Global

Business 2014 Ranim Helwani

Chapter 1 Expanding Abroad: Motivations, Means and Mentalities

Operating in an international arena brings many opportunities but also new challenges:
access to new markets and low-cost resources, new sources of information and knowledge
broaden the options of strategic moves
but: operations get more complex, diverse and uncertain.

The Multinational Enterprise (MNE): Definition, Scope and Influence

Definition: Qualifications for MNE:
- MNEs have substantial direct investment in foreign countries and not just hold trading
relationships of import-export business
- MNEs are engaged in active management of these offshore assets and see them as
integral parts of the company, both strategically and organizationally.
- Very recent phenomenon; developed after WWII

Scope:
changing definition of MNEs by the UN highlights the importance of both strategic and
organizational integration: The active, coordinated management of operations located in
different countries is the key differentiating characteristic of an MNE.
MNE create an internal organization to carry out cross-border tasks and transactions
internally, rather then depending on trade through external markets.


MNE Influence in the Global Economy
MNEs have an enormous influence in the global economy
- in 2010: number of MNEs > 65,000
- Value added is about a quarter of the global gross domestic product GDP
- Most large companies in the world are MNEs
- Some revenues of MNEs are as big or even bigger as the total GDP of some countries.


The Motivations: Pushes and Pulls to Internationalize
some motives are entirely idiosyncratic (ie. CEO wanting to spend time in Mexico)
but mostly there are systematic patterns of motivation to expand operations internationally

Traditional Motivations
three driving forces behind overseas expansion of MNEs:
1. The need to secure supplies (ie. aluminium, rubber, oil)
2. Market-seeking behavior: additional sales would enable economies of scale and scope;
particularly strong motivation for companies that have an intrinsic advantage related to
their technology or brand recognition which gave them a competitive advantage in
offshore markets.
3. Desire to access low-cost factors of production: sourcing labor more economically;
availability of lower cost-capital due to government financial incentives

The Product Cycle Theory:
captures the ways in which the three motives interact to push companies to become MNEs
1. Stage:
- innovation created in home country serves as starting point for internationalization
process
- production facilities are built in home market to maintain close linkages between
research and production

Global Business 2014 Ranim Helwani

-

Some demand created in other countries is met by exporting products establishing

export unit marginal side benefit

2. Stage
- the product matures and production processes become standardized
- export sales have become important part of revenues, not marginal anymore
- increasing competition as firms begin to see growing demand and start to establish
themselves in the market served by exports
Preventative reaction: Innovation company sets up production facilities in the
importing countries
transition from exporter to becoming a MNE

3. Stage
- products become highly standardized; many competitors enter business
- competition focus on price and cost
activates resource-seeking motive: company moves production to low-wage
developing countries
Developing countries become net exporter and developed countries net importer


Emerging Motivations
managers began to think about their strategy in a more integrated, worldwide sense;
traditional motives become secondary
1. Factor:
- Increasing scale economies, ballooning R&D investments and shortening product life cycles
transformed many industries into global rather than national structures and made a
worldwide scope of activities a prerequisite for companies to survive.
2. Factor:
- Global Scanning and Learning Capability: becoming aware of alternative low-cost
production sources; being exposed to new technologies and markets that stimulated
innovative product development. Worldwide presence gives informational advantage
3. Factor:
- Advantages of competitive positioning: Leveraging their global information access by
seeking government intervention in order to offset the challengers competitive price
reductions
MNEs rarely driven only by one factor; use the many strengths to play strategic game called
global chess.


The Means of Internationalization: Prerequisites and Processes
How a MNE expands
Prerequisites: attributes a company must possess if it is to succeed in overseas markets

Prerequisites for Internationalization
Domestic companies have a huge natural advantage over foreign companies: greater
familiarity with culture and government requirements, existing relationship with customers,
suppliers etc.
Three Conditions must be met for existence of MNE:
1) Foreign country must offer location-specific advantages to provide the motivation for the
company to invest there.
2) MNE must have a distinctive competency to overcome the liability of its foreignness (ie.
superior skills, advanced technological expertise an advantage in the value chain)
3) MNE must possess organizational capabilities to achieve better returns from leveraging
its strategic strengths internally (through FDI; subsidiaries) rather than through external

