Oxford University Press International Business R. M. Joshi 1 MULTINATIONAL ENTERPRISES

Copyright @ Oxford University Press International Business R. M. Joshi

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MULTINATIONAL ENTERPRISES


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Learning Objectives

To explain the concept of an Multinational Enterprises (MNEs)

To discuss various types of MNEs To examine the impact of MNEs on host

economies To explore various techniques to measure

MNEs’ internationalization To assess emerging MNEs from rapidly

developing economies


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Significance of MNEs

MNEs are considered powerful drivers of globalization. They account for about two-third of world trade and about one-third of the total world trade is intra-firm trade. The universe of MNEs is considered to be large, diverse, and expanding. This makes the study of multinationals imperative for international managers.


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Multinational Enterprise A firm that operates in more than one, that is, multiple countries. For a firm to be an MNE, the following criteria need to be fulfilled:

• Should own or control operations in multiple countries.

• Should generate a substantial portion of its revenues by its foreign operations.

• Should employ workforce from multiple countries.

• Should have a strategic management perspective and a vision of multinational operations.


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Types of MultinationalsOn the basis of Investment Associates: An enterprise in which a

non-resident investor owns between 10 to 50 per cent

Subsidiaries : An enterprise in which a non-resident investor owns more than 50 percent

Branches: Unincorporated enterprises wholly or jointly owned by a non-resident investor


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On the Basis of Operations Horizontally integrated

multinationals have manufacturing operations located in different countries to produce same or similar products.

Vertically integrated multinationals have manufacturing operations in certain countries to produce products that serve as inputs to its production in other country/countries.

Diversified multinationals have manufacturing operations located in different countries that are either horizontally or vertically integrated.


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On the Basis of Management Orientation Ethnocentric firmsThe headquarters of the parent company, located in the home country, exert high level of control over the subsidiaries through centralized decision-making Polycentric firmsHighly oriented to overseas markets wherein subsidiaries have autonomy in decision-making.


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Regiocentric firmsForeign affiliates consolidate their decision-making and organization on regional basis and the level of integration is high within the regions but not across the regions. Geocentric firmsOrganization of geocentric firms is relatively more complex and inter-dependent than that of the other types. The firm follows a collaborative approach to decision-making between headquarters and subsidiaries.


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Positive Effects of MNEs

Bring in FDI Transfer of technology Promote competition Promote research and development Benefit customers Promote exports in the host economies


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Negative Effects of MNEs Influencing host-country government decisions Transfer of inappropriate technology Cultural imperialism Exploitation of host country resources Perceived as agents of neo-colonialism Promotes unhealthy market competition Promotes hostile mergers & acquisitions Crowding out domestic entrepreneurship Limited benefits to host countries Circumventing host countries’ regulatory

framework


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Measuring the Extent of MNE’s Internationalization

Size: It is generally believed that firm size has a positive influence on its internationalization, though not accepted universally. Major criteria used for determining the size of a firm include sales revenue, profits, market value, return of equity, etc.


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Structure: Structure implies the number

of countries an MNE operates in and the

citizenship of its top managers and

corporate owners influence the level of its

internationalization.


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Performance: The extent of commitment of the firm’s resources to foreign operations and the reward from these commitments. Various performance based parameters, such as foreign sales, profits, assets, etc., may be used to gauge the extent of a firm’s internationalization.


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Management Orientation

Attitude and behaviour of top management

towards internationalization, though

abstract, are crucial factors in determining

the extent of a firm’s internationalization.


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Ethnocentrism: A predisposition where all strategic decisions are guided by the values and interests of the parent firm

Polycentrism: A predisposition where strategic decisions are made to suit the countries of the firm’s operations

Regiocentrism: A predisposition that tries to blend the interest of the parent firm with that of subsidiaries on a regional basis

Geocentrism: A predisposition that seeks to integrate diverse subsidiaries through a global systems approach to decision-making.


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Indices for Measuring the Extent of MNE’s Internationalization

Transnationality Index (TNI): The average of the ratios of foreign assets to total assets; foreign sales to total sales; foreign employment to total employment

Internationalization Index (II): The ratio of the number of foreign affiliates to the total number of affiliates in the firm


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Emerging MNEs from Rapidly Developing Economies

Companies from rapidly developing economies (RDEs) are on the fast track to become major multinationals. These firms are fast gaining global market share, making worldwide acquisitions and emerging as important customers, business partners, and competitors for the world’s largest companies, which include:

• Bharat Forge (India) • Ranbaxy Pharmaceuticals (India) • Wipro (India) • ONGC (India)• Infosys (India)• Johnson Electric (China) • Pearl River Piano Group (China) • Techtronic Industries Company (China)• Cemex (Mexico)


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Advent of Indian Multinationals

Consequent to economic liberalization Indian

companies are fast expanding overseas to

become multinationals eg. Hindalco

industries, Infosys technologies, Larsen &

Toubro, ONGC, Ranbaxy, Reliance, Tata

steels, Videocon, Wipro etc.

Documents

Oxford University Press International Business R. M. Joshi 1 MULTINATIONAL ENTERPRISES