Lecture II MNEs and the Evolving Global Business Environment (ch. 1)

Definition of MNE Substantial DFI (Direct Foreign Investment) Active management of offshore assets Can be in manufacturing or service Can be wholly owned or joint venture operations * Differences between joint venture and strategic alliances

Beyond Multinational The Globally Integrated Enterprise Samuel J. Palmisano, Samuel J. Palmisano Foreign Affairs, May/June 2006May/June 2006 Summary: A new corporate entity based on collaborative innovation, integrated production, and outsourcing to specialists is emerging in response to globalization and new technology. Such "globally integrated enterprises" will end up reshaping geopolitics, trade, and education.

Matching Organization to Innovation

Virtual Company vs. MNE (or,TNC)

Evolving Global Business Environment 1. Free trade? (Managed trade?), removal of trade barriers, (GATT), WTO – Globalization (also see Ch2 – BG) 2. Changing attitudes of the developing countries, more favorable DFI policies 3. Regional economic integration – EU, NAFTA, ASEAN, APEC …. 4. Technological advancement – impacts on strategy and structure 5. Competition for capital, borderless global operations – immense investments and new technologies force MNCs to look for global markets 6. Globally integrated supply chain, greater interdependence

Alvin Toffler [1990], “ international firms are moving toward stateless corporations, no longer US, Japanese, or German; rather, they are non-national …” Robert Kuttner [1990], “ MNCs are … stateless, globalized corporations with operations, shareholders, and managers all over the world, largely indifferent to location except on the grounds of economic efficiency ” Robert Reich [1992], The Work of Nations: Preparing Ourselves for the 21st Century capitalism. Lester Thurow [1999], Building Wealth: The New rules for Individuals, companies and Nations. F. Fukuyama [1989], “ The End of History ”, Foreign Affairs T. Freidman ’ s “ Golden Arch Theory of Conflict Prevention ” – see Friedman ’ s book of The Lexus and The Olive Tree [1999] (see lecture 1 for “ changing thoughts in the 21 st century) Thoughts leading to Globalization in the late 20 th century

Additional Issues Safety- - “Managing the World Safe for Markets” HBR, 8/2003, A. Chua - World on Fire, A. Chua, 2003 Cross-Border, Cross- Cultural Business Ethics - “Emerging Threat:Human Rights Claims” E. Schrage, HBR, 8/2003 (Chapter 8 – see slide # 25)

Why Companies Expand Internationally? Motivations (BG – Ch. 1) 1. Traditional Motivations ( ) 2. Emerging Motivations ( ) 3. Beyond Motivations

1. Traditional Motivations ( ) Secure key supplies Market seeking Searching low-cost production fac

2. Emerging Motivations ( ) Increasing scale economics Escalating R&D investments MNCs ’ global scanning and learning capabilities

3. Beyond Motivations a. Location-specific Advantages b. Strategic competencies Strategic advantage – ownership-specific advantages such as patented technology, product differentiation, economies of scale, brand names, managerial skills, etc …… c. Organizational capabilities The firm ’ s organizational capabilities that could employ its strategic advantages better than others (see K. Ohmae ’ s article in BG ’ s book for “ insiderization ” )

Underlying theories of International Expansion( see other IB texts) Theory of International Trade (theory of Comparative Advantage) Theories of DFI Theory of International Product Life Cycle

International Product Life Cycle R. Vernon [1966] Stage 1- innovative country, new product, home market Stage 2 - mature, standardized design, lower price, other industrialized countries joined production Stage 3 - DFI in developing countries, export back to home and other markets Stage 4 – technological diffusion, full globalization

International Product Life Cycle Wells [1972]

Types of International Business Operations Import/Export Counter-trade Barter, Counter-purchase, Buyback, Switch- trading Turnkey projects Licensing/Franchising Joint Venture minority ownership, JV, majority ownership Wholly owned Operation

MNE’s International Expansion Strategies Licensing Management Contract Strategic Alliance Joint Venture Merger Acquisition Build from Scratch

Decision Factors: Control Restrictions from the Host Governments Risk Capital Technology Timing

MNCs’ Evolving Mentality Permultter [1968] Ethnocentric Polycentric Geocentric

MNCs’ Evolving Mentality (Contd..) Bartlett & Ghoshal International mentality Ethnocentric, home country oriented Multinational mentality Polycentric, host country oriented Global mentality Centocentric Transnational mentality Geocentric

Geocentric mentality? Best Practice Value-driven model: V = ( Q + F + S ) / C

BG’s transnational companies Efficiency Flexibility World wide learning

IHRM example of MNCs’ evolving mentality Expatriates Host nationals Ethnic expatriates Cosmopolitan personnel

The Future of the Transnational – an Evolving Global role Ch. 8 basically deals with MNE’s social responsibilities, which are further complicated by: - operating in culturally different markets and subject to different legal constraints. - growing pressure of sustaining competitiveness ( much of it comes from greater efficiency – the exploitive MNE) - growing discontents with globalization - rising nationalism (pressure to localize)

Managers in the new century Green, Hassan,Immelt, Marks and Meiland, “In Search of Global Leaders” HBR, 8/2003pp Cultural Competency Overseas assignment – prerequisite? Attitudes