Global Business 2014 Ranim Helwani

market mechanisms (contractual relations such as licensing technology, franchise brand

name, sell products to local distributors less effort)


The Process of Internationalization

process is rarely well thought out in advance and typically builds on rational analysis,
opportunism and pure luck.
But there is some general pattern firms follow:

A Learning Model of Internationalization (Uppsala Model)
Describes foreign-market entry as a learning process
1. initial commitment of resources to foreign market gains local market knowledge
about customers, competitors etc.
2. On basis of the market knowledge, firm evaluates current activities, extent of its
commitment and its opportunities for additional investment.
3. Firm makes subsequent resource commitment more local market knowledge
through several cycles of investment, the company develops the necessary levels of local
capability and market knowledge to become an effective competitor in the foreign country.

some companies speed up this process of building market knowledge by investing in or
acquiring local partners or starting up as born globals

Complexity of decisions that MNEs face in entering a foreign market: Level of market
commitment(resources committed) vs. level of control needed over foreign activities
- some internationalize by gradually moving up the scale from exporting, to joint venture
to FDI; others start directly with high control and high commitment; Born globals chose
low-commitment and low-control mode
-
(Figure 1-2)
Small and medium-sized enterprises (SMEs) retain their size while others observe a positive
impact due to their FDI activity and grow.


The Evolving Mentality: International to Transnational
Four stages that reflect the evolutionary pattern; the way in which management thinking has
developed over time as changes have occurred in both the international business environment
and the MNE as a unique corporate form.
- it highlights that the initial motives have changed over time, thereby changing
management attitutes
- classification provides a specific language system to describe the different strategic
approaches adopted by MNEs

1. International Mentality
domestic with foreign appendages
- earliest stages; overseas operations seen as distant outposts to support the domestic
company with incremental sales
- derived from the international product cycle
- products are developed for domestic market and subsequently sold abroad,
- technology and knowledge sources transferred from parent company to overseas
- offshore manufacturing as a means to protect companys home market
- managers assigned overseas because they know language
- decisions are made in opportunistic and ad hoc manner
- entering countries where there is low psychic distance

Global Business 2014 Ranim Helwani

2. Multinational Mentality
begins as managers recognize the differences among national markets
- growing importance of sales and profits from foreign markets; more than marginal
- success of local competitors in foreign market accelerate learning that of companies that
otherwise would remain unresponsive with international mentality
- adapt a more flexible approach by modifying products, strategies and management
practices to the local environment Establish multiple, nationally responsive strategies
of the companys worldwide subsidiaries.
- Managers are highly independent entrepreneurs with local market knowledge that are
able to establish a considerable independence from headquarters.
Downside: rises inefficient manufacturing structure; no linkages; inefficiency in design,
production, logistics, distribution etc.


3. Global Mentality
views the world as its basic unit of analysis, not individual national markets
falling trade barriers:
creating products for a world market and manufacturing them on a global scale in a
few highly efficient plants improves on transportation and communication
- underlying assumption: national tastes and preferences are more similar than
different can provide standardized products at adequate cost and quality
- central coordination and control
- managers have worldwide responsibility; R&D managed from headquarters and
strategic decisions take place at the center.

Downside: success created countervailing forces of localization:
- host governments saw global companies getting too powerful and threatening: increased
restrictions and demands on them
- customers rejected homogenized global products and went back to national preferences
- increasing volatility in international economic and political environment
these problems lead to inefficiency of a centralized global approach


4. Transnational Mentality
more responsive to local needs while capturing the benefits of global efficiency
- key activities and resources neither centralized nor too decentralized that each
subsidiary carries out own tasks.
resources and activities are dispersed but specialized to achieve efficiency and
flexibility at the same time. Resources are integrated into an interdependent network of
worldwide operations.
- intensive, organizationwide coordination and shared decision making
- In contrast to Global Mentality: recognizes importance of flexible and country level
operations
- In contrast to Multinational Mentality: provides links to coordinate operations to retain
competitive effectiveness and efficiency


most companies exhibit some attributes of each of these different strategic approaches


Administrative heritage: The unique and deeply embedded structural, processes and cultural
biases that play an important part in shaping every companys strategic and organizational
capabilities.

Global Business 2014 Ranim Helwani