International Business
Oded Shenkar and Yadong Luo
Chapter 4
The Multinational Enterprise
Chapter 4: The Multinational Enterprise
Do You Know?
• Who are the players in the international
business arena?
• How can you tell the degree of a firms
internationalization?
• Will a higher degree of
internationalization lead to higher
corporate performance?
• What advantages and disadvantages do
MNEs have when they operate
overseas compared to local firms?
Chapter 4: The Multinational Enterprise
Do You Know?
• What are the typical features of
developing country MNEs?
• How do they differ from developed
country MNEs?
Chapter 4: The Multinational Enterprise
What is a Multinational Enterprise
• The internationally committed
company – has at least one plant or
joint venture abroad.
• The internationally leaning company –
has foreign sales and/or a
representative office and/or a licensing
agreement abroad.
• The multidomestic firm – has multiple
international subsidiaries independent
of headquarters.
Chapter 4: The Multinational Enterprise
What is a Multinational Enterprise
• The transactional firm – has
subsidiaries that fulfill a variety of
strategic roles typically performed by
HQ.
• The multinational firm – engages in
FDI and owns or controls value adding
activities in more than one country.
• The global firm – has integrated
international subsidiaries controlled by
headquarters.
Chapter 4: The Multinational Enterprise
What is a Multinational Enterprise
• Multinational Enterprise (MNE) – a firm with
foreign direct investment, service or
manufacturing, over which it maintains
effective control.
• International firm – a firm engaged in trade
activities but without an FDI component.
• Small and Midsize International
Enterprises (SMIE) – Most of these firms do
not have FDI presence and do not qualify as
MNEs
Chapter 4: The Multinational Enterprise
The Degree of Internationalization
• Transnationality Index (TNI) – the
level of MNE internationalization.
• Calculated as the average of three
ratios:
– Foreign assets to total assets
– Foreign sales to total sales
– Foreign employment to total employment
Chapter 4: The Multinational Enterprise
The Degree of Internationalization
Exhibit 4-1: Average transnationality of the world’s 100
largest MNEs 1990-1998
Chapter 4: The Multinational Enterprise
History of the MNE
• MNEs can be traced to the Phoenician,
Carthaginian, Greek, and Roman
empires
• Date back to Assyria around 2000 B.C.
• Faced the same obstacles as today’s
MNEs:
– Tariffs
– Nationalistic opposition to foreign trade and
investment
– Using competitive advantage and market
power
Chapter 4: The Multinational Enterprise
The World’s Largest MNEs
• In 1998, the top 100 nonfinancial MNEs accounted for
– 13% of all foreign assets
– 19% of all foreign sales
– 18% of all foreign employment.
Chapter 4: The Multinational Enterprise
The World’s Largest MNEs
Exhibit 4-3: Home country of the world’s largest 100
MNEs by TNI and foreign assets
Chapter 4: The Multinational Enterprise
The World’s Largest MNEs
Exhibit 4-4: The largest 10 U.S. MNEs (at the end of
1999)
Chapter 4: The Multinational Enterprise
The Industry Composition of MNEs
Exhibit 4-5:
Industry
composition of
the largest 100
MNEs
Dominated by a
limited number
of industries.
Chapter 4: The Multinational Enterprise
The Industry Composition of MNEs
Exhibit 4-6: The largest 5 MNEs in each industry
Chapter 4: The Multinational Enterprise
The Growth of Service MNEs
• There has been significant growth of
MNEs in service areas, due to:
– Economic transformation – developed
nations shifting into service economies
– Globalization and liberalization of
regulatory systems – “open skies”
agreements, accounting standards, flexible
store hours, etc.
– Communication advances – allow MNEs
to coordinate knowledge-intensive
operations across borders.
Chapter 4: The Multinational Enterprise
The Growth of Service MNEs
Exhibit 4-7: The world’s
top 20 banks 2001
(based on total assets)
Note the U.S.
Chapter 4: The Multinational Enterprise
The Growth of Service MNEs
Exhibit 4-8: The world’s top
airlines, 2001
Chapter 4: The Multinational Enterprise
The MNE in the Public Eye
• The MNE has been both lauded and
vilified for its impact on host and home
countries.
• Among the more positive attributes are:
– MNEs provide knowledge, capital,
technology, expertise, global affiliations,
contributions to national productivity and
exports, innovation, employment, and
societal change.
Chapter 4: The Multinational Enterprise
The MNE in the Public Eye
• Among the negative attributes are:
– the MNE is perceived as a threat to national
sovereignty
– have unfair advantages over local competition
– exploit government incentives at the expense of
taxpayers
– limit knowledge transfer to developing nations
– exploit critical national and natural resources
– move on when their exploitation is finished
Chapter 4: The Multinational Enterprise
The Competitive Advantage of the MNE
• The MNE generally has large capital,
human, brand, and technological
resource base, it can use many
countries.
• Global spread provides MNEs with:
– diversification so they can compensate for
SBU low performance and uncertainty
– helps them overcome entry barriers and
high start up costs.
