Heterogeneity of the World and its Influence on Multinational Companies Decisions - Case Study Example

Heterogeneity of the World and its Influence on Multinational Companies’ Decisions Name Institution Date Table of Contents Introduction 3 How heterogeneity of the world impacts decisions of MNCs 4 Factors Conditions 4 Structure, Rivalry and Strategy of Firms 6 Demand Conditions 7 Supporting Industries 7 The Role of Government 8 Heterogeneity of Culture in the World 8 Heterogeneity of time 9 Religious Heterogeneity 10 Conclusion 10 BIBLIOGRAPHY 12 JENKINS, R. (2013). Transnational Corporations and Uneven Development (RLE International Business): The Internationalization of Capital and the Third World. New York. Routledge. 13 JOHNSON, D. & TURNER, C. (2010). International Business: Themes and Issues in the Modern Global Economy. New York. Routledge. 13 TAYLOR, M. & THRIFT, N. (2013). Multinationals and the Restructuring of the World Economy (RLE International Business): The Geography of the Multinationals, Volume 2. New York. Routledge. 14 Introduction The world is increasingly becoming homogenous thanks to globalization. The homogeneity and unduly standardization of the world is propelled by various forms of cultural imperialism and inherent technological advancements. Effective and efficient infrastructure has indeed been laid that makes possible the existence of international business. The international business platform in the form of the Multinational Corporations (MNCs) and other focal firms have taken absolute advantage of the infrastructures, particularly the transport and communication features of globalization (O'SULLIVAN, 2008). The MNCs have grown to become the world economy’s first order features. The multinational companies comprise production facilities that are distributed across different parts of the world. However much the world is homogenous, heterogeneity is still inherent. The world has not wholly become perfectly homogenous. It is still insufficiently homogeneous in terms of government systems, varying costs of production, availability of resources, diverse cultures and languages, time differences, different religions, and different types of markets and economies (SHARAN, 2006). With the operations of the MNCs being the biggest and most important type of the focal firms, their significance to the world economy is equally massive. The MNCs constitute large organizations with established networks of production factories and marketing subsidiaries in many countries through the regional headquarters. The MNCs adopt the foreign market strategies in their operation at the international business environment. Some of their operations include exportation of goods and services, importation of raw materials, licensing, franchising, turnkey contracting, foreign direct investment and equity joint ventures (HEAD, 2007). These operations of MNCs also mark their entry strategies to foreign markets, a fact that exposes them to the influences of the heterogeneous factors of the world. This paper therefore is developed to examine the extent to which the world is still not homogenous and how this impacts the decisions made by the multinational companies. The paper will first advance the discussion based on the five heterogeneity factors advanced by Michael Porter in his Diamond Model Theory, then reinforce the discussion with additional factors. How heterogeneity of the world impacts decisions of MNCs The Diamond Model by porter generally explains the competitive advantage of companies in their home countries. The theory categorizes the heterogeneity of the world based on four elements: the structure, strategy and rivalry of the firm; the demand conditions, the related supporting industries and factor conditions. This theory provides insight into the heterogeneity of factors that enable multinational companies to thrive in their home countries and seek to expand their operations in other countries across the world (TALLMAN, 2009). Factors Conditions This theory is an improvement of the traditional economic theories that majorly focused on the factors of land, location, natural resources, labor and local population size. Porter’s Diamond model covers these under the factor conditions that are heterogeneous across the world. Indeed the availability of land is an important heterogeneous factor of the world that influences the multinational companies’ decisions. Land is an important factor of production whose presence or availability varies across the world. There are those countries with massive areas of land; which translates into adequate space for the construction and operation of the firms (HOFMANN, 2013). The availability of the necessary space encourages some multinational companies to maintain their operations