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International Business
Rakesh Mohan Joshi Professor & Chairperson, IIFT New Delhi

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

Chapter 13: Multinational Enterprises

Chapter 13

MULTINATIONAL ENTERPRISES

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

Chapter 13: Multinational Enterprises

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
Chapter 13: Multinational Enterprises

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

Significance of MNEs
MNEs are considered powerful drivers of globalization. They account for about twothird 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
Chapter 13: Multinational Enterprises

for

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

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 countries. workforce from multiple

Should have a perspective and a operations.

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

strategic vision of

management multinational

Chapter 13: Multinational Enterprises

Types of Multinationals
On the basis of Investment

Associates: 50 per cent

An enterprise in which a

non-resident investor owns between 10 to

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

Branches:
investor

Unincorporated

enterprises

wholly or jointly owned by a non-resident

Copyright @ Oxford University Press International Business R. M. Joshi Chapter 13: Multinational Enterprises

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.
Chapter 13: Multinational Enterprises

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

On the Basis of Management Orientation

Ethnocentric firms

The headquarters of the parent company, located in the home country, exert high level of control over the subsidiaries through centralized decision-making

Polycentric firms

Highly oriented to overseas markets wherein subsidiaries have autonomy in decisionmaking.

Copyright @ Oxford University Press International Business R. M. Joshi Chapter 13: Multinational Enterprises

Regiocentric firms Foreign 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 firms Organization of geocentric firms is relatively more complex and interdependent than that of the other types. The firm follows a collaborative approach to decision-making between headquarters and subsidiaries.

Copyright @ Oxford University Press International Business R. M. Joshi Chapter 13: Multinational Enterprises

Positive Effects of MNEs

Bring in FDI Transfer of technology Promote competition

Promote research and development

Benefit customers Promote exports in the host economies

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

Chapter 13: Multinational Enterprises

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
Chapter 13: Multinational Enterprises

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

Measuring the Extent of MNEs Internationalization

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

revenue, profits, market value, return of

equity, etc.
Copyright @ Oxford University Press International Business R. M. Joshi Chapter 13: Multinational Enterprises

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.

Copyright @ Oxford University Press International Business R. M. Joshi Chapter 13: Multinational Enterprises

Performance:

The

extent

of

commitment of the firms 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 firms

internationalization.
Copyright @ Oxford University Press International Business R. M. Joshi Chapter 13: Multinational Enterprises

Management Orientation

Attitude and behaviour of top management towards internationalization, though

abstract, are crucial factors in determining

the extent of a firms internationalization.

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

Chapter 13: Multinational Enterprises

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 firms 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.
Chapter 13: Multinational Enterprises

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

Indices for Measuring the Extent of MNEs 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
Chapter 13: Multinational Enterprises

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

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 worlds largest companies, which include:

Emerging MNEs from Rapidly Developing Economies

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)
Copyright @ Oxford University Press International Business R. M. Joshi Chapter 13: Multinational Enterprises

Advent of Indian Multinationals

Consequent to economic liberalization

Indian
overseas

companies
to

are

fast

expanding
eg.

become

multinationals

Hindalco industries, Infosys technologies, Larsen & Toubro, ONGC, Ranbaxy, Reliance, Tata steels, Videocon, Wipro etc.
Copyright @ Oxford University Press International Business R. M. Joshi Chapter 13: Multinational Enterprises