International Business Mnes

IB: L5 Actors (MNEs)

Key Learning Objective

• This topic will focus on the form, nature & types of Multinational Enterprises (MNEs). The positive & negative roles & behaviors of MNEs will also be discussed in this topic.

Key Questions

• Who are the actors in globalization?

• Organizations like MNCs/MNEs
• Supranational institutions like WTO, ILO, IMF
• International non-government organizations (NGOs)
• Governments

• What is the ‘mission’ of these respective actors?
• How do the actors relate to each other? (What is the relationship among these actors?)
• How do they resolve conflicts?

Victoria’s Big Secret in Burkina Faso

• “When I get tired & I slow down, he comes to beat me”
• # Bloomberg reporters went to Burkina Faso, Africa where Victoria's Secret usually buys fair trade and organic-certified cotton crop to make the lingerie it sells. Reporters there found 13-year-old children laboring in the fields in pain from being beaten with switches by their bosses, the cotton farmers
• ☺ Victoria Secret’s subcontractor was found to beat workers when they don’t work (what was demanded) & found to employ child labour
• ☺ Nike doesn’t allow outsiders to supervise their factory. Saying that it’s to protect their property but in fact they are hiding their ‘dirty works’ such as ill-treat of workers

Multinational Enterprise (MNEs)

• ‘an enterprise that controls & manages production establishments located in at least two countries’ (Caves 1996)
• ‘a firm which has the power to co-ordinate & control operations in more than one country, even if it does not own them’ (Dicken 1998)
• ‘an enterprise that engages in foreign direct investment & owns or controls value-adding activities in more than one country’ (Dunning 1993)
• ☺ doing business outside (> than 1) but must own the facilities

Why are they important?

• In 1969 Howard Perlmutter wrote:

• Multinational Corporation is a new kind of institution – a new type of industrial social architecture particularly suitable for the latter third of the twentieth century
• This type of institution could make a valuable contribution to world order & conceivably exercise a constructive impact on the nation-state

The growth of the MNEs

• The Honourable East India Company (1600 – 1858):

• Established trading rights with the Mughal Empire
• Acquired exclusive rights to tea, silk, dyes, etc
• Held rights to mint currency, acquire territory, establish military, exercise legal rights, make war & peace
• Administrative authority over the British Indian Empire

• Contemporary MNEs:

• From largely European, North American & Japanese: e.g. Philips, Unilever, Coca-Cola, Sony, Etc
• To Chinese & Indian: e.g. Lenovo, Tata Motors, etc
• From largely resource/product based: e.g. oil, minerals, consumer goods, etc
• To services & finance: banking, investment funds, insurance, R&D, etc

• # R&D

• At an operational level, R&D investment is considered to support the identification of new product opportunities, of new ways of applying existing products & of technological advances in production processes
• At the strategic level, investment in R&D is seen as an essential approach to building & maintaining competitive advantage over other organizations in the same market – e.g. in technology-intensive industries such as pharmaceuticals, aircraft manufacture & telecommunications
• Represent a high cost to businesses → large multinational org. are better able to support major R&D projects than are smaller enterprises
• Majority of R&D effort is concentrated in countries that are able to offer the necessary knowledge & skills bases in their workforce → (1) in the development of technology clusters, where firms engaging in the same field of business locate close to each other in order to take adv. of these resources; (2) R&D is not exclusive domain of the traditional ‘developed’ economies – e.g. China
•  A commercial org. which aims for profit-maximization will ensure that the R&D spending is towards low-risk & high-return developments. BUT when considered from the perspective of various stakeholders, there are pitfalls. (1) in the field of pharmaceuticals, it is known that new drug development takes a considerable amount of time & is high-risk & high-cost undertaking. Thus firms in this industry tend to concentrate their resources on research & development of those medicines that are guaranteed to bring a return on the R&D investment → leaving a lot of health problems in the world unaddressed

• ☺ R&D: is one of the push factor for internationalise; explore R&D outside the country
• ☺ now move on to – fast consuming producer goods, banking, telecom services, IT, pharmaceutical
• ☺ e.g. Rolls-Royce commences construction at Seletar Aerospace Park. Rolls-Royce, the global power systems company. Singapore is an important regional hub. The establishment of our Seletar Campus aims to meet the growing needs of our global customer base. Singapore offers highly competitive skills, a business-friendly environment conducive to high value-added manufacturing, a strong focus on research and innovation, and proximity to our growing customer base in the Asia Pacific region.

• # Firms may adopt a number of strategies in seeking to gain ‘competitive advantage’ through internationalizing.
• # A central theme of contemporary internationalization is the drive to configure the company ‘value chain’ in order to increase efficiency, make most effective use of resources & hence maximize profits.
• # Why firms decide to grow internationally?

1. Increase in profitability
2. An expectation of delivering a product or service that is not currently available in a foreign market
3. Take advantage of expertise in the foreign market
4. To benefit from tax subsidies available abroad
5. To generate economies of scale through increasing production to meet international demand
6. To respond to competitive pressures
7. To counter the decline in demand within the domestic market
8. To utilize excess production capacity
9. To seize the opportunity to expand abroad through serving a foreign market located within a close geographic or psychological distance from the domestic

• ☺ Uppsala model: when you are more familiar with the country, you will tend to setup more in the country. In other words, company goes stage by stage
• ☺ Why MNCs internationalise? To expand the market, role of govt.

Motivating Factors for MNEs (Push factors/Why they want to go beyond the country?)

1. Resource Seeking Investment

• Where are rare earth reserves / mines located?
• # Resource seekers invest abroad to acquire resources that are either unobtainable or only available at much higher cost in the home country. Such investment involves primary pdts (agricultural goods, minerals & raw materials)
• # E.g. oil production in developing countries. Frequently involves inward FDI. FDI enables oil companies to secure inputs for their downstream activities (refineries & ultimately retail outlets) located outside the country where the oil is extracted. From the perspective of the host country, multinational oil companies bring technical expertise
• # Other resources sought by foreign investors include cheap unskilled, semi-skilled & increasingly with the development of software exports from developing countries, skilled labour; such investors come from countries with high real labour cost
• # Other location-bound resource-seeking investments (Dunning's 'L' factor) include tourism & construction
• Secure access to resources (raw materials) & ensure long-term supply

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• E.g. FDI Inflow in Russia – Sector-wise Breakup

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The food industry has attracted the highest number of FDI projects – 45 projects, associated with $2.4 billion of investment on 2002-2003. However, in terms of total investment, the energy sector is by far the biggest recipient – accounting for $10 billion in 2002-2003. Other major sectors include wood products ($1 billion), consumer goods ($95 million), automotive OEM ($670 million) & metals/mining ($552 million) sectors