deployment of foreign direct investments; the facilitation of international trade, as when the products are introduced in the new market; the sourcing of substantial employee pools at lower labour rates, and the facilitation of technology transfer in the course of assimilating the new manufacturing processes and techniques (Keller & Yeaple, 2005). The operational advantages of thus converting to MNEs include the geographical reach and dispersion, as well as the internalization of these functions. Aside from systemic advantages in the nature of better-quality or lower-priced resources, or access to fresh market demand, the multinational enterprise is strengthened by the operation of international treaties to which signatory countries have committed. It is in this aspect that the might of the MNE is seen to overshadow even the sovereignty of the state. Some of these multilateral agreements that provide support to the MNE and work to its advantage are the following: More than 100 countries have opened their telecommunications industries to foreign ownership, and in certain circumstances would put such utilities under the control of a few large foreign corporation, due to investment provisions under the General Agreement on Trade in Services, or GATS. As a result of the agreement on Trade Related Investment Measures (TRIMs), some FDI manufacturing facilities of MNEs in the motor vehicle industry are empowered to source their parts through importation without the necessity of meeting domestic content requirements specified by the host country. A consequence of the agreement on Trade Related Intellectual Property Rights, or TRIPs, is that host countries for investment projects are mandated to overhaul their national intellectual property rights regimes that must, among other requisites, protect the copyrights, patents, and other intellectual property entitlements of foreign parent corporations and their local affiliates. Another result of the GATS is that individual employees of MNEs will have the right to enter countries for temporary stays to discharge their duties to the MNE employers, and in effect override immigration policies that would have otherwise imposed highly restrictive visa requirements on them. Disputes concerning government policies vis-à-vis firms’ and individuals’ foreign direct investments are provided a venue for settlement, through procedures conducted under the auspices of several international organizations. Such procedures could likely involve the World Trade Organization (WTO), the International Centre for the Settlement of Investment Disputes (ICSID) in the World Bank, or the North American Free Trade Agreement (NAFTA). Not all views about MNEs have been positive and laudatory. Some are negative conjectures that tend to cast MNEs in a bad light. For instance, there has been forwarded a so-called “exporting job” hypothesis – that is, expansion of operations overseas for multinational enterprises tends to cause a decrease in home employment. Yamashita and Fukao (2009) found no evidence of this in their study. On the country, their evidence shows that expansion of operations by MNEs to overseas destinations appears to enhance the firms’ competitiveness and profitability, but also help maintain the level of home employment. The authors explain this as the result of a generating a greater demand for home-based technology, remittance of profits, and upgrading of skill intensity of home production. The outward expansion of MNEs has other advantages for the home country. For instance, Nachum, Jones and Dunning (2001) found that for the most part of the last century, the UK’s share of OECD output, exports and outwards foreign direct investment have been declining, but UK MNEs have consistently been performing better than the nation’s domestic economy. This tends to highlight the role of MNEs in the international competitiveness of an economy even as the home economy slumps (Nachum, et al., 2001, and Keller & Yeaple, 2005). Conclusion Brewer and Young called the multinational enterprise the single most important economic, political and social influence in our time, and the observation is well-founded. The world is becoming increasingly integrated, and where once the individual states were the dominant force, the power they now wield is greatly tempered by and in certain instances subordinated to the need for multinationals to operate freely and unrestrictedly. The fruits of such forbearance is substantial, in the form of a mutually beneficial exchange of goods and services, creation of jobs, access to markets, transfer of technology, and productive growth at lower cost. The multinational enterprise is more than just a business; it is the conduit by which economic goods are created and circulated among peoples across borders, resulting in the improvement of living standards and human development. It is no longer entirely about profit, it is about the creation of value, and in the end it is about the elevation of the human condition. Appendix “A” Table 1: Foreign Market Entry Modes Source: Internet Center for Management and Business Administration, 2007 REFERENCES Brewer, T L & Young, S 1998 The multilateral investment system and multinational enterprises. Oxford University Press, New York, NY. Internet Center for Management and Business Administration 2007 QuickMBA.com Foreign Market Entry Modes. Accessed 22 November 2009 from http://www.quickmba.com/strategy/global/marketentry/ Keller, W & Yeaple, S R 2005 Multinational enterprises, international trade, and productivity growth: Firm-level evidence from the United States. Deutsche Bundesbank, Discussion Paper Series 1: Economic Studies. Luo, Y & Zhao, H 2004 Corporate link and competitive strategy in multinational enterprises: a perspective from subsidiaries seeking host market penetration. Journal of International Management, vol. 10, pp. 77-105 Nachum, L, Jones G G & Dunning, J H 2001 The international competitiveness of the UK and its multinational enterprises. Structural Change and Economic Dynamics, vol. 12, pp. 277-294 Organisation for Economic Co-operation and Development (OECD) 2008 OECD Guidelines for Multinational Enterprises. Accessed 10 March 2010 from http://www.oecd.org/dataoecd/56/36/1922428.pdf Yamashita, N & Fukao, K 2009 Expansion abroad and jobs at home: Evidence from Japanese multinational enterprises. Japan and the World Economy, doi:10.1016/j.japwor.2009.10.001 Yeaple, S R 2009 Firm heterogeneity and the structure of US multinational activity. Journal of International Economics, vol.78, pp. 206-215 Read More