International Business

Introduction

A multinational company is one that extends beyond the borders of an individual country and carries out business operations with branches and affiliates in two or more countries .Many companies have been evolving from local firms to large multinational corporation so that they are present in many parts of the world either physically or though the internet. These companies make a substantial investment in foreign markets and actively take part in the management of resources in these countries. In growing global business environment, many firms cannot afford to assume that their local market will be sufficient for continuous growth and profitability. Therefore, firms want to become multinationals in order to have ownership and localization advantage and internalizing benefits.  The overall aim is for the firms to increase on their sales, reduce costs and hence increase profitability.

 Fundamentally, the major motivation for companies to carry out foreign direct investment relates to the need for seeking resources, market, efficiency and strategic seeking of assets.  This can be linked to various advantages a firm expects to achieve by expanding into the international markets which will place it at a competitive position in the global market. Expansion of a market means attainment of economies of scale in terms of reduced cost and expenses and increased sales and hence the achievement of the profitability goal set by the management (McDonald, 2016). Every organization wants to have as low costs and expenses as possible and a global arena is important in helping a firm to attain this goal. A company will carry out an examination of the resources it needs and identify places where they can be obtained at the lowest price. The search will involve outside the borders on a hope to locate more economical solutions to the manufacturing and production problems being experienced due to limited resources (Sönmez, 2013). This boils down to the idea of localization of advantage where the multinationals choose to serve their customer from their own location.

Localization of advantage means that a firm will choose adopting a strategy that will ensure low cost of manufacturing and labor and hence move the manufacturing plants to places closer to natural resources, efficient technology and favorable tax structures. For instance, a firm located in Canada and gets the large part of resources from China can consider moving its operations closer to China or find a new source of required resources. The process of outsourcing may not be very favorable for business to cost and regulatory procedures involved in contracting the resources from another country. For maximum advantage, multinationals normally try to build facilities that will produce and sell the products in areas close to their customers. An example is where Coca Cola chooses to open up bottling plant in locations where customers are so as to reduce cost of transportation or to assist the firm in fitting in better with needs and tastes of the customers. The Polish Coca cola affiliate has bottling plant in Beskidy Mountains in Poland where mineral water for making various beverages is in plenty. In the retail industry, various factors can make firms to seek the multinational status (Federal Reserve Bank, 2015). These factors include imminent saturation in the local market, the need to spread risk and consolidate buying power. Others include the constraints from public policy, economic conditions that can result to increased interest rates and taxes and hence cost.

In addition, various factors can motivate the retail companies to become multinationals including the access to cheaper capital sources, surplus capital, management with ambitious entrepreneurial vision, being induced by suppliers to expand into new markets and removal of trade barriers through lowering of tariffs and hence easing the entry process. Other motivating factors include the availability of exploited markets in the foreign countries and the pre-emption of competing retail companies.  This implies that there is a huge segment of consumer market which has not been exploited in such countries and this present an expansion opportunity into this market (Sönmez, 2013). The retail companies may also want to exploit the gain access and take advantage of a qualified and cheap work force or to access new management in other countries. Moreover, following internalization by a manufacturer can make a retail company to consider moving to international market so as not to lose the already established corporation. In regard to risk, geographical proximity and cultural proximity enhance the expansion into new markets because there is a great reduction of uncertainty. For instance, many firms seem to first consider expansion into the same markets.  Wal-mart expanded into Canada in 1994, after entering into Mexico. Tesco first expanded into central Europe market, and later into the East Asia market (Twarowska, 2013).

 Saturation of the home market saw the European companies such as Sainsbury, Carrefour and Ahold become multinationals before the American companies, a fact confirmed by Wal-mart being among the few American companies to build a large foreign store network.  A reaction to competitor’s moves can be explained by Carrefour case, where company opted to move into Brazil and Poland, emerging markets, where there was no competition from the stores similar to those in western countries. The move enabled the company to get exceptionally huge returns ranging from 25 to 30 percent on the invested capital (Twarowska, 2013)..  The opportunities presented by emerging markets as prime locations, more so the big ones are quite limited and a retail company can build up trust or scale that the late-movers may find very difficult to overcome. This is what motivates Carrefour to expand and it was able to enjoy the advantage of being the first company to move and caught the trust of the expanding middle and its effect. The acquisition of ASDA by Walmart in 1999 may have motivated Tesco’s expansion into the international market since Tesco’s expectation was that competition could become more intense (Twarowska, 2013).  Hence, the decision for a company to be turned into a multinational can be determined by the availability of a fitting acquisition targets and the prevailing condition of the sellers who are willing to sell, as happen on the attractiveness of a given market. In the retail sector, the accessibility of skilled labour and management who are also culturally ware can also be a significant factor.  The prevailing economic condition may also play a role in the expansion efforts or the motivation by government institutions through policies or incentives purposely instituted to attract foreign investments. For instance, the 1997 Asian crisis can explain the economic factor, as it seemed to facilitate the expansion by offering opportunities for companies to acquire resources or assets more cheaply (Sönmez, 2013). This can be said of any economy whose conditions offer such an opportunity.

