The Degree of Globalization in MNE - Assignment Example

Degree of globalization in MNE’s of the Table of Contents Introduction 3 Degree of globalization 4 Factors influencing globalization 4 Competition factors 4 Technological capabilities 4 Investment levels 5 Opportunity capturing 5 Procurement 5 Greater strategizing capabilities 6 Cultural and global integration 6 Globalization in EMNE’s and DMNE’s 1500 6 Sample analysis 10 Conclusion 15 References 17 Introduction Globalization has enhanced the communication and the interaction levels existing between nations. The easy exchange of resources and the lessening of trade barriers have fuelled the growth of the world economy massively. Globalization has led to the creation of a platform where resources such as manpower, technology, raw materials and other factors of production which are required for carrying out commercial activities can easily be exchanged. The easy exchange of resources has led to increase of efficiency in both the national and the international front. One of the most important influences of globalization has been upon technological innovation and the necessity of collaborating resources to gain competitive advantages. The changes in the technological front have facilitated better utilization of resources and overcome the barriers associated with lack of resources. As a result many nations were successful in overcoming their economic weaknesses and produce in a more effective manner. Many consider globalization to be a phenomenon associated with growth and prosperity. Globalization also includes interaction of cultures, social values, political aspects and flow of ideas and information between different nations. The concept of globalization is a debatable aspect. It has impacted different nation in diverse ways. The free flow of capital and resources has facilitated bringing together the developed nations and has integrated them more strongly. Many developing nations displayed a steady rate of growth while many had lost their competitiveness and displayed lagging trends of economic prosperity. There exists a large degree of heterogeneity in the impacts of globalization across nations. In many nations it was observed that globalization led to increasing the gap existing between the rich and the poor nations. Similar factors have also impacted the manner in which multinational enterprises in developed and developing nations function and grow. Developed economy multinational enterprises (DMNEs) are seen to procure greater advantages and grow more rapidly than the emerging economy multinational enterprises (EMNEs). Multinational enterprises keep looking for innovative ways of doing business by procuring new ideas, suppliers, resources and customers. MNEs from developed nations are able to do achieve growth more easily due to their immense financial capabilities. On the other hand multinational organizations in the developing nation are required to struggle more to achieve growth and competitiveness. The current paper tries to analyze the impact of globalization upon the multinational organizations belonging to the developing and developed nations. The goal is to understand whether DMNEs are more successful than EMNEs (Farndale, Brewster & Poutsma, 2008). Degree of globalization Factors influencing globalization The degree to which an organization globalizes itself depends on a number of factors. These factors subsequently facilitate understanding the reasons due to which globalization of multinationals, is seen to differently exist in developing and developed nations of the world. Competition factors Developed nations of the world are characterized with an economy which is highly competitive and most of the industries of such a nation are well developed. Due to the existence of stiff completion in their domestic nation, they tend to move out of their parent nation and develop business sub units in other nations. Since the DMNE’s are seen to posses greater financial strength received from their parent organization, they are able to expand to a large number of markets across the globe. As and when a market becomes saturated, such companies can easily expand themselves to other potential locations. On the other hand, emerging nations economies are not very well developed. There exist very few firms in such nations which are well developed. As a result competition factors are low. This provides lower impetus to the EMNEs to expand further into new markets. They tend to concentrate more upon their indigenous nations economies market. Moreover the financial capabilities of EMNEs are less favourable to rapidly expand to other nations (Chew & Sharma, 2005). Technological capabilities DMNEs are able to derive immense power from their highly developed technological capabilities. This makes it easier for such organizations to expand themselves to other nations. Technological capabilities facilitate such nations to concentrate upon the growth of their primary and secondary industries. As a result economic sustenance and growth is rapid. Since industrial bases are strongly developed, it becomes easier to expand. Moreover the existence of superior technological capabilities aids the development of technical