International Business Assignment PDF

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Candidate No.

1801176

Year:

1

Course Code

MN1205

Course Tutor:

Tom Wainwright

Assignment No.:

1

Degree Title: Question No. & Title:

Business Management with Marketing “why do firms become multinational enterprises? Using examples, explain what motivates organisations to engage in international business and how they internationalise”

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1535

“Why do firms become multinational enterprises? Using examples, explain what motivates organisations to engage in international business and how they internationalise”

INTRODUCTION By definition, a multinational enterprise (MNE) can be defined as a “company which undertakes productive activities outside the country in which they are incorporated” [ CITATION Dun77 \l 2057 ]. Firms look to expand their activities outside of their domestic market for several reasons (such as profit maximisation and cheaper labour costs), however, this is an extremely difficult task that results in failure for many companies. Two of the most prevalent ways in which to become an international business are; foreign direct investment (FDI) and exports/imports [ CITATION Rug95 \l 2057 ]. There are several different approaches that are taken in order to achieve internationalisation, the pathway chosen depends heavily on the nature of the business and the beliefs of the CEO.

MOTIVATIONS TO INTERNATIONALISE Businesses are started for many different reasons and are run by owners with various aspirations and abilities [ CITATION Bla13 \l 2057 ], therefore motivations to become multinational enterprises vary from firm to firm. These reasons may include: risk reduction, responding to competitors, reducing costs and taking advantage of decreased trade barriers and regulations. RISK REDUCTION One motivation for a firm to expand into foreign markets is to try and diversify business in order to minimise risks, such as a depreciation in market share in the domestic market [ CITATION Kub13 \l 2057 ]. In entering into a foreign market with a different currency, a firm protects themselves from the uncertainties of the domestic business cycle. This alternative currency may also aid in diminishing the negative effects of economic issues in the home nation [ CITATION Rug95 \l 2057 ]. OVERCOME TARIFFS/REDUCE REGULATION Another reason a firm might want to become international is to minimise tariffs and avoid trade regulations. As it stands, there are a few main trade blocs whom are able to trade with each other without paying any tariffs. For example, the European Commission (EC) are able to transport goods freely across EC borders, without paying any tariff. However, those outside of the trading bloc must pay large fees in order to transport across Europe [ CITATION Rug95 \l 2057 ]. This is regarded as a reason to become international as, longterm, it would likely be more cost effective to have activities in Europe than have to pay the large fees of transportation. Another way in which firms are able to minimise the taxes and tariffs they have to pay is through offshoring. Offshoring is when a business relocates one of their operations overseas, in order to evade tax. Although not an illegal process, a tax amnesty was launched in 2009-2010 by the HMRC (the “New Disclosure Opportunity”) targeting businesses and individuals with offshore holdings. The idea was that, those whom disclosed their offshore holdings would only face a 10% penalty [ CITATION Wai11 \l 2057 ].

LOWER COSTS – (LABOUR & TRANSPORT) Another motivation for internationalisation, is that a firm may be able to attain lower costs; potentially leading to higher profit margins. In establishing subsidiaries or production facilities outside of the home market, local companies can broaden the market for their products and capitalise on lower labour costs in the host countries [ CITATION Jun16 \l 2057 ]. However, MNEs don’t just benefit from lower labour costs, they can also benefit from decreased transportation costs. Amazon’s system is a clear example of how internationalisation can lower transportation costs. Amazon has built its company to include 145 warehouses worldwide [ CITATION Lie14 \l 2057 ], in doing this the company is able to locate the ordered good from the nearest warehouse. This minimises transportation costs, as well as the customer’s waiting time; resulting in excellent customer service. This is arguably a significant factor in why a firm may want to become international. RESPONSE TO COMPETITIORS Along with this, firms may want to internationalise in response to foreign competitors who start to emerge in domestic markets. As a result of globalisation, firms are being forced to operate as if the world were one large marketplace in order to remain successful [ CITATION Hut09 \l 2057 ]. This is not regarded as negative however, as foreign competition has been shown to erode margins, drive industry productivity and accelerate the quest for innovation and differentiation [ CITATION Hut09 \l 2057 ]. By responding to foreign competition this way, firms might be reacting before they are fully equipped to internationalise which may result in a failed attempt at internationalisation or the dissolution of the company all together. Another point to mention is that competition no longer occurs as a result of who can produce a good the cheapest for consumers; there is now an increased focus on quality of the product. This may encourage firms to take their time in trying to outsource their production to a higher quality factory with a slightly higher price in order to attract more customers. The larger the company, the more likely they are to absorb the higher cost so as not to pass it onto the consumer.