Chapter 4: The Multinational Enterprise
MNE’s Capabilities
• MNE Capabilities
– Firm capabilities
• Familiarity with national culture, industrial
structure, and government requirements
• Existing relationships with customers,
suppliers, regulators
– Strategic capabilities
• Technological assets (patents, trade secrets,
proprietary designs, product development)
– Managerial skills
– International experience
Chapter 4: The Multinational Enterprise
MNE’s Capabilities
• Capability Deployment
– MNE’s must transfer critical capabilities
unavailable to local players.
– Technological and financial capabilities are
more transferable than organizational
skills.
• Capability Upgrading
– Learning capability – the capacity to
generate ideas and acquire new
knowledge.
– More transferable than firm resources.
Chapter 4: The Multinational Enterprise
The MNE from Emerging / Developing
Economies (DMNE)
• MNEs from developed nations typically
dominate global business.
• DMNEs, however, are making inroads.
• DMNEs face the following constraints
and advantages:
– Resource constraints.
– Knowledge, sophistication constraints.
– Sheltered environment constraints.
– Home government support.
– Flexibility
Chapter 4: The Multinational Enterprise
The Largest Developing Country MNEs
• DMNE Scale
– Median DFI holding for a top 50 DMNE in
1998 was $1.5 billion, versus $14 billion for
a global 100.
• DMNE Industries
– Largest group consists of diversified firms
– Electronics, petroleum, and food/beverage
• The National Affiliation of DMNEs
– Dominated by South, Southeast, and East
Asia
Chapter 4: The Multinational Enterprise
The Largest Developing Country MNEs
Exhibit 4-10: Global expansion of Cemex SA 2001
Chapter 4: The Multinational Enterprise
The Largest Developing Country MNEs
Exhibit 4-11: Industry composition of the largest 50
MNEs from developing countries
Chapter 4: The Multinational Enterprise
The Largest Developing Country MNEs
Exhibit 4-12: Country composition of the largest 50
MNEs from developing economies
Chapter 4: The Multinational Enterprise
Obstacles Facing MNEs from Developing
Economies
• Resource Constraints
– Capital investment, lack of reputation,
brand recognition
• Lack of Knowledge
– Experience in foreign operations, lack of
production, marketing and management
skills
• Sheltered Environment
– Protected by duties, lack of knowledge and
expertise from conducting international
business
Chapter 4: The Multinational Enterprise
DMNE Advantage in Global Markets
• Home Government Support
– Impact of the DMNE on the national
economy
– Shields the firm from the marketplace,
hampering its capability development
• Flexibility
– Lower production scale permits flexibility
and adaptation
– Less investment sunk in older plants and
technologies
Chapter 4: The Multinational Enterprise
Typical Features of DMNEs
• Internationalization Patterns
–
–
–
–
To develop ownership advantages
To serve as intermediaries
To overcome import quotas in developed markets
To reduce risk via diversification
• Focus on Other Developing Markets
– More likely to have greater share of FDI in other
developing markets.
• Reliance on Third Parties
– To compensate for resource shortages
Chapter 4: The Multinational Enterprise
Typical Features of DMNEs
• Governance
– Less likely to be publicly traded, and tightly
controlled
• Industry Domain
– More likely to be in manufacturing
• Bargaining Power
– Lack bargaining power in the host country
• Strategy
– More likely to compete on price than on
product differentiation
Chapter 4: The Multinational Enterprise
What is an SMIE?
• The SMIE is a “small to medium sized
organization”
• SMIEs account for approximately 94%
of all international firms.
• They often face serious obstacles to
internationalization.
Chapter 4: The Multinational Enterprise
What is an SMIE?
Exhibit 4-14: Small companies can be international
Chapter 4: The Multinational Enterprise
Obstacles to SMIE Internationalization
•
•
•
•
•
Scale and Transaction Constraints
Access to Capital
Lack of Knowledge
Lack of Market Power
Vulnerability to Intellectual Property
Violations
Chapter 4: The Multinational Enterprise
Obstacles to SMIE Internationalization
Exhibit 4-15: Entry barriers to international trade for
Minnesota SMIEs
Chapter 4: The Multinational Enterprise
SMIE Internationalization Features
• International Motivation
– Push factors – competitive pressures in
its domestic market
– Pull factors – make foreign locations more
attractive
– Management factors – managerial
commitment and resources devoted to
international activity
– Chance factors – unforeseen
circumstances that create
internationalization opportunities
Chapter 4: The Multinational Enterprise
SMIE Internationalization Features
• Internationalization Patterns
– Often not incremental, often “leapfrog” into
international markets
• SMNE Exporter Profile
– 97% of U.S. exporters are small
businesses
• Exporter Demographics
• SMIE Foreign Investment Profile
– At present relatively small, but growing
Chapter 4: The Multinational Enterprise
SMIE Internationalization Features
• Chance Expansion
– SMIEs respond to incidental opportunity
• Nature of FDI by SMIEs
– Emphasis on Developed Markets
• More likely to invest in developed markets
– Selective Globalization
• Tend to focus on one link in the supply chain
and on a selected market
– Strategy
• Often adopt niche strategies
• Rely more on cooperative strategies
Chapter 4: The Multinational Enterprise
Born International
• A business organization that from
inception seeks competitive advantages
from the use of resources and sale of
output in multiple countries.
Chapter 4: The Multinational Enterprise