within their home countries and export their products and services to other countries. Limited land on the other hand has been established as hindering the expansion of the MNCs which resort to relocate in other countries where there is enough of this factor. There is also no world currency. Different countries have their distinct national currencies even though there are some currencies such as Euros for the regional blocks. The heterogeneity of the world currencies affects the MNCs in relation to the exchange rates (BLONIGEN, 2006). Availability of land goes hand in hand with location. Ideal locations are necessary for the operation and growth of the multinational companies. Ideal locations are assessed in terms of access to market, raw materials and supply of labor. Ideally, a multinational company may decide to relocate not because of the insufficiency of land, but because of poor location. A location may for instance be deemed ideal if it supports low cost production and/or has high market presence (JOHNSON & TURNER, 2010). The availability of raw materials will definitely influence decision by the MNCs. Raw materials such as the minerals and other natural resources are unequally distributed across the world. The companies need access to these materials for them to be operational and effectively compete and expand as well. If there is limited resource in the home country, a multinational company will consider relocating to those areas with abundance of the resources, or still may consider importing or sourcing the materials. In the modern international business environment, technology assumes massive significance (NYSTROM, 1981). Multinational companies have identified the incorporation of technology and innovation into their production processes to be very crucial in producing efficiently at low costs while generating high volume outputs. Different parts of the world exhibit different rates of industrialization and modernization thus the variance in technology. MNCs would generally favor areas in which technology and innovation are highly available and dynamic, a factor that is necessary for their continued expansion and attainment of competitive advantage (RUGRAFF & HANSEN, 2011). Labor is another element categorized by Michael Porter under the factor conditions (TALLMAN, 2009). Availability of labor in itself is not important, what matters is the quality of labor. Quality of labor is evaluated in terms of their technical know how, education and literacy and capacity of innovation. In simple terms, the multinational companies’ decisions and strategies are highly influenced by the labor; whether skilled or manual. Most of them will seek skilled labor at the expense of unskilled. However depending on their products some, might seek unskilled labor which often demands less compensation thus ensuring low costs of production. The local size of the population also matters a lot. Population interrelates with other factors such as labor, land, market and others that determines the operation of a MNC. In general, the factor conditions highlighted by porter will determine the multinational companies’ decision to relocate, export, import, and outsource from foreign countries (IWOMP & CHAMPMAN, 2012). Structure, Rivalry and Strategy of Firms Porter’s diamond model also emphasizes the structure, rivalry and strategy of the firm as influencing decisions regarding creation, organization and management of the firms (TALLMAN, 2009). Competition and rivalry are very heterogeneous across the world. Competition may be stiff in some countries and not others depending on other factors. For instance certain countries are renowned for their advancement in certain industries based on the high presence of companies operating in them. This is the case with electronics in china and textile in Italy. In his theory, porter argues that the high competition in a particular industry within a country triggers quality and innovation. In addition, the rivalry would push firms to expand to other foreign countries depending on their strategy (OXFORD ANALYTICA, 2010). They may decide to import raw materials to boost their competitive position or access a larger market by exporting their products and services. MNCs may also decide to adopt turnkey contracting or equity joint ventures to boost their local and foreign competition, presence and expansion. Demand Conditions Porter’s model also proposes that the demand conditions at the home country will determine the status of a company (TALLMAN, 2009). This is true considering the fact that it is the characteristics of the consumers, the market and other factors such as climatic conditions that quite often enables firms to massively develop within their home countries. For instance depending on the nature of