Module 1 (ism)

International Strategic Management

CONCEPT OF MNCCONCEPT OF MNCSS

Definition: MNCAn enterprise operating in several countries but managed from one (home) country. Generally, any company or group that derives a quarter of its revenue from operations outside of its home country is considered a multinational corporation.

There are four categories of multinational corporations :

1. A multinational, decentralized corporation with strong home country presence.

2. A global, centralized corporation that acquires cost advantage through centralized production wherever cheaper resources are available.

3. An international company that builds on the parent corporation's technology or R&D, or

4. A transnational enterprise that combines the previous three approaches. According to UN data, some 35,000 companies have direct investment in foreign countries, and the largest 100 of them control about 40 percent of world trade.

TTYPESYPES OFOF MNC MNCSS

• Transnational Corporations:

Strive to operate on a borderless basis and without being identified with one national home.

• Ethnocentric:

Strict headquarters control over foreign operations, expects to operate the same way it does at home.

• Polycentric

Gives it foreign operations more operating freedom, respects market differences among countries, and treats each country as a separate competitive domain.

• Geocentric

Like Traditional it seeks total integration of global operations by operating without "home country" prejudices, making major decisions for global perspective, and employing senior executives from many different countries.

Characteristics of MNC

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– A company with production and distribution facilities in more than one country. – With a parent company located in the home country– At least five or six foreign subsidiaries

THE RISE OF THE MULTINATIONAL CORPORATION / GROWTHTHE RISE OF THE MULTINATIONAL CORPORATION / GROWTH

A Forces Changing Global Markets

Massive deregulation

Collapse of communism

Privatizations of state-owned industries

Revolution in information technology

Wave of M&A

Emergence of free market policies in Third World Nations

Countless nations accepting the standards of free market capitalism

B. The Rise of China as a Global Competitor

The most dramatic change in the international economy over the last decade

The number one destination for foreign direct investment (FDI) - the acquisition abroad of companies, property, or physical assets.

C. The MNC’s Evolution

Reasons to Go Global:

1. More raw materials

2. New markets

3. Minimize costs of production

1. Raw Material Seekers

Exploit markets in other countries

Historically first to appear

Modern-day counterparts

British Petroleum

Exxon

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2. Market Seekers

Produce and sell in foreign markets

Have heavy foreign direct investors

Represented today by firms such as:

IBM

MacDonald’s

Nestle

Levi Strauss

3. Cost Minimizers

Seek lower-cost production abroad

Their motive: to remain cost competitive

Represented today by firms such as:

Texas Instruments

Intel

Seagate Technology

D. What is the MNC?

From a Behavioral View

It’s a state of mind committed to globally producing, undertaking investment, marketing, and financing.

E. The Global Manager:

1. Understands political and economic differences;

2. Searches for most cost-effective suppliers;

3. Evaluates changes on value of the firm.

PPARTART II INTERNATIONALIZATION OF BUSINESS AND FINANCE II INTERNATIONALIZATION OF BUSINESS AND FINANCE

Globalization

Political and Labor Union Concerns

Consequences of Global Competition:

The acceleration of the global economy/competitors – for example: Mexico/NAFTA/Immigration

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PART III. MULTINATIONAL FINANCIAL MANAGEMENT (MFM): THEORY AND PRACTICEPART III. MULTINATIONAL FINANCIAL MANAGEMENT (MFM): THEORY AND PRACTICE

I. The MNC’s Policies

A. Main Objective of MNC: Survival or Maximize shareholder wealth

B. Other Objectives Reflect Its Ability to Link: Via affiliate transfer mechanisms

C. Mode of Transfer: Reflects freedom to select a variety of financial channels.

D. Timing Flexibility: Most MNC have some flexibility in timing of fund flows.

E. Value: The ability to avoid national taxes has led to controversy.

II. Functions of Financial Management

A. Two Basic Functions:

1. Financing 2. Investing

B. Additional Factors Facing the MNC Executive:

1. Political risk 2. Economic risk

III. Theoretical Foundations

A. Useful Concepts from Financial Economics:

1. Arbitrage

2. Market Efficiency

3. Capital Asset Pricing

B. Importance of Total Risk:

1. Adverse Impact lower sales and higher costs.

2. Justifies hedging activities of MNC.

3. Diversification reduces risk.

IV. The Global Financial Market Place

A. Inter-linkage by Computers

B. Market Acts as A Global Referendum Process Where: Currencies may rise or fall.

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EMERGENCE AND GROWTH OF MNCEMERGENCE AND GROWTH OF MNCSS

What do you think a MNC is?