knowhow. These factors contribute towards the easy expansion of companies into other nations. Alternatively EMNEs have lesser technological strength. Developing nations are characterized with less strongly developed primary and secondary industries. This hinders the technological growth for the multinational enterprises located in such nations. They have lesser knowhow and technical strength to expand into other nations as rapidly as those from the developed nations (Debrah & Smith, 2003). Investment levels DMNEs have a stronger profit earning capability. Moreover since such companies operate in well structured and efficient markets, it becomes possible for them to attract investments from foreign markets much more effectively. Investors find it more secure to invest in DMNEs since they operate in more favourable economical, political, legal and social setting. On the other hand emerging nations are generally characterized with unfavourable political, economic, technological and social climatic factors. As a result investors find it risky to invest in such firms. Even though many EMNEs have been able to successfully expand to other nations, they are not completely independent of the conditions existing in their parent nations. When the organizational base has not been strongly set up, it is perceived to be risky to invest in them (Bohlander & Snell, 2006). Opportunity capturing DMNEs are able to capture more markets and make their operations more widespread due to greater capabilities associated with resource utilization. DMNEs are able to meet market needs existing in different nations much more effectively than EMNEs. This is primarily due to their higher technical and financial capabilities. As a result DMNEs are able to establish themselves more strongly in the foreign markets (Beck, 2000). Procurement DMNEs are seen to depend upon the markets of the emerging nations for procuring resources. Moreover a large number of DMNEs have set up their production locations in the emerging nations of the world. As a result they take greater advantages of the resources located in the emerging nations than the EMNEs. EMNEs due to their lower scale of operations and weak financial capabilities cannot fully utilize the advantages derived from their home nations (Scholte, 2005). Greater strategizing capabilities DMNEs are able to create more impactful strategies for the market. Consumers are greatly influenced by the goodwill and the attractive strategies of the company. Moreover since DMNEs have greater presence in the markets, they are able to procure higher brand image. Consumers automatically presume their products to be of higher quality. DMNEs are able to develop successful association with a number of supporting firms and form effective strategies relating to growth. Supporting firms find it more reliable to associate themselves with DMNEs due to their superior goodwill. Hence, while entering into emerging nations; smaller firms are eager to associate themselves with these DMNEs rather than the MNEs of their own nation (Hitt, Ireland & Hoskisson, 2012). Cultural and global integration DMNEs had begun participating in the global economy more rapidly than the EMNEs. As a result their abilities to associate and adapt with global economic changes and other aspects are more rapid than the EMNEs. This is also one reason due to which DMNEs have been able to play a more important role in the world economy. DMNEs overtime have been successful at developing an organizational culture which can be easily be adopted by other nations. The openness towards global cultural attributes is a characteristic feature that is more strongly developed in the DMNEs than the EMNEs (Block & Cameron, 2002). Globalization in EMNE’s and DMNE’s 1500 Globalization has facilitated the fading away of a number of trade barriers. MNE’s from both the developed and the emerging nations are focused upon higher economic prosperity through capturing the markets at a global scale. They both try to remain independent of their home nation economy by diversifying their market scope. One of the greatest motives of internationalization for DMNEs and EMNEs is risk diversification. Economic complexities have induced greater risks into commercial activities and it has become difficult to predict stability of revenues. As a result organizations find greater advantages in spreading their activities across a number of markets (Bhagwati, 2007). DMNEs are considered to be the pioneers of the global economy who consistently develop new trends in carrying out commercial activities. Most of the successful DMNEs of the world had begun to associate themselves with globalization since the beginning of the industrial revolution. However the EMNEs were seen to enter the realm of globalization only a few decades back. Majority of the DMNEs belong to the nation of North America and Europe. These nations are characterized with greater technological and financial strengths. Since companies belonging from these nations had a strongly developed base they could successfully expand themselves. Moreover developed nations of the world had a strongly developed primary and secondary Industries. These firms supported the growth of the MNEs by supplying