Sunday, June 3, 2012

Essay on Multinational Enterprises

Essay on Multinational Enterprises

Although the roots of the multinational companies began their formation with the beginning of the intense colonization, international travels and discoveries of the new territories back in the sixteenth century, the phenomenon has become truly global only four centuries later. In the following paper we intend to analyze and determine the underlying reasons for the emergence of such companies and their basic steps in becoming multinational.

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First of all, it is important to define the term under discussion: according to Dunning and Lundan, a multinational enterprise is “an enterprise that engages in foreign direct investment and owns, or in some way, controls value-added activities in more than one country” (2008, p.3). Jean Francois Hennart defines the same term as “an organization that extends employment contracts over national boundaries” (Pitelis & Sudgen, 2000, p.72). An MNE is an enterprise that controls and manages production units located in at least two countries, according to Richard Caves, (Caves, 1991, p.146), while Vernon and Wells call it “a cluster of affiliated firms located in a number of countries” (Vernon and Wells, 1981, p.3). Although the definition of the multinational enterprise varies in complexity and wording, most scholars agree at the several core points: it is a business enterprise of some kind, and it expands its business interests over the national boundaries. Dunning and Lundan continue exploring the topic through defining the criteria for assessing the level of an enterprises’ “multinationality”. According to the scholars, the latter may include: the number and size of foreign affiliates or associate companies, the number of countries in which the company owns or controls the value-added activities, the degree of management’s internationalization, the proportion of global assets, revenue, employment or income accounted for by its the foreign affiliates, etc. (Dunning & Lundan, 2008).

It is notable that the first theories trying to explain the emergence of the multinational enterprises based on increasing popularity of the foreign direct investment (Hennard, 2008). However, the differences in real interest rates provide “neither a necessary nor a sufficient reason” for the existence of the multinational enterprises and there is, according to the scholars no evidence of the interconnection between the foreign direct investments and the growth of a multinational enterprise. Steven Hymer questioned the FDI theory of the MNE, asking why did firms, not the commercial institutions like banks, have undertaken the FDI and sought control over the foreign assets (Hennard, 2008, p. 129). Hymer also stated that “if a firm of one country possesses an advantage over firms of all other countries in a certain line of activity, that does not necessarily mean that the firm will have its own enterprises in foreign countries (1976, p. 47), implying that the firm might not choose to use an advantage but license it instead. Yamin claims that direct foreign investment was more preferable because there were just a few buyers on the market of the advantage, while direct foreign investment potentially increased joint profits and eliminated the oligopolistic competition (Yamin, 2008, p. 59). Hymer’s theory suggested that the emergence of the multinational enterprises was mainly caused by the internalization pecuniary externalities of the two monopolists that would combine their forces in order to overcome the structural market imperfections. However, in reality MNEs exist in highly competitive fields with numerous participants like car production and textile industry as well.

The existence of the natural market imperfections made the scholars go further in their theoretical vision of the causes of the business internationalization. Internalizing the non-pecuniary externalities (natural market imperfections) is the main idea of the transaction cost/internalization theories. The transaction cost theory argues that an MNE “arises to organize interdependencies between agents located in different countries” (Hennart, 2008). This only happens in case the costs of such transactions within the firm are lower than the same costs within the market and simultaneously are lower than the final profits gained. The additional challenge for the MNE is that it has to deal with the political and the cultural barriers.

Trying to determine the main reasons for the multinational enterprises’ activities, the scholars have determined several motives for the foreign production. These findings allow categorizing the MNEs into the following core types: the natural resources seekers, the market seekers, the efficiency seekers and the strategic asset seekers. There are several additional theories trying to explain to some extend the activities of the multinational enterprises in the form of the direct foreign investments. The latter include, according to Dunning, the risk diversification hypothesis, macro-financial and exchange rate theories.

The companies going abroad may justify such a move through numerous possible benefits, including the economy on scale, the economies of scope, access to key factor and location-related advantages, satisfying growth expectations of shareholders, accumulation of the market power, etc (Venzin, 2009). For either reason a firm might switch its production or trade location – the most important condition for such actions would be that the cost of such “moves” is lower than the same moves on the internal market or any other alternative actions.

The next question is: how do they do it? How do the firms become multinational? There are a number of ways a firm can internationalize its business: through contractual agreements, exports or foreign direct investments. Numerous factors add to the decision-making process, including the industry characteristics, the market size, the restrictions on foreign investments, the competitive advantage of the foreign firm and the resource availability to implement the strategy may be named as several core factors among others. Decision-making here is a complex procedure implying cost and risk analysis and it obviously needs a huge data base to be able to go international. To be on the safe side, a firm will most naturally follow the organic growth pattern in the form of a subsidiary, branch or representative office and accumulate knowledge and experience in order to ensure further market success. The range of multinational organizations may roughly be divided into “horizontal” firms, which produce the same goods and services in multiple countries, and “vertical” firms that tend to geographically diversify and fragment the production stages (Carr & Markusen & Maskus, 2001). The former, the scholars claim, seem to be more prevalent in the existing business world.

Despite the reason and the form of cross-border expansion, the multinational enterprises are a continuously growing and expanding phenomenon of the previous century that tends to continue activities in the twenty first century. The history of the multinational enterprises activity is a mix of political, social, economical, cultural factors, events and reactions. Active globalization has proved that MNEs are willing and able for either reason to organize cross-border production and transaction more efficiently. This phenomenon still requires further deep studies of the reasons and ways of the existing businesses going international and the impacts of these activities on an international scale as well as for each separate country involved in such multinational business. For either reason, the multinational enterprises offer new possibilities for the consumers and other businesses and add to our knowledge of commercial benefits that might be brought through experiencing new challenges and opportunities on the foreign or even global market. The studies of the MNEs continue, and it is obvious that building a strict theoretical basis for the activities of the multinational companies is far from being realized and applied as a universal rule for the international commercial success. Further studies might help both the theorists and the practitioners realize how a company may become more profitable and successful, which might, in the end, bring additional benefits for the consumers as well.
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