The other motivation for firms to become multinationals is the ownership advantage, where they normally develop and claim the ownership of proprietary technology or brands that are widely recognized that their competitors cannot apply in production (Sönmez, 2013). For instance, the Coca Cola has patented its formula and kept it as a great secret and to always safeguard this, the firm became a multinational instead of leasing out the patent to other companies in foreign market as this would not protect it well from the competitors. Ferrari as a highly recognized has to be safeguarded by the producer who prefers setting up the production facilities into foreign markets instead of franchising or contracting the production of the product to other firms in the international market which is highly competitive. Multinational companies are usually leaders in the technology field and embark on heavy investment in the development of new products, brands and processes, while at the same time maintaining their confidentiality and protecting them through intellectual property rights. The maintenance of stronger protection for these elements assists the companies in enjoying higher profits from their own innovations (Twarowska, 2013).  The ownership advantages are therefore, firm assets which they use to obtain power in the market which link the company to specific advantages and the major competences or corporate strategy school that is resource based.  The advantages can be transaction-based or even asset based. Various products that are unique like the fashion label “George” for Asda or quality reputation attributed to Waitrose are examples that are asset- based.  The transaction-based advantages result from the way companies carry out business operations or activities. Definitely, these advantages are hard to indentify but could be what the in-store picking method that was utilized by Tesco.com. Tesco chain management that is based on lean supply and use of data from loyalty card are some of these advantages which allowed the firm to enter into the South- Korean market (Twarowska, 2013).  In essence, ownership advantages are beliefs of a firm on being fit, in regard to assets or skill or a combination of both which a firm uses to compete and even survive in a foreign market.  

Internalizing benefits involve companies wanting to own a particular technology, expertise, brand or patent which they find unprofitable or too risky to license to other companies. Enforcement of international contracts can sometimes be very ineffective or costly in countries where the rule of law is not strong or where there are long court procedures that can be also inefficient. In such instances, a firm may also risk losing the ownership advantage it possesses whose creation was done at a considerable amount of cost (McDonald, 2016).  Where the internalization advantages are more than the benefits of using the market, a firm will make use of foreign direct investment method rather than contracting.  A company with great ownership of assets will deem it very necessary for it to protect the assets through the maintenance of control over its great secrets (McDonald, 2016). Many firms establish Research and Development facilities in the foreign countries in order to take advantage of extra scientific resources, and this can lead to acquisition of useful knowledge in the entire process. For instance, Avon made use of know-how acquired from the marketing experience in Latin America in assisting selling to the market in US Hispanic countries. Another motive for companies to go international involves shortening the product life-cycle. As the product life cycle of a product become shorter, enough returns for the research and development that has been done for a product could only be obtained by the introduction of product to many larger markets. Moreover, companies are always aiming at introducing a product in as many markets as possible simultaneously to tap into maximum returns before other competing companies start the production of substitutes. 

Economies of scale is a major factor which makes companies to become multinationals since exporting is a good way for business expansion using the products that have a high level of acceptability around the  global markets.  For many manufacturing industries, moving into international markets can assist the firms in achieving high scales of economy more so for those in domestic markets that are smaller. In other scenarios, an organization may want to exploit a differentiating advantage through a brand or service model (McDonald, 2016). The emphasis is mostly similar with only slight changes to the local markets, where the scale economies would be undermined. Moreover, a firm may aim at increasing its innovation through the extension of customer base in the international market which can assist in financing the development of new products. Furthermore, a firm management may also have exclusive knowledge about a market in relation to foreign customers or prospects, market situations or places that may not be known to the others. Long-term security is a goal for domestic companies, especially in the developed countries with big but mature markets where competition is very intense due to many local and foreign competing firms (McDonald, 2016). Where the domestic capacity is in excess, the trade on international business is a necessity if a firm need to be at par in a global market place that is expanding and hence enjoy cost savings potential. Technology has been a big driver for firms becoming multinational, given that it has reduced the time needed for sending information or receiving it. The telephone and the internet have served to bring electronic commerce and the integrated money market. Therefore, the knowledge that it is easier for firms to go global on a friendly platform has enhanced the internationalization of business activities (Sönmez, 2013). This is because transactions around the world can now be conducted seamlessly and instantly.

Conclusion

The changing character, extent and geography of multinationals business activities over the decades is an indication of various path-breaking economic, political and technological events and circumstances. The economic factor has been the main driver, nonetheless, which has seen many domestic firms tend to go international, and the aspect is majorly influenced by the other factors. However, the internationalization has never been a “one size fits all approach”. It involves different firms having different motives to become multinationals and to be done in a way which will best suit business model adopted by each company. These models determine the reasons for a firm becoming a multinational and whatever methods adopted to do so is based on this understanding. The basic aspect is that a firm will go multinational to sustain its growth through market expansion ,  gain competitive advantage and thus improve profitability. 

 

Reference

Sönmez, A. (2013). Multinational Companies, Knowledge and Technology Transfer: Turkey's Automotive Industry in Focus. Cham: Imprint: Springer.

McDonald, C. (2016). Why go global?. Risk Management, (4). 45.

Federal Reserve Bank, (2015).Why would a Firm Want to Become a Multinational? Retrieved from: https://www.stlouisfed.org/on-the-economy/2015/april/why-would-a-firm-want-to-become-a-multinational

Twarowska, K. (2013).International business strategy reasons and forms of expansion into foreign markets. Retrieved from: http://www.toknowpress.net/ISBN/978-961-6914-02-4/papers/ML13-349.pdf