the necessary raw materials, technology and infrastructure for organizational growth and development. Developing nations of the world predominantly belong to the continents of Asia, South America and Africa. Majority of these nations have a weakly developed infrastructure and technological base as a result they are not able to support their industries properly. EMNEs therefore are required to depend on foreign firms to acquire the required strength for global expansions. This makes them dependent on other economies for the achievement of growth. EMNEs are required to depend upon imported capital and foreign direct investments for achieving growth. Indirectly EMNEs facilitate the growth of DMNEs by procuring materials and technological support from them (Stiglitz, 2007). Another aspect hindering the growth of developing nation’s multinational organizations is mismanagement of essential resources. Experts claim that EMNEs lack growth primarily due wrong type of internationalization strategies. Many EMNEs are seen to choose developed nations as potential markets. They fail to realize that such markets are already saturated with a number of players. Also EMNEs are seen to depend upon developed nation’s economy for capital and other types of resources. EMNEs in many ways are seen to violate the rules associated with international expansion. In order to effectively compete with DMNEs, many EMNEs try to skip the stages of growth. Since the pattern of internationalization is not followed properly they lose competitive advantages in the market. As a result instead of achieving growth firms are seen to lose profits and become indebted. Overtime they cease to thrive in many markets, focusing only upon a few. EMNEs lack the expertise, knowledge and skills to utilize resources effectively. The mismanagement leads to extremely slow paced growth. Many EMNEs have been seen to withdraw their activities from the international front due to the inability to stand competition and move back to operating only in their parent nations (Baylis, Smith & Owens, 2013). EMNEs lack the expertise and the ability to meet the needs of the target foreign markets. However, if strategically planned and managed, such firms possess the capabilities of emerging successfully in the international front. Although developing nations possess a number of disadvantages, there also exist various factors which foster growth. One of the prime factors of advantage for developing nations is the existence of low cost of production. Developing nations possess the strength of explored markets. Since economic development has not been rapid, a number of industries which are already saturated and matured in many developing nations are yet to develop in the emerging nations. MNEs in these nations can take advantage of such a situation and establish themselves. As the firms slowly gain financial strength and stability they can slowly consider expanding themselves in similar markets existing of other emerging nations. One of the prime mistakes EMNEs make is that they target the developed nations for expansion. Instead they must at the initial stage of growth target only those nations whose economic conditions are similar to that of the parent nation. It is also argued that EMNEs target home nations resources and exploit them to a significantly to gain competitive advantages. However few MNEs based in such nations are seen to formulate effective strategies in terms of resource utilization and emerge as significant players (Calvo & Mendoza, 2000). A significant advantage EMNEs are able to procure is their exposure to street level or low end market conditions. Most DMNEs operate targeting the organized and the high end market conditions. The low end domestic market segments are considered to be most risky. Consumer tastes in these markets keep altering and changes in firm financial conditions are more frequent. Firms who operate in this segment overtime develop enough experience and understanding of the markets and are able to take quick decisions. Such organizations develop the experience to built demand conditions in unfavourable market conditions as well. Their bold organizational structures indicate that they can take effective long term decisions and ensure that the organization has an adequate position in the market (Rodrik, 2008). Firms can make use of such attributes when they consider expanding to other markets. EMNEs must realize that their expertise lies in controlling and operating in the low segment markets. Hence successful EMNEs are seen to first target those segments of foreign nations with which they are familiar based on their past experience. Starting from the low end business segments and then advancing upwards towards upper segments is what successful EMNEs are seen to pursue. EMNEs can also take the advantage of serving or acting as suppliers for DMNEs. Most organizations from the developed nations consider setting up production locations or purchasing resources from the emerging nations. However they lack the expertise to understand who the good service providers are in the emerging nations. EMNEs can take advantage of such situations and act as suppliers or associate firms guiding the DMNEs. Many successful