Why do Firms become Multinational Enterprises?
A multinational enterprise is a business that extends beyond the borders of an individual country and operates with associates and branches in more than one country. Also known as global enterprises, multinationals organizes phases for manufacturing goods and services to market in various countries (Terpstra & Sarathy, 2001). For instance most auto makers have adopted international segmentation where they manufacture vehicles to be sold in different countries, using their production firms abroad and locally. In simpler terms, a multinational company or MNC is a firm that is registered and does business in more than one country at a time. Usually, the company has its base in one country (normally country of origin) and operates partially or wholly owned subsidiaries abroad. Therefore, companies with a joint venture in other countries, have a foreign subsidiary or acquired an existing business in a country other than home country are considered MNCs (Twarowska & Kakol, 2013). In the modern business world, several companies are finding the need to expand their business to the larger global market. With the advent of the internet and online marketing technology, more firms than ever before including small and start-up companies are finding the need to become multinationals (Rugman, 2012). This essay seeks to explore the reasons why companies opt to go global including the need to increase sales and profits, discouraging completion from local industries, learning or education purposes and first mover advantage among others.
Ways through Which Companies Can become Multinational Enterprises
Before exploring the possible reasons that prompt firms to become multinational enterprises, it is important to understand the various ways that companies become multinationals. There are various ways through which a company can become a multinational enterprise (Dssing, 2010). First, a firm can just chose international trade. In international trade, a company exports its merchandize (Forsgren, 2008).
International trade is safer because a company can easily pull out in case the venture turns out to be unprofitable (Forsgren, 2008). Nevertheless, international trade may be risky since revenue may decline as a result of protectionist reforms of tariffs, exchange rate instability, other trade barriers, or sudden logistical limitations (Terpstra & Sarathy, 2001). In April 2010 for example, exporters of perishable products suffered loss as a result of volcanic ash cloud which affected Europe.
In a second alternative, a company can go global through licensing. A company may allow other companies to manufacture, sell and market its products or services in foreign countries through licensing. NBA for instance earns millions of dollars from firms in China which has been licensed to market their merchandize (Dssing, 2010). Licensing is beneficial as very little investment is required to become a multinational corporation. In addition, licensing provides a company with an opportunity to harness the rise in return that the foreign partner may be in a position to create through high technology, innovation and or customer experience. However, the originating company loses control of the quality of the product or service (Dunning, 2013).
Thirdly, a company can become a multinational enterprise through becoming a franchisor. A franchisor offers a distinct service or sales strategy, support assistance and at times an initial investment in the business in exchange for a regular fee (Dssing, 2010). The limitations and delimitations of franchising are more or less similar to licensing.
Reasons for becoming Multinational
Before a company considers becoming a MNC, there are various factors that it has to consider in foreign market. The company must carry out an analysis of the country it plans to roll out its operations to. The factors analyzed include political, economical, social cultural, technological, environmental, and legal aspects otherwise known as PESTEL analysis in economic theory (Byrne & Popoff, 2008). The reasons why firms decide to become multinationals are varied and depend on the company and the market the company is targeting to venture in. Before coming to analyze the market a company is targeting, there is always a reason for wanting to become a multinational.
This is probably one of the major reasons for companies to become multinationals. When a company is operating locally, the market is constricted to a small population. For example Finland has a small population of about 5.5 million people (Techhub, 2013). When a company operates in such a population its sales are restricted by the small population. To increase sales, there is need to become multinational. Several companies in Finland have been successful in going global. Nokia for example is one of the leading telecommunication and GIS provider is based in Finland. However due to the limited market size of Finland, the company rolled out to other countries and currently sells in several countries in Europe, Asia, Africa as well as the United States (Twarowska & Kakol, 2013). This enabled Nokia to become one of the largest mobile phone makers globally, boosting its sales significantly. The company`s profits have also increased tremendously over the years even after being sold to Microsoft (Diaconu, 2012).
Nokia`s success can also be attributed to the competition the company faces in the multinational platform. Its competitors including Samsung, Apple and LG are driven by innovation and have been able to make a huge impact in the mobile phone market. This has compelled Nokia to also invest in innovation and development of new products to match this competition. As a result, the company has been able to improve its product quality and boost sales. Rovio Mobile also based in Finland which is involved in development of video games can attribute its success from becoming a multinational. Games such as Clans and Angry Birds developed by the company have been globally accepted, leading to the company`s success (Rovio, 2014).
The need for a company to increase its sales, boost its profits and remain competitive is evidently a reason for companies becoming multinationals. Besides, local markets may not be conducive for growth (Biggs, 2011). Despite China having the highest population, Chinese companies have seen the need to become multinationals. This is because foreign markets may offer an opportunity for a company to grow than local market. Local policies may hinder a company from growing and a company may take the first opportunity for growth to international market (Paul, 2009). The current boom of Chinese companies in foreign markets including in the United States does show that, not population limitation motivate companies to becoming multinationals, but other factors including policies and room for growth and innovation (Byrne & Popoff, 2008). Sungy Mobile Ltd has fared quite well in the U.S market. It is obvious that by spreading to the multinational market, Sungy Mobile was able to enhance its sales and profitability. Concentrating on Chinese market would not have allowed the company to grow to the levels it is enjoying in currently in the global market.