consumers, a firm may grow in its production (BEUGELSDIJK, 2013). If the local consumers are demanding at home countries, the firms will generally be defined by quality orientation to meet the customer needs. More demanding customers influence the strategies of the firms in line with innovation and quality delivery to leading to competitive advantage. Once a firm has been molded by the demands at home, it will ensure that it operates by the same standards in the foreign market (PODDAR, 2004). Supporting Industries The fourth element in Porter’s diamond model is the related and supporting industries. The presence of competitors, suppliers as well as complementary firms that excel within a certain industry will significantly influence the decisions of the multinational corporations (TAYLOR & THRIFT, 2013). Just like the other factors, this dimension of the diamond model also varies in the world. MNCs for instance will seek to expand their businesses in those areas where there exist knowledgeable firms and workers who are able to support the operations in that particular industry (EMAMI, 2006). Most of the MNCs cannot exist and operate on their own and depend on products and services that are offered by other firms. They thus need the presence of such firms for them to consider establishing their productions in given areas (MARINOV & MARINOVA, 2012). The Role of Government Porter’s diamond model emphasizes the role of government as acting as both a challenger and catalyst; influencing the capacity of the companies to enhance their aspirations and improve their degrees of competitive performance (TALLMAN, 2009). On the other hand, the governments may pose country risks that would also influence the decisions of the MNCs. The developments in a country’s political and legal environments will definitely affect the profitability and operations of an MNC in both the home and foreign countries. The government can offer incentives that encourage the existence of MNCs. It can also discourage the growth and operation of the MNCs through strict and rigid legislation and political upheavals and unrest (CHEN, 2012). Heterogeneity of Culture in the World Assessing the diversity of culture and ethics also indicates how the world is not homogeneous. The world is not made up of a single culture even in the wake of globalization. Different people, groups, regions and localities have their own distinct cultures. Culture constitutes the patterns of learnt behavior shared in the society (MINKOV & HOFSTEDE, 2011). The culture is usually represented through the norms, values, behaviors, attitudes, ideas and symbols. Culture is a major factor that has to be considered by the MNCs whose operations transcend the borders of their home countries (COHEN, 2007). The cultural diversities expose MNCs to what is called cross cultural risks. Culture impacts the operations of MNCs through the design and development of products and services, in promotional materials and adverts, communication with foreign partners, business negotiations and interactions with existing and prospective customers. Language is also an essential element of culture that the MNCs consider in expanding to the foreign countries (MINKOV & HOFSTEDE, 2011). The multinational corporations in the foreign countries have to design their operations and products to reflect the cultural values of the foreign cultures. The managers of the MNCs have to distant themselves from ethnocentric orientations and instead embrace geocentric orientation (MINKOV & HOFSTEDE, 2011). Heterogeneity of time Time is a very important element in international business and becomes a challenge as it is not homogenous across the world. Time varies from place to place according to the time zones. It essentiality in the international business platform is marked by its influence on planning, scheduling, profit streams among other activities. For the multinational companies, time affects every inch of their operations in their effort to maintain similar operations in all their branches. Such companies are usually forced to balance between monochromic and polychromic timing, depending on the culture and time zones in which they are based (SANDRI, 2011). Religious Heterogeneity There is no also a single religion of the world; there are just too many of them. Religion impacts culture and therefore has direct influence on the consumer behavior and business in general. Each religion has its own associated rituals, sacred objects, traditions divine beings/things. They also define individuals’ tastes and preferences as well as behaviors and attitudes. The protestant work ethics is an example. The MNCs recognizing these facts have to design products and operations that consider the religious practices and beliefs of the present