EMNEs have emerged as successful players in the international markets due to the aspect that they are able to take advantage of the cheap labour and resource facilities existing in their home nations and outsource the same to other developed nations (Kaul, et al., 2003). Successful EMNEs have the unique capability of creating a niche markets and developing demand conditions. They are capable of turning unfavourable demand conditions into their favour. DMNEs are therefore seen to be cautious of the rising strength of the EMNEs. If their strategies and forms of operations are successfully carried, it is highly likely that they can easily take over the power of the DMNEs. EMNEs are seen to operate in the international markets following the strategy of thinking globally and acting locally. Since emerging nations MNEs are late entrants of the globalised environment, they were provided with the time and the opportunity to remain as close watchers of other DMNEs. EMNEs could study the manner in which DMNEs operate in the globalised platform and learn from their mistakes. Many EMNEs follow the strategy of adopting the business model of DMNEs, but in the long run remain incapable of achieving success. This is primarily due to the fundamental differences existing in the form of infrastructural and technological capabilities. As new players in the global industrial environment, EMNEs have the extraordinary capability of understanding the local market conditions. The globalised platform of business has evolved as an extremely competitive market and only those players who utilize resources effectively are able to do well in the markets in the long run. An important drawback of the EMNEs is that they are required to enter the global markets on the basis of forming alliances with other firms who are already well established in the foreign markets. This creates a dependency of the EMNEs upon other foreign firms to acquire stability and expand their operations. Often foreign nations are seen to remain biased and do not facilitate the growth of such EMNEs. Unless EMNEs procure the necessary strength to enter the foreign markets based on their own capabilities, it is difficult for them to be able to evolve as a superior performing entity. Additionally to evolve as superior performing entities it is essential that the emerging nation’s economies are developed. The primary and secondary industries located in these regions must be developed well so that they are able to cater to the needs of the multinational firms developed in their nations (Crane & Matten, 2010). In order to be established as important global players, it is essential for EMNEs to develop themselves as complete globalizers with less dependency over the already established DMNEs. EMNEs that have been able to do well in the foreign markets are seen to target neighbouring regions first before enlarging their operations into other nations. By altering their expansion strategies and using proper resource management strategies, it is possible for EMNEs to expand properly. As the developing nations economic capabilities expand it more EMNEs are expected to form. Developing nations are slowly becoming characterised with higher population and greater volumes of disposable incomes. Such factors are expected to strengthen the expansion capabilities of EMNEs in the future times (Davidson, 2000). Sample analysis In order to understand whether EMNEs display slower growth in terms of DMNEs, a sample analysis has been carried out. The sample consists of 10 large MNEs. Of them 5 belong to the category of EMNEs and the remaining five belong to the category of DMNEs. The analysis has been carried out as follows: The selected categories of companies are: DMNEs EMNEs General Electric Co Samsung Electronics Co., Ltd. Royal Dutch Shell plc Hon Hai Precision Industries Toyota Motor Corporation Petronas - Petroliam Nasional Bhd Exxon Mobil Corporation China National Offshore Oil Corp British Petroleum Plc Hyundai Motor Company Asset based comparison: Figure1: Assets held by DMNEs (Source: UNCAD, 2014) Figure 2: Assets held by EMNEs (Source: UNCAD, 2014) (Amount for both figure 1 and 2: Millions of dollars) From the total assets comparison it can be seen that the assets position of DMNEs is much higher that of the EMNEs. DMNEs due to their vast spread operations and their massive scale of operations are seen to procure greater assets level. Net assets are a dimension belonging to the Firm Specific advantages. This means that the nation from which the MNEs belong from have little role to play in the development to of such an advantage. DMNEs are seen to posses’ valuable and non imitable assets at large. Since their technology and methods of production cannot easily be procured by many, they continue to remain powerful and develop unique ways of achieving success. As the profit scales rise, the overall size and span of operations of the companies also expand. This results in enhanced profits and procurement of higher levels of assets. From the above figures it can be assessed that amongst the emerging nations MNEs, Samsung Electronics Co. Ltd. accounts for the highest level of total net assets which is approximately 169701.5 million dollars. On