Term Project

A. FEATURES OF THE MNE

1. Definition

a. Must have “substantial direct investment” in foreign countries.

b. Must have “active management” of overseas operations.

2. Scope

a. “Active, coordinating management of operations” is key differentiating characteristic of an MNE (from other organizations)

b. True MNEs have systems in place to handle cross-border tasks internally.

3. Influence

a. Some statistics according to the UN:

i. Over 130 million firms

ii. Foreign affiliates of MNEs generated approx. $8 trillion in value

B. MOTIVATIONS TO INTERNATIONALIZE

Some reasons why companies are motivated to expand overseas

1. Traditional Motivations – historical motivations (pre-1980s) include:

a. Secure key supplies – e.g., aluminum companies seeking bauxite.

b. Market-seeking behavior

i. To exploit an intrinsic advantage (e.g., technology, brand recognition, R&D capabilities)

ii. To seek additional sales to exploit economies of scale and scope

c. Access low-cost factors of production, especially:

i. Labor

ii. Capital

B. MOTIVATIONS TO INTERNATIONALIZE (continued)

NOTE: Prior to the 1980s, the product life cycle (PLC) theory could explain much of a company’s motivation to internationalize.

2. Emerging Motivations (i.e., motivations post-1980s)

a. Foreign operations no longer seen as only strategic and organizational “appendages” to domestic operations

b. Factors influencing a company’s motivation to internationalize (i.e. why overseas operations became more important):

i. Increasing scale economies, R&D investments, and a shortened PLC.

ii. The MNE’s global scanning and learning capabilities – alternatives regarding labor, technology, etc.

iii. Increased competitive positioning allowing cross-subsidization of markets

Note: Cross-subsidization of markets – using profits of a subsidiary in one market to subsidize an unprofitable subsidiary in another.

C. MEANS OF INTERNATIONALIZATION

Examines the requirements and processes of going international (i.e., how)

1. Domestic Firms vs. MNEs (advantages/disadvantages)

a. Advantages of domestic firms

i. Know national culture, structure of industry, etc

ii. Have existing relationships with suppliers, customers, regulators

b. Advantages of MNEs

i. Likely has advanced technology

ii. Scale economies (in R&D, production, etc)

NOTE: Above listed advantages of MNEs does not mean they will enter the market through their own offshore operations.

2. Prerequisites for Becoming an MNE (3 conditions) – see next page

2. Prerequisites for Becoming an MNE (3 conditions)

a. Must have motivation to invest overseas

b. Must have strategic competencies/ownership-specific advantages (see advantages above)

c. Must have internal organizational capabilities

3. Process of Internationalization

a. The Learning Process of foreign market entry (1977)

i. Firm makes initial commitment of resources

ii. Gains knowledge of local mkt, customers, etc

iii. Improved ability to evaluate current operations and opportunities

iv. Able to make additional investments thus increasing effectiveness

b. Other market entry processes:

i. Purchasing existing facilities/firms

ii. Subcontracting to others (e.g. licensing)

iii. Increasing commitment (from exporting, to joint ventures, to FDI (See Fig. 1-2).

D. EVOLVING MENTALITY: INTERNATIONAL to TRANSNATIONAL

Four evolutionary stages (mentalities) of internationalization:

1. International Mentality

a. Overseas operations seen as “outposts.”

b. Heavily influenced by the PLC

2. Multinational Mentality

a. Overseas operations increase in importance as sales/profits increase.

b. Products/technology modified to suit specific foreign mkt.

3. Global Mentality

a. Reduce inefficiency in multinational mentality by producing for a “world market”

b. Assumes national tastes are somewhat similar

c. Requires increase levels of coordination

4. Transnational Mentality

a. Emerged due to the need to be locally responsive while developing global products