Text 1. WHY DO MULTINATIONAL ENTERPRISES EXIST?
Why do multinational enterprises (MNEs) exist? This seems to be a silly question. The answer seems to be simple – because they are profitable! But the issue is more complicated than it sounds.
There is some agreement that five different pieces together provide a good explanation of why multinational firms exist (and why they are as large as they are. The combination of these five pieces into a framework for understanding multinationals is often called the eclectic approach with credit for the synthesis going to John Dunning.
Inherent disadvantages
Our first step is to recognize that there are good reasons why MNEs should not exist. An MNE has inherent disadvantages in trying to compete
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For instance, if the advantages are based on superior technology, a strong brand name, or better management practices, the firm could license one or more foreign firms to use these assets.
An important advantage of licensing foreign firms is that the firm avoids (most of) the inherent disadvantages of establishing and managing its own foreign operations, as we discussed above. On the other side there are advantages to keeping the use of the firm-specific advantages within (internal to) the enterprise. Internalization advantages are the advantages of using an asset within the firm rather than finding other firms that will buy, rent, or license the asset. Inter¬nalization advantages exist because there are drawbacks to using the market for many firm-specific advantages, particularly intangible assets like technology, brand names, marketing techniques, and management practices.
Internalization advantages arise from avoiding the transaction costs and risks of licensing an independent firm. Negotiating the license is often costly and diffi¬cult. The licensor wants a high payment, and the licensee wants a low payment. The licensor also wants to put various restrictions on how the licensee can use the asset, but the licensee wants to have as few restrictions as possible. Then, even if the license agreement can be negotiated,
It also requires more of an investment and commitment by the international company which creates a higher risk. There is also the down side of having difficulty managing local resources.
Multinational corporations can be divided into three broad groups according to the configuration of their production facilities:
The foreign partner can also become a competitor by selling its production in places where the parental company is already in.
Ownership advantages could be intangible assets like technology and information, managerial, marketing and entrepreneurial skills, organisational systems, access to intermediate or final goods markets, a production process, patent and blueprint. The ownership advantage includes some firm specific valuable market power or cost advantage on the firm sufficient to outweigh the disadvantages of doing business abroad. They are closely related to the technological and innovative capabilities and the economic development levels of source countries.
Indirect exporting is when a company sells their product to a third party that will then sell that product to customers in foreign countries (2012). Strengths for this type of strategy are there is little financial commitment, the financial risk is reduced by using the third party, and there is a reduced risk that the future of the product or brand will look bad in the new market (2012). A limitation of this entrance strategy are the company has to rely on the third party to get customers and negotiate the sale prices for them (2012). Direct exporting is when the firm that is entering the market enters on its own and handles their own exports (2012). Strengths of this strategy are the company gets to handle their own exports, they have complete control, the company also has a greater amount of potential returns, and they can maintain a greater profit from their sales (2012). Limitations of this are there is a higher risk involved since the company is handling its own foreign markets, and there is a larger investment in not only money but time (2012). Licensing is when there is a relatively low link to risk that permits the company to enter into the market (2012). The strengths associated with licensing are no large capital investment, the company may be able to get around the restrictions and barriers a country can put up, and the company can charge a higher price for their product (2012). Limitations of licensing are
We found innovation, cost reduction and market conditions as key elements supporting a successful internal strategy and strategic alliance and diversification to be among the most widely applied strategies for a foreign market penetration and development, while fusions and licenses were the least preferred.
There are many theories given by different group of researchers about the existence of multinational enterprises or MNE's. According to John Cantwell, it was in the 1970's and 1980's that many theories on MNE's were proposed. These theories were either general theories of MNE's which were called the main institution for international production or the theories on foreign direct investment, the means by which international production is done ( Pitelis, Christos N. and Sugden, Roger, The nature of the Transnational firm, Pg 10). Amongst the most famous are the Hymer's theory of international production, the internalization theory put forward by Buckley and Casson, Dunning's Eclectic Paradigm, and the evolutionary theory
* We are not looking at which projects may have a positive impact on the company’s other business units. Perhaps one project stimulates the retail of licensing business more than the other.
The rapid pace of Globalization has led to a change in the global economy during the past several decades; it is believe that factors such as trade liberalisation, access to cheaper labour and resources, similarity of consumer demand around the world, and advances in technology and communication has widened the market of consumption, investment as well as production on a global scale. These globalization driven factors created new challenges and global competition for businesses around the world thus as a response many companies decided to expand their operation across national borders in order to be competitive. A company that operates their business in at least one country other than its country is called Multinational
There are many reasons an organization should pursue global sourcing. Figure 1, showcases many of the major advantages of global sourcing. The main advantages to source globally are cost benefits, new technology, and quality.
Eclectic Paradigm: - The Eclectic paradigm and transaction cost analysis – It is the length, types and pattern of international production and it is founded on the juxtaposition of the ownership-specific advantages of the company considering foreign production. The propensity to internationalise the cross-border markets for these, and the attractions of a foreign market for the production (Dunning 1988).
Multinational business enterprises have had a big impact on the global economy over the years because of their
Emerging Market Multinationals mainly emerged because domestic companies in developed countries saw a shift in growth pattern once they reached the peak of their economic curve. Growth slowed down and even became stagnant. This was primarily because the markets in the developed countries had already reached their optimum levels. On the other hand, this was the period of time when developing countries began to experience rapid economic growth. This prompted companies to look towards the potential and resources of these emerging markets as their source of salvation and develop
Licensing differs from contract manufacturing in that more value chain functions have been transferred to the licensee. In outsourcing production and downstream activities a licensor firm can concentrate on its core competences and therefore will remain technologically superior in its product development- for example Apple licenses its brand to manufacturers of accessory products, and the BBC licenses rights to broadcast TV shows around the world. However a lack of control over licensor operations and therefore quality may lead a company to use franchising (a sub variant of licensing) in which the franchisor gives a right to the franchisee against a
First the licensing may result in a firm's giving away its know-how that is giving away his competitive advantage to the competitor in the foreign market. Suppose Ford gives license to AvtoVAZ, one of the large Russian manufacture then it can start its own car manufacturing using Ford's know how. Second disadvantage is providing the license to the company there is no tight control over the subsidiary firm in foreign market. Ford wants to exploits the opportunity that it has in Russia by its own way. Licensee may not follow all instruction of Ford. The last problem with the giving license is that some terms of know-how can not be defined on a page or documented. Like service industry (Hospitality industry) that how to license the subsidiary for "how to well come and how to greet" as a part of the service.(Hill, 2003,p-215).