Whydo firms become multinational enterprises? Identify and discuss fourreasons, making sure to incorporate examples into your answer.
Whydo firms become multinational enterprises? Identify and discuss fourreasons, making sure to incorporate examples into your answer.
Amultinational company (MNC) is a business that operates beyond itsgeographical boundaries of its country of origin by opening branchesor dealing with associates in more than one country. In other words,it is a company that engages in foreign direct investment (FDI). MNCsorganize processes of manufacturing and delivering of goods andservices to market in various countries, using their production firmseither locally or abroad. To be able to operate in other countries, acompany must be registered in these individual countries. Theheadquarters of multinationals are usually in the country of origin,with partly or fully owned subsidiaries abroad. Today, the world isincreasingly becoming a global village. With internet technology,businesses are finding it easy to become global, breaking thegeographical barriers of doing business through online venture. Moreand more business enterprises including small and start-up businessesare finding it easier to become global businesses. Businesses canbecome multinationals through different ways. This include throughinternational trade, licensing and finally through franchise. Thereare various reasons that make businesses go global.
ReasonsWhy Business Become Multinationals
Thedecision to become a global company is influenced by differentfactors. However, before entering international markets, a businessmust do an analysis of the country it is interested in investing. Theabsolute and comparative advantage of a country must be assessedbefore the decision to invest. Carrying out an environmental analysiscan help determine the viability of investment. The elements thatneed to be analyzed in such a probable country include political,economical, social, technological, environmental and legal, which arepopularly referred to as PESTEL analysis (Sexton& Vlasto, 2012).Besides, the company must evaluate its internal analysis in the lensof the new market by carrying out a SWOT analysis to establish itsstrengths, weaknesses, opportunities and threats. The reasons whycompanies chose to become multinational corporations vary. Evenbefore carrying out market analysis, the reason is always there.Establishing the right country to invest, can go a long way inexpanding the business in the future markets. However, some venturesfail, but that does not mean that the business cannot still do wellin other alternative markets (Sexton& Vlasto, 2012).All in all, there are different reasons which push companies to gointo the global market, otherwise known multinational companies. Thereasons are discussed below.
Firstmover benefit refers to the venturing into a new market and gettingall the advantages of being the first to operate in that market inparticular products or services. A firm may consider going global inan effort to tap untapped market for its products or services.According to Biggs (2011), a business that enters into a market asthe first operator not only benefit from increased sales and profits,but also the likeliness of building customer loyalty. Majority of U.Sbased companies ventured in developing economies so as to gain thefirst mover benefit. For example, Cocacola, the leading beveragemanufacturer made entry into the African market at a time when therewas no other operator in the soda industry. This enabled the companyto enjoy market command through innovation as well as a strong brandname. When competitors tried to enter the same market, theyexperience difficulties to succeed (Ramamurti,2012).For example, Pepsi Inc. entry into the African market has not beensuccessful as the market is already saturated by Cocacola, whichenjoys first mover benefit. As noted by Biggs (2011) when a companyis the first mover, its products are in high demand and theauthorities are ready to facilitate its entry through removal ofbarriers for the new investor.
Africanmarket remains untapped and has great potential for growth ofcompanies willing to have first mover benefit. For example thecontinent does not have an automaker and depends on imports fromJapan, U.S, China and Europe (He,Zou, & Zhu, 2011).When an automaker offers to establish an assembly plant in the area,governments compete for these opportunities as they perceive greaterbenefits from such investments including reducing cost ofimportation, generation of job opportunities for its population, andreduction of overdependence on imports (Dssing, 2010). As a result,these lacks of barriers enable a company to dominate and buildcustomer loyalty, which translates to high sales and profits. At thesame time Twarowska & Kakol (2013) perceives this as anopportunity for the company to leverage on development and innovationof new products as there is no competition.
Untappedmarkets also give an opportunity for a company to understand and growwith the market. This is because the company has time to interact,study and understand the needs of the market, which allow ininnovation and development.
Consequently,the cost of entering fresh markets is relatively low. The companydoes not need to market itself in terms of advertisement since thereis no competition. The company instead invests on creating brandawareness. Competitors need to invest in advertisement which givesthe first mover an upper hand of maintaining competitive prices whilegaining profits. This makes the market unattractive for competitorsaltogether.
