Culture and its Effect on Multinational Enterprises - Coursework Example

Business culture and economy Name: Institution: How MNE’s (multinational enterprise) finds new ways to build capabilities in the recent increased globalization. Including: y acquiring local resources, building experienced managerial team, cooperating with other firms Introduction Globalization entails considering the world or a part of it as a single market in which to conduct business. It creates new markets and sources of knowledge for a firm which enhances their competitive advantage. Competitive advantage in the international market is achieved by strategizing on mounting and leveraging distinctive internal capabilities of a firm as well as seeking to improve and develop new ones. These firms however, need to have in place specific strategies so as to fit their capabilities with the varying environments. A company’s capabilities are either; business-level capabilities or corporate level /architectural capabilities. Ways of building Capabilities Architectural capabilities are the sources of the firm’s synergies usually developed during a firm’s operations hence tend to relate specifically to the firm. For instance, Wal-Mart is an example of a firm with superior architectural capabilities due to its ability to grow from a small firm to a global retailer as a result of its ability to coordinate and integrate its component capabilities. Businesses seeking to indulge in foreign markets needs to have a well organized hardworking and competent management that embraces innovation while maintaining high quality levels. Among the methods businesses adapt to internationalize their businesses include; Cross national cooperation and agreements, Foreign Direct Investments (FDI), and Joint Ventures. Cross-national cooperation and agreements play a significant role in development of international trade through integration. This can be achieved generally through three different approachable ways; through the world Trade Organization, bilateral integration and regional integration. For instance, the European Union among others such as the world trade organization which is one of the most effective trade agreements among nations with a membership of over 150 countries. Foreign direct investments are found in the form of either green-field investment or mergers and acquisitions or brown field investments. Green field investment occur through the opening of branches in a foreign country or through foreign financial collaborators which means investment in the equity capital of a foreign company mostly new established companies. Mergers and acquisitions are either an outright purchase of an organization that is already operating abroad or joining with a company running in a foreign jurisdiction. The term brown field investment refers to a combination of green field investments and mergers and acquisitions. It is found on instances where a firm acquires another firm and after acquisition it completely replaces the plant and equipment, labour and product line of the firm. Foreign direct investments can either be horizontal or vertical, For example, Suzuki’s investment in India to manufacture cars exemplifies a horizontal FDI. A Vertical FDI arises when a firm invests abroad in other operations either to control input supplies or the marketing of its products. For example, British petroleum investment abroad in production of oil is a vertical investment. Joint ventures occurs when a firm partners with another firm while both retaining their identity. Conclusion Building developing and improving a firm’s capabilities through global learning enables a firm to utilize effective business strategies, services or products when looking to adapt and embrace different cultures in the foreign markets. This way they enhance their capacity to think on a global scale and study international cultures to strike a good understanding. Through appreciating and understanding varying beliefs, values, behaviours and business strategies of various companies in other countries, entrepreneurs are able to internationalize successfully. Culture and one of its manifestations: languages. Why MNE’s ignorance of foreign languages and traditions may end up making cultural mistakes and big loss. Introduction Companies are constantly indulging themselves in international trade to overcome competition as well as boost their profits and market share. This expansion is however met by new challenges that the company must handle some of which it has probably not faced before and tend to be crucial for the long-term success of the company. Culture is one of these obstacles and can adversely affect the entire firm’s operations. Culture and its effect on multinational enterprises. Culture brings with it language barriers, difficulties in pricing as well as tension incase of conflict between various cultures. Firms must therefore be well poised to tackle these difficulties in the most satisfying manner possible. This is because some mistakes would be disrespectful to the foreign culture hence destroying the entire business relation. It is therefore important for firms to understand the manners and customs in the new culture since foreign cultures have their own ways of conducting business and failure to comply could lead to harsh consequences. Respecting the diversity of culture and beliefs of other people could be of utmost importance to a company. For instance learning the language of the host country enhances trust and respect in addition to gaining a competitive advantage. Culture affects the behaviour of individual managers and subordinates as they interact with others which greatly influence the view of the managers by the employees. To understand and be in a position to meet the varying customer needs and requirements multinational companies must be well versed with the different cultural factors of the markets they operate in. This is because these factors are significant in determining the direction of the business. These factors include; both verbal and non verbal attributes, religion, values, manners and customs, material elements and social institutions. Multinational companies should therefore conduct a cultural analysis and interpret this information in the right manner so as to be in a position to plan appropriately in advance. Failure to do this would limit the company ways of coping with differences and harnessing tension in case there is a conflict. Language plays a vital role when negotiating with partners from foreign cultures as recent studies have shown that there is always a link that exists between successful company performance in winning new business in foreign markets and being able to carry out business in the customer’s language. For instance there are those cultures that wish to conduct business negotiations in a formal manner and one would become offended when called by their first name, similarly there are other cultures where individuals prefer being informal and calling them by their first name symbolizes trust. Individuals from these two separate cultures could easily misinterpret each other incase they indulge in negotiations without prior knowledge of the other’s norms and values. It is however important to understand the limits within which a person should go while adapting to foreign culture. This is because if one is doing it in a superficial manner while overlooking the deeper meaning it could lead to misinterpretation and deemed false and insincere. Conclusion Culture is a core element in international business and it should be given full attention by companies seeking to expand abroad. It affects the negotiation of business and pricing process and without its consideration negotiations and pricing could become complex to handle hence leading to an overall failure of the business. It