The logic behind becoming multinational for a firm is quite simple the global population is way too huge as compared to the population of one country. For example if Microsoft concentrates on the U.S market where English is spoken, it may lose potential customers from non-English speaking countries such as Germany, China, France and other countries (Navaretti, Venables, & Barry, 2004). As such, Microsoft had to develop programs in a variety of languages to become a multinational and has been able to reach virtually every corner of the world (Zou & Cavusgil, 2002). Besides, a company with an uphill potential must take advantage of the situation to increase its sales (Twarowska & Kakol, 2013). Some companies like Microsoft offer unique products or technology which is not available in other countries hence this advantage should translate to massive business success abroad. Most companies are able to saturate the local market within a short period of their operation, especially if they offer a unique product with a high demand. For such a company, moving to another country become the next step. The urge to go global is usually motivated by success in the local market. For example Starbucks started expanding its business to international market after successfully covering most of the states in the United States.
First mover advantage
A firm may consider going global in the bid to tap the untouched market. First-mover advantage basically means entering into a market and getting all the benefits of being the first in that market. Companies that are able to penetrate a market as the first and only operators are able to benefit from increased sales, surging profits and at the same time can build customer loyalty (Dunning & Lundan, 2008). Most of the companies in the United States have ventured the in the developing countries to gain first mover advantage. Cocacola company entry into Africa came at a time when there was virtually no other competitors in the market, hence gained market control through innovation and its strong brand name. Though other competitors such as Pepsi Inc. have tried to venture in the various African markets dominated by Cocacola, their entry has not been as successful. In addition, when a company is the first to enter a market, there is always high demand for the product and governments are willing to facilitate or remove entry barriers to allow the company to easily establish itself in the foreign market (Terpstra & Sarathy, 2001).
The entire African continent, there is no a car manufacturer and all vehicles are imported from Japan, the United States or Europe. When a company such as Toyota establishes a car assembly industry in such countries, the governments are usually very open to the idea since it is seen as a way to reduce import related costs, creating employment and reducing overreliance on imports (Yip, 2002). Consequently the few restrictions and regulations allow a company to gain control of the market. This leads such companies to have increased sales and high profits. Due to lack of competition, the company may also leverage on innovation and development of new products (Twarowska & Kakol, 2013). This makes it difficult for new entrants to sway the market and the first mover may enjoy these benefits for a long time, as in the case of Cocacola in the African markets.
New markets also present a firm with an opportunity to understand the market and grow with it. The company has a chance to interact with the market, understand the needs of the people which can help the company in innovation and development of new products. As is the case of most multinationals, venturing in an un-tapped market opens a whole new opportunity than venturing in already invested markets. The cost of venturing a new market is relatively low. The company does not need to invest heavily in advertisement to gain market control, but invests in creating brand awareness. When other companies make entry in this market, they must work hard and invest in advertisement to establish their brand. This gives the firs mover an upper hand as it can maintain a lower price while gaining profits. The market may therefore become unattractive for competitors (Byrne & Popoff, 2008).
Discouraging Local Competitors
A company may also decide to become a multinational corporation with the intent of positioning themselves for competition and discouraging local competitors. For instance U.S companies such as Euclid Analytics, Square and Airbnb have their European counterparts in Walkbase, iZettle and Wimdu (Techhub, 2013). One of the reasons why these European start-ups companies exists is because U.S based companies had not entered the European market yet. Allowing way for others to take the initiative. When a company gets to a new market, it discourages other from venturing into the same market.
With benefits such as growth potential, more customers and a large market on offer it is clear why operating globally is a huge attraction for companies. Competition is a major threat to any company and companies do anything to curb of prevent competition (Byrne & Popoff, 2008). Going multinational offers opportunity for a firm to discourage competitors from going global. Another example which shows how becoming a multinational stops competition is Samsung and LG venturing into the global markets. Several electronic makers from Japan have tried to venture into the global market including Panasonic and other start-up companies with little success. This is because the giant electronic makers already established their market in the foreign markets which makes it difficult for new entrants to survive in these markets.
Sometimes a company may decide to enter a foreign market not because of financial gain, but in an urge to learn. For instance the product category of Koc, the Turkish company, entered Germany, termed as the world`s largest market for refrigerators, freezers, dishwashers and washing machines in regard to superiority and product specification. In this venture, the company discovered that its less popular brand would not easily gain market share in this intensely competitive market (Biggs, 2011). Nevertheless, Koc embraced the view that as a hopeful multinational company, it would obviously benefit from its participation in the world`s fiercest market and that, its product model and marketing strategy would improve and allow it to perform better elsewhere in the world. Mostly, when a company participates in the “lead market” it becomes a requisite for qualifying as a global leader even though it may have performed poorly in this market, in terms of profits (Biggs, 2011). Lead markets include Japan for consumer electronics, United States for software, German for automobile and Italy for Fashion among other markets and sectors.
For a company to capitalize on learning from a lead market, it is advisable to participate using its own subsidiary. Indirect learning through a local partner or distributor is less effective and has insignificant impact to the company`s development into a global leader (Twarowska & Kakol, 2013). Though this is very rare for companies becoming multinationals, it is one of the reasons a company may want to become a multinational enterprise.
Becoming a multinational is a dream of most if not every company. Even small companies and start ups are seeking to become multinationals due to the benefits that come with becoming global. The choice of a country or a market to venture in is usually determined by different factors. A firm must be able to carry out a PESTEL analysis to access the market`s political, economic, social-cultural, technological, environmental and legal framework before settling down on where to roll out its operations. The benefits of becoming a multinational enterprise are numerous and every company strives to capture every opportunity available for going global. The underlying reasons which influence a company to becoming multinational are many and include the need to boost sales and profits, discouraging local competitors, learning/education, and first-mover advantage among others. Whatever the reason motivating a company to go global, the company must have a good strategy to ensure that its journey to the global market is successful. Market research is usually very important for any company to become a multinational.
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