Characteristics of Multinational Enterprises and Their Future - Coursework Example

Multinational Enterprises xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx An analysis of Multinational Enterprises xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Instructor xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Multinational Enterprises Multinational enterprises (MNES) refer to firms that extend their .productive capacity from the home country to other countries. Due to increased deregulation of local markets in the entire world, the liberalized firms in foreign countries strategize on extension of their production activities into other countries with the aim of benefiting from high cost advantages. They extend to international countries in search for raw materials, cheap labor, preferential government regulations and the market for their products. This paper, will tackle MNEs strategic planning as well as the steps involved in strategic planning since it is a very important to strategize before beginning any form of business so as to discover maximum profits. The characteristics of MNEs will be discussed to create awareness on the nature of MNES. Reasons for globalization will be discussed to give a briefing on the factors that force companies to become internationalized. It goes without saying the impacts will be included so that it can be clear on the positive and negative impacts on MNEs. Finally the theories of MNEs will be discussed since they explain the origin and existence of MNEs. The paper will exclude the future of MNEs since it is clear that it is the desire of every corporation to be internationalized. Characteristics of multinational enterprises The multinational enterprises have a greater responsiveness to the different environmental business forces such as the differing governments, financial institutions, suppliers, customers and competitors. They draw a common pool of resources such as human resources, information, trademarks, patents and assets with local businesses and have affiliates with common strategic visions (Robin, 1997). These enterprises also differ from those companies confined to domestic operations by making decisions that are considered to be the best for the organization even if circumstances force them to transfer their job or funds to the other country of operation. High risks exposed to this businesses force the companies expanding abroad to so with caution. A wholly- owned subsidiary should be set up at the last stages of operation. Internationalization process for any enterprise trading in standardized products mostly begins with obtaining a licensing agreement (Raza, 2009). This is a contractual agreement that enables a firm to have access to its trademarks, patents or technology in a firm operating in the host country in exchange for a fee. The firm can also decide to export their goods and services via a distributor or an agent. This is followed by establishing a foreign sales subsidiary or hiring a domestic representative. If the business gives hope for a successful operation, the organization can then consider having a foreign direct investment by setting up a wholly owned subsidiary in the foreign country. Companies become multinational due to a strong desire of protecting the firm from uncertainties and risks exposed to it by domestic business cycle, to respond the high increase in foreign competition, a high desire of reducing operation costs, need of overcoming tariff barriers and taking advantage of foreign technological expertise (Raza, 2009). Strategic planning process A successful result-based accountability system in multinational enterprises requires a proper strategic planning process and the resources that make implementation, monitoring and evaluation of these plans possible. Before any strategic planning takes place, the organization management has to address a variety of questions which will act as the guidelines to the way forward. These questions are; where the organization is at the moment, what they have to work with, where they want to be and how to get there (Schilder, 1997). To determine their current position, the enterprise has to examine its recent history and the changing contexts, both internal and external, of their state of operation, programs, sub-programs and the organization at large. The question of what to work with is answered through evaluation of the organization’s strengths and weaknesses (SWOT analysis) thus enabling them to determine the strengths that they should capitalize on. Where they want to be is well looked at by articulation of their vision and mission. The question of how to reach their goals requires a thorough process of articulating the strategies to be used in achieving their goals. There are several steps involved in strategic planning of a multinational enterprise. Firstly, they have to review their mission and vision. This is done by obtaining first hand information from a variety of stakeholders who include the shareholders, managers, legislators, providers, their customers, their employees and the supplier’s communities among many others. This information enables them to determine if what the stakeholders think about the organization is in alignment with their objectives (Schilder, 1997). It is advisable for multinational corporations’ planners to articulate different mission statements depending on the country of operation. Secondly, the organization has to carry out their business SWOT analysis. This enables MNEs to determine the existing internal strengths and weaknesses and further identify the expected international threats and opportunities. In addition, the management has to select and develop the various strategic options that have to be employed in addressing the organization’s objectives. Every individual expected to contribute to the success of the organization should be considered in selection of a few strategies from all the available options. This is followed by establishment of strategic objectives which should be Specific, Measurable, Achievable, Realistic and Time-bound (SMART). SMART strategic options give a hierarchy in which the plans will be implemented in the country of operation since it’s based on affordable resources of the enterprise (John & David, 1995). The management has to draw a strategy execution plan which is to be followed in implementation of the business strategies. This step is followed by allocation of resources and responsibilities. The management assigns a selected strategy to a given personnel who is deemed