HOW TO ACHIEVE INTERNATIONALISATION COMPETITIVE ADVANTAGE – (OF FIRMS & NATIONS) Firms may choose to implement the theory of competitive advantage in order to internationalise. This theory, created by Michael Porter, refers to the advantage a firm has when it is able to provide the same product as its competitors at a lower price, or successfully charge more for their products as a result of differentiation. Competitive advantage is supported by a political economy and, as a result, is linked to the competitive advantage of nations and subsequently Porter’s Diamond Model.

[ CITATION Cla16 \l 2057 ]

This model analyses the success of a firm in international markets, depending on the domestic environment. There are six key elements to the Porter Diamond Model: factor endowments; demand conditions; related & supporting industries; firm strategy, structure, rivalry; role of chance; and role of government. These factors, when applied together to a firm, will outline whether or not penetrating an overseas market would lead to success. This is an extremely useful tool in understanding how a firm would aim to become international as it identifies why some industries have a competitive advantage over others.

FDI Foreign direct investment is a direct investment into production in a country by a company located outside of that country [ CITATION Cas13 \l 2057 ]. FDI is considered to be crucial to MNEs, this is because without an investment, it makes it very hard to internationalise. FDI can be divided into smaller modes of entry to foreign markets; Greenfield investment, mergers and acquisitions (M&A), joint ventures and strategic alliances. These ways in which a firm can internationalise are regarded as slightly more simple ways to become an MNE, this is due to the involvement of a third party in things such as strategic alliances and joint ventures. Greenfield investment is when a company moves into a new country and builds their operation from scratch. This is a high-risk strategy as if the firm is not successful overseas, it is likely they will lose a significant funds and time. However, it gives the firm a high amount of control over their activities, enabling them to make their own decisions. This method would likely be implemented by a firm that is extremely successful in the domestic market and has completed significant market research on the country they wish to move into; without doing this, companies can be susceptible to alternative culture differences. For example, the Swedish furniture brand Ikea, failed, for almost a decade, to penetrate Ukraine due to difficulty with purchasing land rights [ CITATION Rom12 \l 2057 ]. Most M&As occur as a takeover of a smaller business, by a larger one; this form of FDI is common within the IT and technology industry. For example, Google have recently identified the growing market for Artificial Intelligence (AI) and in the summer of 2017 acquired an Indian company – Halli Labs, who have been developing AI systems [ CITATION Sur17 \l 2057 ]. The risk of this theory is average, although roughly 40-80% of M&As fail. This is one of the easiest ways in which to enter a foreign market, as the means of production, transport routes, labour force etc. is already in place.

Strategic alliances are similar as they require two, or more companies, pooling their resources and pursue a project that will benefit all parties involved. This method of internationalisation is all round very low risk and beneficial for all parties involved. A joint venture is a more permanent form of a strategic alliance, involving two or more companies, entering into a project together. For example, Google and NASA entered into a joint venture in order to create Google Earth. This again is a relatively low risk strategy but requires a lot of cooperation and coordination with other parties involved.

CONCLUSION When deciding to internationalise, firms put their focus towards two main goals: cost reduction and profit maximisation. Some of the ways in which internationalisation can occur is through: FDI, M&As or analysing the competitive advantage of both the firm, and the country in which it anticipates on operating. Although not all approaches are viable for every firm, Porter’s Diamond Model can be put into practice in order to help evaluate whether becoming an MNE is feasible for the firm. There are several benefits that come with internationalisation, which would be an attractive reason to commit to it; such as sourcing lower costs, minimising tariffs and cutting regulation and the spreading of risk across several platforms.

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