ToIncrease Sales and Profits
Themajor reason most companies decide to go global is to expand itsprofits. When a company operates in a small geographical area, itsmarket is limited to a small population. Some companies operating incountries with small population like Finland which has about 5.5million people have a limitation of the market size as opposed tothose operating in countries like China which has a population ofmore than a billion people. For companies in Finland to increasesales and profits, they must think of becoming multinationals. Mostof companies in the country have taken this step. For instance theworld’s largest telecommunication and GIS provider, Nokiaoriginated from Finland. The company operates in several countriesincluding Asia, Europe, the United States and African markets(Twarowska & Kakol, 2013). This put Nokia on the world map as oneof the most successful mobile phone marketers in the world. Thecompany’s profits continue to increase even after it was bought byMicrosoft Corporation (Diconu, 2012). Another company also in Finlandthat expanded into the global market is Rovio Mobile which is majorlyconcerned with the development of video and mobile phone games. Thecompany’s products such as Angry Birds and Clans have donetremendously in the global market leading to a huge success for thecompany (Rovio, 2014).
Othercompanies that have achieved great success for going global includethe giant store Walmart. Walmart started as a local company in theU.S and its decision to expand its operations globally has not beendisappointing. The company is currently the largest public company inthe world with over $400 billion in revenues each year (Ramamurti,2012).This could not be achieved if the company remained constricted in theU.S market, despite the U.S having a significant population. Severalother companies have gone global for such reasons includingautomakers such as Toyota based in Japan, Samsung a Korean company,and several others have gone global in order to increase sales.
Accordingto Biggs (2011), the need for firms to enhance their sales, increaseits profits and stay competitive is the main push for companiesbecoming global enterprises. In addition, the local market may notoffer lucrative opportunity for growth. For example, China has a verylarge population but most companies in China have expanded globallyas there are no growth opportunities for growth in the country ascompared to the global market. Not just population limitationinfluence global expansion, but also policies and room for innovationand development as stated by Biggs (2011). This is evident bycompanies from China going global despite the country having thelargest population in the world. A good example is Sungy Mobile Ltdwhich expanded its operations to the U.S market and faired reallywell in terms of sales and profits. This benefit would not have beenachieved in the Chinese market despite its size (He,Zou, & Zhu, 2011).
Anotherreason why a company may chose to go global is the need to learn fromthe best there is in the market. It is a rare reason, but can be oneof the reasons why companies go global (Dssing, 2010). There are someestablished markets for certain products for example the UnitedStates is known for software, Italy is known for Fashion, German forAutomobile and Japan for consumer electronics among other notablemarkets. The product category of Koc, a company from Turkey venturedinto the German market, which is the largest market for freezers,washing machines, refrigerators, and dishwashers based on superiorityand product specification. Koc noticed that, it would be difficultfor its less popular brand to be acknowledged in the fiercelycompeted Germany market. However, Koc acknowledged the idea that as alikely global company, it would reap from participating in a highlycompetitive market in the world and that, its product category andmarketing approach would fare well in other markets in the world.When a company participates in a top market in its category,increases its potential in the global market even though it may dopoorly in terms of profits (Dssing, 2011).
Twarowska& Kakol, (2013) argues that, learning from a lead market is bestachieved when a company uses its own subsidiary since indirectlearning via a local associate cannot be as effective and hastriviality to the company’s development into a world leader.
Thoughnot common, a company may decide to become a MNC with the soleinterest of positioning itself for potential competition, hencediscourage competition. Becoming multinational has various benefitsand thus operating at global scale is a huge attraction fororganizations. In any business, competition is a key concern and acompany can do whatever it takes to stop competition.
Companieswhich has entered in foreign markets for purposes of curbing localcompetitors from venturing into such markets include Square, EuclidAnalytics and Airbnb which have their European equivalents iZettle,Walkbase and Wimdu respectively (Techhub, 2013).the reason why thesestartups exist in Europe is because there were no U.S companies inthese market. When a company gets hold of a fresh market, competitorsare discouraged to venture the same market.
Similarly,LG and Samsung which are leading electronic manufacturers in theworld became multinationals, discouraging their competitors and otherstart up corporations in Japan like Panasonic into succeeding in theglobal market. This is because the giant electronic manufacturersalready defined their dominance in the global market (Prestowitz,2010).
Theopportunities that the global market presents to companies arelucrative and no company can resist the temptation of going global,even for startup companies. The first step to entering into foreignmarket usually involves assessing the viability of that market. Eventhough companies seek to get high sales and profits from expandinginto global markets, sometimes the reasons can be varied includingthe need to discourage local competitors, to learn as well as firstmover advantage. With the popularity of internet, both big and smallcompanies are finding it easier to go global. Regardless of thereason for entering into the global market, a company must ensurethat it carries out adequate research before entering the market.Ultimately, operating in a global scale has numerous advantages.
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