influences the way a company relates with the foreign country and unresolved cultural differences can lead to conflicts and misunderstanding which could impact negatively on a company thereby failing to manage future businesses abroad. Individuals with varying cultural backgrounds have varying basic assumptions which have a direct influence on international business handling. MNE’s strategic responses to deal with exposure Introduction As the exchange rates between various currencies and countries keep changing every now and then, multinational firms have become increasingly concerned about the effects of these changes and the risks they pose to their firms. Firms are driven to protect themselves from this exposure so as protect themselves from various risks associated with variation in the exchange rates. These risks include; Transaction risk; this is the effect that changes in the exchange rates has on the value of receivables/payables from exports/imports agreements, Economic risk which refers to the impact the changes in exchange rates on the present value can have on future revenues and expenses of a firm and Translation risk which refers to the impact changes in the exchange rates can have on the valuation of assets and liabilities of a multinational firm especially on its consolidated financial statements MNE’s Remedy to Exposure Invoicing and hedging of local/domestic currency enable multinational firms to avoid much exposure to variations in exchange rates hence affording them a chance to effectively manage transaction and transaction risks. For instance, when exports are invoiced in domestic currency, the importing firm or individual bears the risk of the exchange rate rather than the exporting firm hence most exporters prefer invoicing transactions using their domestic currency. Exporters can however eliminate the exchange rate risk rather than placing it on the buyers by appropriate hedging. This can be achieved through foreign currency borrowing or through diversifying their production and sales in a geographical context. It is important to note however that uncertainity in cash flows may make hedging difficult in the long run. Exchange rate exposure can also be reduced through natural hedges, this is because despite foreign currency loans being functional substitutes to forward and futures, they can easily cover longer maturities than derivatives. For instance, firms that can easily access international capital markets can easily hedge future revenues in the US dollar through issuance of a US dollar bond. This exposure can also be minimized by balancing the expenditure and revenues of foreign currency as well as by matching the foreign currency assets with the foreign currency liabilities which offers protection against the translation risk. Multinational firms also reduce their risks through risk diversification. According to the theory of portfolio selection under conditions of uncertainity, a multinational firm can reduce risk by having in place a diversified portfolio of international assets. This can enhance a firm to indulge in direct investment which allows the investor to retain control over the investment. For example a multinational parent firm can invest in a foreign branch and take control of the subsidiary’s investment. Conclusion Domestic currency invoicing and exchange rate forward hedging are both aimed and effective at eliminating transaction risk, hence a firm may adapt either of the two methods depending on the cost and the firm’s strategies. Hedging and Invoicing can however complement each other. For example where a firm is experiencing price-sensitive demand it can use foreign currency invoicing to minimize economic risk while also getting rid of transaction risk through derivative hedges. Through engaging in international trade multinational firms are well positioned to avert risk in instances as when the domestic currency is not doing so well or on instances where business is not doing so well in a particular country, hence they can fund the operations in other countries where business is doing well. The Obstacles Confronting Multinational Enterprise From Emerging Markets Interested In Expanding Overseas. Introduction Contemporary dynamics and variation in the process of internationalization prevents the development of an all-embracing theory. Different firms have varied internationalization strategies hence they decide to invest in a certain country for entirely varying reasons. However, all foreign investments regardless of their line of operation are strongly related to the existence of trade barriers or Obstacles that limit their business operations in foreign markets. Market barriers comprise anything that interferes with trade. They cause the incurrence of costs, which affect trading decisions that rational individuals would make in their absence. Market barriers are usually structural as they arise from structural deviations due to perfect competition in the final product market. Perfect competition emanates from unique and permanent control of technology, privileged access to economies of scale, inputs, control of distribution systems and product differentiation. Two distinct categories of market obstacles exist; those due to government regulations and those occurring naturally. Obstacles to Trade Government imposed barriers are meant to protect the local industries from foreign competition. This is achieved through imposing tariffs or non tariff barriers by the host country. The non tariff barriers take the form of quantitative restrictions and safe norms. Investment resulting from government imposed market imperfections is called tariff jumping. Despite foreign investments having potential threats to indigenous organizations, they also happen to be advantageous to the host economy and trade in some instances, for example, through jobs creation. Natural market barriers could either fall under firm-specific knowledge and transaction costs. The situations under which internalization of transaction costs can be attractive are mainly related to uncertainty. This is in regard to market behaviour of key suppliers, uncertainty about service quality or quality related to goods, and uncertainty about agreements in foreign markets. The pricing of firm-specific knowledge is complicated. Firm specific knowledge and know how, are intangible assets which if sold on a regular market under regular market conditions, would be highly unfavorable for a company. This is because one can never be certain how the knowledge would perform when the buyer buys it. Intangibles transactions suffer from opportunism. Trade in knowledge is a difficult matter since during negotiations the asset cannot be revealed entirely to avoid risk, the buyer would under-bid. Selling the asset on an arms length market is, therefore, highly unfavorable for a company. Conclusion The more pronounced the market barriers are the more reason it is necessary for a company to maintain full control of its own activities. However, a firm may still wish to sign agreements for protection and the utilization of organization specific knowledge, through a joint venture or licensing. This is because both options lead to a reduction of uncertainty, thus lowering transaction costs. As a result, these options might also be favorable. International trade facilitates the exchange of capital, technology, goods and services beyond political borders hence being a key source of revenues for some countries. Barriers to trade are put in place to govern the trade by protecting local industries as well as regulating the kind of trade taking place. It is therefore an integral part of multinational trade hence multinational firms have a duty to adapt and seek the markets whose barriers are friendlier to them or fit with their strategies and requirements. Read More