the other hand the minimum level of total asset amongst the selected group of DMNEs is 305690 million dollars belonging to British petroleum, which is much higher than Samsung. Hence the gap in the size of organization is huge between the EMNEs and the DMNEs. As a result it can be quite evidently deduced that DMNEs due to their large size and massive resource capabilities are able to procure greater market strength. The asset strength of DMNEs would include technological resources, marketing assets, intangible assets and physical assets which include property and machines amongst many others. The assets owned by such companies posses more economic value and competitive advantages than the ones possessed by the emerging nations MNEs (Davidson, 2000). Net values of asset are an important aspect for judging the overall strength of companies. The greater the value of their net assets, the more strongly and widely they can expand to other nations. Although the selected EMNEs are not financially as strong as the DMNEs their overall growth is commendable. Companies such as Samsung, Hyundai and Petronas have been able to compete successfully with the developed nations MNEs. This indicates that the EMNEs if provided with suitable resources and competitive advantages possess the capability to compete with DMNEs successfully. A suitable example in this respect would be Samsung. The company has been able to emerge as a strong electronics firm not only in the emerging nations, but also in many developed nations of the world. The sales of Samsungs mobile phones in the U.S are comparable with many other strong brands such as Apple. The massive operational size of DMNEs facilitates them to produce products cheaply. However many large size organizations fail to achieve such high technological aspects (Chew & Sharma, 2005). Employment based comparison Figure 3: Employment levels by DMNEs (Source: UNCAD, 2014) Figure 4: Employment levels by EMNEs (Source: UNCAD, 2014) (Amount for both figure 1 and 2: Millions of employees) As compared with DMNEs, the net number of employees recruited by EMNEs is far too short. Since the scale of operations of the selected EMNEs are not as wide spread or developed as the DMNEs their employment requirements are smaller. It can be seen that the DMNEs are much better developed and widespread than the MNEs of the emerging nations. As a result the employee requirements in DMNEs are more than EMNEs. DMNEs are seen to take advantage of the human resource advantages existing in the emerging nations. They also form tie ups with EMNEs in many nations so that they can take advantages of the familiarity such firms have with the local environment. DMNEs are seen to be located in a vast number of markets as compared to EMNES and hence their human resource requirements are higher. Due to their high financial capabilities DMNEs possess the power to be able to recruit more number of employees than the EMNEs (Bohlander & Snell, 2006). Conclusion The comparative analysis adequately proves that at large EMNEs posses lesser market power than the DMNEs. EMNEs have entered the globalization process much later and as a result most such organizations are in there growth and expansion stage. Being in the growth stage and hailing from nations which have abundant resource capabilities, EMNEs have massive scopes for future growth. They are consider4ed to be huge threats for DMNEs. In fact in a few markets, it is seen that EMNEs growth are much higher than the growth of DMNEs. MNEs belonging to the nations of China, India, Malaysia, Brazil and Russia are considered to be strongly growing as compared with other emerging nations. Mostly it is seen that MNEs from the emerging nations invest in firms which belong to the service industry. A number of telecommunications, information technology and electronics based organizations are also seen to emerge from the developing nation who are pioneering the world markets at a stable pace. EMNEs who are already successful in the international front display extraordinary skills of being able to adapt with changing market conditions. EMNEs have the extraordinary capabilities to innovate and improvise upon the achievements of DMNEs. This causes immense threat for developed nations MNEs. The latest technologies and the innovative abilities of the new MNEs from emerging nations are seen to provide cost effective products and services. Even in developed nations the products manufactured by EMNEs are seen to slowly gain importance and growth. EMNEs are required to focus upon the growth of markets located in the parent nations before advancing into other nations. EMNEs must understand the consumer profile and the target market segments needs so that they are able to expand into the target market segments effectively. The primary gap in the growth of EMNEs is lack of capital resources. The issue can be resolved by ensuring that emerging MNEs concentrate upon their indigenous markets initially and once suitable financial strength is achieved they may consider expanding themselves into other markets. Most of the current EMNEs consider expanding on the basis of the developing mergers and alliances. 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