fit and knowledgeable in that area of operation. The last step is the implementation of a review process. This enables the management to make judgment on their business progress and make amendments incase of any deviations from the expected results. Reasons for globalization of multinational enterprises A variety of multinational enterprises operate in foreign countries due to a number of reasons. When need arises, enterprises move as first as possible to new countries with the aim of securing a strong market and position in the key world countries (Iyanda, 1999). They mostly move if their products are customized to greatly satisfy the needs of the foreign country’s residents in comparison to the services provided by the domestic businesses. According to Okolo (2008) these enterprises either adopt the defensive or aggressive approach in order to remain ahead in competition. Trade barriers, customer demand, competitors’ globalization, regulation and restrictions are some of the defensive or reactive reasons for globalization. To avoid the trade barriers, many companies opt to manufacture their goods overseas instead of manufacturing them in the headquarter country. Companies decide to go global in response to their esteemed customers’ demand for product assurance, effective operations, reliability and provision of logistical solutions to their problems (Okolo , 2008). Many foreign customers prefer operating with local companies due to ease in accessibility enhancement of flow in production. The company has to therefore respond to the consumer demands since customer satisfaction is the first priority in any business. Companies make quick action to become global once one organization makes the first step to ensure globalization of competitors. Businessmen are aware that if overseas companies are allowed to operate for a long period of time without any competition or challenge, they will develop a very solid competition ground which will make it difficult for any organization to become a successful competitor. Their main aim will be to eat up the profits of any enterprise aspiring to become a successful competitor thus making it impossible to operate overseas. The aggressive or proactive reasons for globalization include; the opportunities for high growth rate, favorable economies of scale, incentives, cost savings and access to resources (Okolo , 2008). It is obvious that many companies prefer to invest in countries with high profits to give them room for expansion. They may be experiencing market immaturity in their areas thus seek new markets in overseas countries in search for growth opportunities. Apart from their dire need in utilization of excess profits, they decide to become global for maximum efficiency through employment of their underutilized resources in capital and human assets such as technology, machinery and management (Wallace, 1988). Multinational enterprises become global with the aim of benefiting from economies of scale. They enable them to achieve high output level spread over extensive fixed costs with the aim of lowering cost per unit. Companies further intend to maximize their utilization of manufacturing equipment and spread the high costs incurred in development and research over the lifecycle of their products. Moreover, those developing countries that are in need of development and improvement through technological development, skills and capital infusion voluntarily give incentives such as subsidies, tax exemptions, fixed assets, human capital and tax holidays (Susman, 2007). This is done with the aim of attracting many companies to operate in their country due to increased profits and risks reduction. It is also evident that multinational enterprises operate in foreign countries due to accessibility of raw materials and the low operational costs incurred in financing, low wages, transportation and power supply. This therefore shows that costs saving and resource access can motivate a company to transfer its operation from their headquarters to overseas countries. Impacts of multinational enterprises We shall consider both the positive and the negative impacts of multinational enterprises. An MNE investing in a certain region brings a significant injection into the area economy. It provides employment directly and indirectly through creation of local subsidiary businesses such as insurance companies, banks, hotels, shops and other related businesses. This results to initiation of multiplier process by generating income as the employees spend the income gained on consumption (Iyanda, 1999). MNEs create a highly skilled labour force in the foreign country due to their training of employee’s so that they can fit in their system and apply the available technology efficiently. The skills gained can be transferred to other parts of the host country and the entrepreneurial and management skills gained from MNEs can be a good source of capital. MNEs are also important in providing tax revenue to the host country government and other revenues generated as the company purchases the hosts national assets (Peter, 2010). On the other hand, MNEs can lead to disproportionate income distribution by employing a large number of highly expatriate managers and a large supply of cheap manual labour. This affects the country by widening income distribution and lessening transfer of management skills. Since majority of MNEs are large and powerful they can exert pressure on the government forcing them to give them subsidies, grants and preferential tax concessions. MNEs can further have a negative impact to the economy by engaging in transfer pricing. This involves shifting of production between different countries with the aim of benefiting from better tax arrangements offered in certain countries. This minimizes the tax revenue obtained by the national governments. Iyanda (1999) asserts that a variety of MNEs negatively affect the Less Developed Countries (LDCs). This is because there is usually a high tendency of the MNEs using capital-intensive methods of production that the locals may not manage to conceptualize due to their low level of technology thus leading to importation of skilled labor from the home country. Theories of multinational enterprises There are a variety of theories explaining the origin and existence of multinational enterprises. These theories are categorized basing on assumption theories of perfect and imperfect markets. Perfect markets are used in reference to the market economic state of interactions where prices are usually set by