A corporation that has its facilities and other assets in at least one country other than its home country.

Such companies have offices and/or factories in different countries and usually have centralised head office where they coordinate global management (headquarters)

Very large multinationals have budgets that exceed those of many small countries.

Sometimes referred to as “transnational corporations”

Five main forms of FDI:

Greenfield Investment: A new operation. Brownfield Investment: Expansions or reinvestment in existing foreign affiliates or sites. Mergers & Acquisitions (M & As) Privatisation and equity investment New forms of investment: Joint ventures, strategic alliances, licensing.

Why are they important?

In 1969 Howard Perlmutter wrote:

◦ “Multinational corporation is a new kind of institution - a new type of industrial social achitecture particularly suitable for the latter third of the twentieth century.”

◦ “This type of institution could make a valuable contribution to world order and conceivably excercise a constructive impact on the nation-state”

“The geocentric enterprise (a type of MNC) offers an institutional and supra-national framework which could conceivably make war less likely, on the assumption that bombing costumers, suppliers and employees is in nobody’s interest”

Governments attitudes towards FDI

How do governments like FDI?

In the 1970s ...

As FDI has become more significant, policies and attitudes to FDI have changed substantially during the last two decades or so.

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During the 70s MNCs were commonly seen by many economists and policy makers as detrimental to host economies, because: they were thought to create monopoly situations.

In addition there was political sensitivity towards FDI. The main reason being that FDI “was not only owned and controlled by private groups in pursuit of private profits but also by private interests that are non-resident to boot.”

In 1990s governments stimulated FDI

Regulations moved from restrict and control to promote and give guarantees. Most host economies have reduced barriers to FDI, and many industrialising countries have

created infrastructure and special concessions to attract it. Standard tactics include extensions of tax holidays, exemptions from import duties and direct

subsidies.

1. Why firms become multinational? ( The OLI Paradigm Dunning J.)

One of the dominant frameworks for explaining the existence of MNCs and the determinants of FDI

O = Ownership

L = Location

I = Internalization

Ownership

The firm that invests abroad has a competitive advantage (to exploit) and out-compete the firms that operate in the country where the investment is done

Economies of scale connected to large-sized company.

Possess technologies that give an advantage on the subsidiary abroad.

Monopolistic advantages in terms of privileged access to inputs or outputs markets

Skills of management.

Location

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Advantages of the foreign location:

Different nations have different factor endowments:

Natural resources:

Cheap labour force

Skills and capabilities

◦ Country characteristics (political stability, regulations, cultural distance)

Internalization

Internalization occurs when a firm expands its operations in another country, by acquiring the property of the assets that are abroad

Ownership of foreign assets more convenient than the market. Why?

◦ Information asymmetries (transaction costs can be too high) -> Market failures Keeping skills and capabilities.

2. Why firms become multinational? Ghoshal (1987)

Becoming multinational to search a competitive advantage:

1. National differences: Exploiting national differences in factor costs

2. Scale Economies

3. Scope Economies

1. National Differences

Different nations have different factor endowments:

A firm can gain cost advantages by configuring its value chain so that each activity is located in the country which has the least cost for the factor that the activity uses most intensively.

E.g. Land in Honduras, cheap labour force in China, cheap but skilled engineers in India. (changing over time).

2. Scale Economies

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A firm expanding its total volume of sales, reduces its average costs in a given period of time

It is thus important to expand to several markets as to produce more of a product.

Higher volumes also favour experience economies (learning by doing).

However, large scale also implies higher complexity and organization is critical.

3. Scope Economies

Scope economies: when the cost of the joint production of two or more products can be less than producing them separately.

Scope economies achieved though:

◦ Shared equipment, brands, and other assets.

