the multinational enterprise (mne) -...

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Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009

The Multinational enterprise (MNE)

Chapter 2

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• Objectives

• The nature of multinational enterprises

• Strategic management and multinational

enterprises

• A framework for global strategies: the FSA/CSA

matrix.

• It’s regional, not flat.

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Objectives

• Describe the characteristics of MNEs.

• Explain the internationalization process.

• Explain why firms become MNEs.

• Discuss the strategic philosophy of these firms.

• Introduce a country/firm framework for examining

a firm’s competitiveness.

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• A company headquartered in one country but with

operations in one or more other countries.

• MNEs often downplay the fact that they are

foreign-held.

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The nature of MNEs

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Table 2.1 The world’s largest 500 multinational enterprises, 2007Source: Authors’ calculations and adapted from Fortune, The Global 500, July 23, 2007

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Characteristics of MNES

• Affiliates must be responsive to a number of

important environmental forces, including

competitors, customers, suppliers, financial

institutions, and government.

• Draw on a common pool of resources, including

assets, patents, trademarks, information, and

human resources.

• Affiliates and business partners are linked

together by a common strategic vision.

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Figure 2.1 The multinational enterprise and its environment

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The internationalization process

• Internationalization: The process by which a

company enters a foreign market.

• Not all international business is done by MNEs.

Indeed, setting up a wholly-owned subsidiary is

usually the last stage of doing business abroad.

• Why do businesses wait to set up wholly-owned

subsidiaries?

– Foreign markets are risky.

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A typical internationalization process

• Initially, the firm might license patents, trademarks or

technology to a foreign company in exchange for a fee or

royalty.

• The firm sees a potential for extra sales by exporting and

uses a local agent or distributor to enter a foreign market.• The firm may use exporting as a “vent” for its surplus

production and might have no long-term commitment to

the international market.

• As exports become more important, the MNE will set up

an office for its sales representative or a sales subsidiary.• The firm might set up local packaging and/or assembly

operations.

• Finally, the firm will set up a wholly-owned subsidiary

(FDI).

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Figure 2.2 Entry into foreign markets: the internationalization process

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Why do firms become MNEs?

• to diversify themselves against the risks and

uncertainties of the domestic business cycle;

• to tap the growing world market for goods and

services;

• in response to foreign competition;

• to reduce costs;

• to overcome barriers to entry into foreign markets;

• to take advantage of technological expertise by

manufacturing goods directly.

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The strategic philosophy of MNEs

• MNEs make decisions based on what is best for

the overall company, even if this means

transferring jobs to other countries and cutting

back the local workforce.

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Table 2.2 The international expansion of four MNEsSource: United Nations, World Investment Report 2001 (Geneva: United Nations Conference on Trade and Development, 2001)

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Strategic management and MNEs

• The strategic management process involves four

major functions: strategy formulation, strategy

implementation, evaluation, and the control of

operations.

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Figure 2.3 The strategic management process in action

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Basic mission

• The following questions must be answered to

determine the firm’s basic mission:

– What is the firm’s business?

– What is the reason for its existence?

For example,

• Royal Dutch/Shell; BP Amoco and Texaco are in the

energy business, not the oil business.

• AT&T, Sprint and MCI are in the communications

business, not the telephone business.

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Analysis of the external and

internal environment• The goal of external environmental analysis is to

identify opportunities and threats that will need to

be addressed.

• The purpose of an internal environmental analysis

is to evaluate the company’s financial and

personnel strengths and weaknesses.

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Formulation of objectives

and overall plan • Internal and external analyses will help identify

long-term (2–5 years) and short-term (< 2 years)

goals.

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The implementation process

• Once goals have been established, the plan is

then broken into major parts and each affiliate

and department is assigned goals and

responsibilities.

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Evaluation and control of operations

• Progress is periodically evaluated and changes

are made in the plan to accommodate changing

circumstances and new information.

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Framework for global strategies:

the FSA/CSA matrix

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Building blocks in

our international business• There are two basic building blocks in an

international business course.

– Firm-specific advantages (FSAs): a unique

capability proprietary to the organization

� It may be built upon product or process technology,

marketing or distributional skills.

– Country-specific advantages (CSAs): country

factors

� Natural resource endowments (minerals, energy

and forests), the labour force and associated

cultural factors, etc.

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Figure 2.4 The basic components of international business

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Figure 2.5 The FSA-CSA matrix

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The competitive advantage matrix

• Quadrant 1: resource-based and/or mature,

globally-oriented firms producing a commodity-

type product � cost leadership (Improving FSA

can make them move to quadrant 3.)

• Quadrant 2: inefficient, floundering firms � no

alternative but to exit or to restructure

• Quadrant 3: follow any of the generic strategies

� both cost leadership & differentiation

• Quadrant 4: differentiated firms with strong FSAs

in marketing and customization �

differentiation (the CSA is not relevant)

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Dunning’s “eclectic” theory of MNEs:

OLI framework• Ownership factors (O): FSAs

• Location factors (L): CSAs

• Internalization factors (I): FSAs

• O and I, in practice, are integrated features of

FSA management within the MNE that cannot be

decoupled in strategic decision making.

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It’s regional, not flat

• The world is flat by Thomas Friedman, the New

York Times journalist.

– Today, a large proportion of international business

takes place through offshoring leading to globalization.

• The world is not flat!

– There remain strong barriers as a business attempts to

cross the boundaries of triad regions.

– The liability of inter-regional foreignness.

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