competitive demand and supply (Buckley & Casson, 2009). Multinational enterprises adopt these assumptions since the perfect market do not suggest that foreign direct investment (FDI) takes place in imperfect markets but rather assume that market structure is inconsequential in market analysis. Theories based on this assumption include differential rates of return, currency differential and portfolio diversification. The theory of differential rates asserts that foreign investment and capital always move from countries experiencing low rates of return on their capital to those experiencing higher rates (Moeti, 2005). The theory of portfolio diversification proposes that if a firm has to choose between different alternatives, it will consider the favorability of differential returns rates as well as opportunities of risks reduction through diversification. The theory of Currency differential argues that investment in foreign countries will tend to flow from countries having strong currencies to those with weaker currencies. They believe that firms operating in countries with weaker currency do not have incentives to enable them to make FDIs into strong currency countries while those enjoying strong currency have advantages of finding it profitable to establish FDIs in countries with weaker currency (Moeti, 2005). Moeti (2005) asserts that the theory of imperfect markets is based on location specific advantages and ownership specific advantages. Location specific advantage suggests that a firm can be motivated to operate abroad due to availability of inputs that are scarce in home country and also inputs selling at lower cost in foreign countries. A firm can be motivated to become international due to advantages of good infrastructures, low rates of tax, extensive scope of expanding, ease of pursuing corporations goals and great political stability. The theory of ownership advantage is based on the characteristics of a firm that give it better competitive advantage over other firms. These include capital asset endowment, advanced technology, liquids asset endowment, a unique market strategy and the human resource capacity (Ansoff, 1988). These ownership advantages can lead to or be used to exploit foreign market imperfections which can be exploited further for the financial benefit of entire firm through FDI. The imperfect theories as dictated by ownership specific advantages are explained by oligopolistic reaction approach and market power approach. The approach of market power gives the idea that the market power of a firm is increased, with respect to oligopolistic competition, by exploitation of ownership advantages. In the early stages of development, an oligopolistic firm experience extensive growth in the domestic market but with time passage oligopolistic firms increase or maintain their market shares through expansion of foreign market competition. This theory asserts that rival firms present in oligopolistic industries counter their competitors moves by making analogous moves as themselves (Buckley & Casson, 2009). Conclusion It is clear that strategic planning is inevitable in any multinational company that intends to have a result -based accountability system of operation in any country. For planning to yield positive results, it is advisable to involve all the stakeholders in the planning process by judging and incorporating their views in the goals of the organization. An enterprise has also to prioritize its goals and objectives in order to achieve a result based accountability system. This is why majority of the entrepreneurs are advised to choose a few from the variety of goals so that they are not overwhelmed by an overload of activities which cannot be met with the available resources. Enterprises have found it beneficial to develop new strategies and systems of operations in their management systems. It is evident that working with different people, companies and countries in the entire world have enabled majority of businesses to acquire a sustained competitive advantage over the other companies that solely operate in home country. It is evident that a few countries use cunning ways to take advantage of the foreign companies and hence the mangers should be careful of such tricks so that they can be beneficial to the host country as well as maximize their profits. The theorists have come up with a variety of ways to explain the existence of multinational enterprises in an attempt to make it clear on the reasons and the benefits of engaging in international businesses .These businesses have a variety of characteristics. Those Corporations aspiring to operate globally should study such characteristics so as to get the knowledge on how internationalize their firms. The less developed countries should therefore adopt the strategies employed by MNEs originating from the overseas so as to overcome their weaknesses and increase their strengths thus favoring international investments. Bibliography Ansoff, H, 1988, The New Corporate Strategy, London: John Whiley. Buckley, P, & Casson, M, 2009, The internalization theory of the multinational enterprise: A review of the progress of a research agenda after 30 years, New York: Palgrave Macmillan Publishers. http://www.palgrave journals.com/jibs/journal/v40/n9/full/jibs200949a.html Iyanda, O, 1999, The impact of multinational enterprises on employment, training, regional development in Namibia and Zimbabwe: A preliminary assessment, Boston: International Labor Organization. John, E, & David, W, 1995, International Business Strategy, Boston: Harvard Business School Press. Moeti, K, 2005, A survey of the theory of multinational enterprises, Pretoria: University of Pretoria. Okolo, S, 2008, Reasons for Globalization, Retrieved on 31 october 2010 from http://ezinearticles.com/?Reasons-for-Globalization&id=1132215 Peter, D, 2010, Practices of successful companies, New York: Farrar, Straus and Giroux. Raza, M, 2009, What are multinational enterprises, Retrieved on 31 october 2010 from http://ezinearticles.com/?What-Are-Multinational-Enterprises- %28MNEs%29?&id=2686918 Robin, J, 1997, Global Business Strategy, New Yolk: International Thompson Press. Schilder, D, 1997, Strategic planning process: Steps in developing strategic plans, New York: Harvard Family Research Project. Susman, G, 2007, Small and medium-sized enterprises and the global economy, California: Edward Elgar Publishing, Wallace, C, 1988, Foreign direct investment and the multinational enterprise: A bibliography, Martinus Nijhoff Publishers. Read More