◦ Shared external relations.

◦ Shared knowledge.

Main strategies for setting up subsidiaries (Dunning):

1. Natural-Resource Seeking

2. Efficiency Seeking

3. Market Seeking

4. Capability Seeking

1. Natural Resource Seeking

Oil : Niger Delta (Agip) Copper, Salmon: Chile Transgenic Soy: Argentina (Monsanto) Bananas, pineapple: Central America

2. Efficiency Seeking

Cheap labour force or inputs Fiscal incentives Low cost, labour intensive manufacturing in most of Asian countries

3. Market Seeking

Access to new markets

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Overcome trade barriers High transport costs

4. Capability seeking (A growing phenomenon in developing countries)

Beyond Silicon Valley, new “high-tech” spots are emerging in developing countries.

How do they operate?

MNC are very different one to another Perlmutter (1969) has been among the first to identify this heterogeneity and he distinguished

between three types:-

◦ Ethnocentric

◦ Polycentric

◦ Geocentric

There are also different types of subsidiaries:

Nobel and Birkinshaw (1998) distinguish between 3 different attitudes and modes of learning:

◦ Local adaptor: limited mandate, only minor adaptation at the local level.

◦ International adaptor: more creative local laboratories, eg. To adapt technologies for a continent (Latin America, Asia) not just a country.

◦ International creator: Internationally interdependent laboratories which provide inputs into a centrally coordinated R&D program.

International Strategic Management:

Comprehensive and ongoing management planning process aimed at formulating and implementing strategies that enable a firm to compete effectively internationally.

What is strategy?

• Strategy as Plan: Concerned with drafting the plan of war and shaping individual campaigns and within these deciding individual engagements (Von Clausewitz 1976)

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• Strategy as action:

• Art of distributing and applying military means to fulfill the ends of the policy (Liddle Hart 1967)

• A pattern in a stream of actions or decisions (Mintzberg 1978)

• The creation of a unique and valuable position, involving a different set of activities, making trade-offs in competing creating a fit among a company’s activities (Porter 1996)

• Strategy as integration

• The determination of the basic long term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals (Chandler 1962).

• An integrated and co ordinate set of commitments and actions designed to exploit core competencies and gain a competitive advantage. (Hitt, Ireland and Hoskisson 2003)

• The analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages (Dess, Lumpkin, and Eisner 2008)

Strategy- Integration school benefits

• Best of both worlds

• Leveraging the concept of theory (explanation and prediction)

• Leads to companys own SWOT- replications and experimentations

• Understanding the difficulty of strategic change

• “From where are we to” “Where we must be”

Strategic Theory

• Theory- abstract and impractical

• Theory- a statement describing the relationships between a set of phenomenon.

• Wal-Mart theory: everyday low prices essence of all activities done by its 1.8 million employees in 6000 stores in 15 countries. Wal-Mart’s latest: save money live better

Factors Affecting International Strategic Management for U.S. Firms:

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• Language

• Culture

• Politics

• Economy

• Governmental interference

• Labor

• Labor relations

• Financing

• Market research

• Advertising

• Money

• Transportation/ communication

• Control

• Contracts

Sources of Competitive Advantage for International Businesses:

• Global efficiencies

• Multinational flexibility

• Worldwide learning

Strategic Alternatives

• Home Replication Strategy

• Multi Domestic Strategy

• Global Strategy

• Transnational Strategy

Low High

Pressures for Local Responsiveness and Flexibility

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Global StrategyThe firm views the world assingle marketplace. Primarygoal is to create standardizedproductsHome ReplicationThe firm uses the core com-petency or firm-specific advantage it developed athome

Multidomestic StrategyThe firm operates as a collection of relativelyindependent Subsidiariesfocusing on domestic market

Transnational StrategyThe firm attempts to combinethe benefits of global scaleefficiencies with the benefitsof local responsiveness

High

Low


Components of International Strategy:

1. Distinctive competence

2. Scope of operations

3. Resource deployment

4. Synergy

1. Distinctive Competence

• Answers the question

– What do we do exceptionally well, especially as compared to our competitors?