religions. Religion would have much influence on the products and service offered by the MNCs. They must be ‘religiously acceptable’ for the targeted foreign consumers to buy them or participate in making them. Conclusion The world is very heterogeneous in terms considering factors such as governments, land, labor, technology, population, cultures and religions, availability of raw materials, location, time, and ethics among other factors. All these factors have direct impact on the MNCs whose strategies often extend their operations to foreign countries. This impacts a large percentage of the decisions the companies make as they have to ensure that the needs, preferences, tastes, values, beliefs and attitudes of the foreign populations are considered. In addition, some of the factors such as the government, location and availability of land, suitable location and skilled labor would influence their decisions concerning relocation or expansion of operations to foreign markets. All these factors usually have to be keenly and carefully analyzed by the MNCs companies before executing any of their foreign strategies. BIBLIOGRAPHY Top of Form BEUGELSDIJK, S. (2013). Firms in the international economy: firm heterogeneity meets international business. Cambridge, Massachusetts : The MIT Press BLONIGEN, B. A. (2006). Foreign Direct Investment: Behavior of Multinational Corporations. National Bureau of National Research. Internet Source. CHEN, J. (2012).The Impact of MNC’s Home Country Politics on Host Country. Journal. Bottom of Form Top of Form COHEN, S. D. (2007). Multinational corporations and foreign direct investment: avoiding simplicity, embracing complexity. New York, Oxford University Press. Top of Form Top of Form EMAMI NAMINI, J. (2006). International trade and multinational activity heterogeneity of firms, incentives for foreign direct investment, and international business cycle dynamics. Berlin, Springer. http://public.eblib.com/choice/publicfullrecord.aspx?p=372089. Bottom of Form Top of Form HEAD, K. (2007). Elements of multinational strategy. Berlin, Springer. http://site.ebrary.com/id/10191972. Bottom of Form Top of Form HOFMANN, P. (2013). The impact of international trade and FDI on economic growth and technological change. Berlin, Physica-Verlag. http://dx.doi.org/10.1007/978-3-642-34581-4. Top of Form IWOMP (CONFERENCE), & CHAPMAN, B. (2012). OpenMP in a heterogeneous world 8th International Workshop on OpenMP, IWOMP 2012, Rome, Italy, June 11-13, 2012. Proceedings. Berlin, Springer. http://dx.doi.org/10.1007/978-3-642-30961-8. Bottom of Form JENKINS, R. (2013). Transnational Corporations and Uneven Development (RLE International Business): The Internationalization of Capital and the Third World. New York. Routledge. JOHNSON, D. & TURNER, C. (2010). International Business: Themes and Issues in the Modern Global Economy. New York. Routledge. Top of Form MARINOV, M. A., & MARINOVA, S. T. (2012). Internationalization of emerging economies and firms. New York, Palgrave Macmillan. http://public.eblib.com/choice/publicfullrecord.aspx?p=851049. Top of Form MINKOV, M., & HOFSTEDE, G. H. (2011). Cultural differences in a globalizing world. Bingley, UK, Emerald. Bottom of Form Bottom of Form Bottom of Form Bottom of Form Top of Form NYSTROM, P. C. (1981). Handbook of organizational design 1 1. Oxford [u.a.], Oxford Univ. Press. Top of Form O'SULLIVAN, K. (2008). Strategic knowledge management in multinational organizations. Hershey, PA, Information Science Reference. OXFORD ANALYTICA. (2010). Multinational Corporations Strive to Compete. Forbes. Internet Source. Retrieved from: Bottom of Form Top of Form PODDAR, T. (2004). Domestic competition spurs exports the Indian example. [Washington, D.C.], International Monetary Fund. http://catalog.hathitrust.org/api/volumes/oclc/56816450.html. Bottom of Form Bottom of Form Bottom of Form Top of Form RUGRAFF, E., & HANSEN, M. W. (2011). Multinational corporations and local firms in emerging economies. Amsterdam, Amsterdam University Press. Top of Form SANDRI, D. (2011). Precautionary savings and global imbalances in world general equilibrium. [Washington, D.C.], International Monetary Fund. http://www.myilibrary.com?id=386661. Bottom of Form Top of Form SHARAN, V. (2006). International business Concept, environment and strategy. Delhi, Pearson Education. Top of Form TALLMAN, S. B. (2009). Global strategy global dimensions of strategy. Chichester, West Sussex, John Wiley & Sons. http://public.eblib.com/choice/publicfullrecord.aspx?p=565112. Bottom of Form Bottom of Form Bottom of Form TAYLOR, M. & THRIFT, N. (2013). Multinationals and the Restructuring of the World Economy (RLE International Business): The Geography of the Multinationals, Volume 2. New York. Routledge. Read More