• Represents important resource to the firm

2. Scope of Operations


– Where are we going to conduct business?

• May be defined by

– Geographical region

– Market or product niches within regions

– Specialized market niches

3. Resource Deployment


– Given that we are going to compete in these markets, how will we allocate our resources to them?

• May be specified by

– Product lines

– Geographical lines

4. Synergy


– How can different elements of our business benefit each other?

• Goal is to create a situation where the whole is greater than the sum of the parts

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The Internet makes business through virtual markets possible anytime and anywhere!

SSTEPSTEPS ININ I INTERNATIONALNTERNATIONAL S STRATEGYTRATEGY F FORMULATIONORMULATION::

Mission Statements

• Clarifies the organization’s purpose, values, direction.

• Communicates firm’s strategic direction.

• Specifies firm’s target customers and markets, principal products, geographical domain, core technologies, concerns for survival, plans for growth and profitability, basic philosophy, and desired public image.

• Hershey Foods

• No. 1 confectionary company in North America, moving toward worldwide confectionary market share leadership

• Carpenter Technology

• Major, profitable, and growing international producer and distributor of specialty alloys, materials, and components

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Develop a Mission Statement

Perform a SWOT Analysis

Set Strategic GoalsDevelop TacticalGoals and Plans

Develop a Control Framework


Environmental Scanning

• Environmental Scan: Systematic collection of data about all elements of the firm’s external and internal environments

– Markets

– Regulatory issues

– Competitors’ actions

– Production costs

– Labor productivity

SWOT Analysis

• Strengths

• Weaknesses

• Opportunities

• Threats

Control Framework

• Set of managerial and organizational processes that keep firm moving toward its strategic goals

• Feedback loop prompts revisions in earlier steps in strategy formulation process

The Value Chain

What is internationalization?

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Definition:

Internationalization is defined as an expansion of economic activity among more countries and is related to all forms of international economic cooperation. Or,

Internationalization is multidimensional process of increased incorporation of inward and outward company activities outside the borders of a home country.

IINTERNATIONALIZATIONNTERNATIONALIZATION DEVELOPMENTDEVELOPMENT STAGESSTAGES::

Internationalization steps of a company (COMPANY VIEW):

1. STAGE ~ Individual export tasks

2. STAGE ~ Establishing a subsidiary in the most promising markets

3. STAGE ~ Licensing and strategic alliances

4. STAGE ~ Establishing own production facility in the foreign market

Development stages of export operations (MARKET VIEW):

1. STAGE ~ Export of excess products

• company does not have resources to perform continuous export

2. STAGE ~ Export marketing

• company is already trying alone to win sales in foreign markets

• company is prepared to adapt marketing in limited terms

3. STAGE ~ Development of foreign markets

• company adapts its products and marketing to foreign markets needs

4. STAGE ~ Technological development

• company develops new products for existing or new markets

Internationalization Motives:

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INTERNNAL EXTERNALPROACTIVE Profit and Growth

Goals Managerial Urge Marketing Advantage Economies of Scale Unique/Product /

Technology Competence

Foreign Market Opportunities/Market Information

Agents Exchange

REACTIVE Risk Division Extend Sales of

Seasonal Products Excess Capacity/ Over

production

Unsolicited Foreign Orders

Domestic Market: Small and Saturated

Competitive Pressures

Proximity to International Customers / Psychological Distance

INTERNATIONALIZATION STRATEGY:INTERNATIONALIZATION STRATEGY:

• The internationalization model :

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Explanation…1

Explanation…2

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Explanation…3

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M AR KE T E N TR Y M O D E S

E X P O R T M O D E S IN TE R M E D IATE M O D E S H IE R AR C H IC AL M O D E S

- E X P O R T B U Y IN G A G E N T- B R O K E R- E X P O R T M A N A G E M E N T C O M P A N Y / E X P O R T H O U S E- T R A D IN G C O M P A N Y- P IG G Y B A C K O P E R A T IO N S

IN D IR E C T E X P O R T M O D E S

s h ar e d c on tr ol an d r i s k , s pl i town e r s h ip

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1 0 0 % in te r n al iz in g( h igh c o n t r o l, h igh r isk , lo w f le x ibilit y )

D IR E C T E X P O R T M O D E S

- F IX E D E X P O R T T A S K- IN D E P E N D E N T E X P O R T D E P A R T M E N T- D IS T R IB U T O R S- A G E N T S- "A C O N T O M E T A " O P E R A T IO N S

C O O P ER A TIV E EX P O R T M O D ES /EX P O R T M A R KETIN G GR O UP S

- C O N TR A C TM A N UFA C TUR IN G

- LIC EN S IN G- FR A N C HIS IN G

- S TR A TEGIC A LLIA N C ES /J O IN T V EN TUR ES- M A N A GEM EN TC O N TR A C TIN G

S A L E S R E P R E S E N T A T IV E S

D O M E ST I CB A SE D

RES ID EN T

S U B S ID IA R Y

- F O REIGN S A LES S U BS ID IA RY- S A LES A N D P RO D U CT IO N

S U BS ID IA RY- REGIO N CEN T ERS

A C Q UIS ITIO NO R

GR EEN FIELD IN V ES TM EN T


Explanation…4

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Explanation…5

POSITIVE ROLE OF MNCPOSITIVE ROLE OF MNCSS

• The first important contribution of MNCs is its role in filling the resource gap between targeted or desired investment and domestically mobilized savings

• An inflow of foreign capital can reduce or even remove the deficit in the balance of payments if the MNCs can generate a net positive flow of export earnings..

• The third important role of MNCs is filling the gap between targeted governmental tax revenues and locally raised taxes.

• Fourthly, Multinationals not only provide financial resources but they also supply a “package” of needed resources including management experience, entrepreneurial abilities, and technological skills.

• Moreover, MNCs bring with them the most sophisticated technological knowledge about production processes while transferring modern machinery and equipment to capital poor LDCs.

Other Beneficial Roles: The MNCs also bring several other benefits to the host country.

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• (a) The domestic labour may benefit in the form of higher real wages.

• (b) The consumers benefits by way of lower prices and better quality products.

• (c) Investments by MNCs will also induce more domestic investment. For example, ancillary units can be set up to ‘feed’ the main industries of the MNCs

• (d) MNCs expenditures on research and development (R&D), although limited is bound to benefit the host country.

NEGATIVE ROLE OF MNCNEGATIVE ROLE OF MNCSS

Although MNCs provide capital, they may lower domestic savings and investment rates by stifling competition through exclusive production agreements with the host governments. MNCs often fail to reinvest much of their profits and also they may inhibit the expansion of indigenous firms.

Although the initial impact of MNC investment is to improve the foreign exchange position of the recipient nation, its long-run impact may reduce foreign exchange earnings on both current and capital accounts.

While MNCs do contribute to public revenue in the form of corporate taxes, their contribution is considerably less than it should be as a result of liberal tax concessions, excessive investment allowances, subsidies and tariff protection provided by the host government.

The development of local skills may be inhibited by the MNCs by stifling the growth of indigenous entrepreneurship as a result of the MNCs dominance of local markets.

In many situations MNC activities reinforce dualistic economic structures and widen income inequalities. They tend to promote the interests of some few modern-sector workers only. They also divert resources away from the production of consumer goods by producing luxurious goods demanded by the local elites.

MNCs typically produce inappropriate products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country.

The behaviour pattern of MNCs reveals that they do not engage in R & D activities in underdeveloped countries. However, these LDCs have to bear the bulk of their costs.

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MNCs often use their economic power to influence government policies in directions unfavorable to development. The host government has to provide them special economic and political concessions in the form of excessive protection, lower tax, subsidized inputs, and cheap provision of factory sites. As a result, the private profits of MNCs may exceed social benefits.

Multinationals may damage the host countries by suppressing domestic entrepreneurship through their superior knowledge, worldwide contacts, and advertising skills. They drive out local competitors and inhibit the emergence of small-scale enterprises.

WHY ARE MULTINATIONAL COMPANIES IN INDIA?

• Huge market potential of the country

• FDI attractiveness

• Labor competitiveness

• Macroeconomic Stability

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Module 1 (ism)

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