Oxford University Press International Business R. M. Joshi 1 MULTINATIONAL ENTERPRISES

Oxford University Press International Business R. M. Joshi 2 Learning Objectives To explain the concept of an Multinational Enterprises (MNEs) To explain the concept of an Multinational Enterprises (MNEs) To discuss various types of MNEs To discuss various types of MNEs To examine the impact of MNEs on host economies To examine the impact of MNEs on host economies To explore various techniques to measure MNEs’ internationalization To explore various techniques to measure MNEs’ internationalization To assess emerging MNEs from rapidly developing economies To assess emerging MNEs from rapidly developing economies

Oxford University Press International Business R. M. Joshi 3 Significance of MNEs MNEs are considered powerful drivers of globalization. They account for about two- third of world trade and about one-third of the total world trade is intra-firm trade. The universe of MNEs is considered to be large, diverse, and expanding. This makes the study of multinationals imperative for international managers.

Oxford University Press International Business R. M. Joshi 4 Multinational Enterprise A firm that operates in more than one, that is, multiple countries. For a firm to be an MNE, the following criteria need to be fulfilled: Should own or control operations in multiple countries.Should own or control operations in multiple countries. Should generate a substantial portion of its revenues by its foreign operations.Should generate a substantial portion of its revenues by its foreign operations. Should employ workforce from multiple countries.Should employ workforce from multiple countries. Should have a strategic management perspective and a vision of multinational operations.Should have a strategic management perspective and a vision of multinational operations.

Oxford University Press International Business R. M. Joshi 5 Types of Multinationals On the basis of Investment Associates: An enterprise in which a non-resident investor owns between 10 to 50 per cent Associates: An enterprise in which a non-resident investor owns between 10 to 50 per cent Subsidiaries : An enterprise in which a non-resident investor owns more than 50 percent Subsidiaries : An enterprise in which a non-resident investor owns more than 50 percent Branches: Unincorporated enterprises wholly or jointly owned by a non-resident investor Branches: Unincorporated enterprises wholly or jointly owned by a non-resident investor

Oxford University Press International Business R. M. Joshi 6 On the Basis of Operations Horizontally integrated multinationals have manufacturing operations located in different countries to produce same or similar products. Horizontally integrated multinationals have manufacturing operations located in different countries to produce same or similar products. Vertically integrated multinationals have manufacturing operations in certain countries to produce products that serve as inputs to its production in other country/countries. Vertically integrated multinationals have manufacturing operations in certain countries to produce products that serve as inputs to its production in other country/countries. Diversified multinationals have manufacturing operations located in different countries that are either horizontally or vertically integrated. Diversified multinationals have manufacturing operations located in different countries that are either horizontally or vertically integrated.

Oxford University Press International Business R. M. Joshi 7 On the Basis of Management Orientation Ethnocentric firms Ethnocentric firms The headquarters of the parent company, located in the home country, exert high level of control over the subsidiaries through centralized decision-making Polycentric firms Polycentric firms Highly oriented to overseas markets wherein subsidiaries have autonomy in decision- making.

Oxford University Press International Business R. M. Joshi 8 Regiocentric firms Regiocentric firms Foreign affiliates consolidate their decision-making and organization on regional basis and the level of integration is high within the regions but not across the regions. Geocentric firms Geocentric firms Organization of geocentric firms is relatively more complex and inter- dependent than that of the other types. The firm follows a collaborative approach to decision-making between headquarters and subsidiaries.

Oxford University Press International Business R. M. Joshi 9 Positive Effects of MNEs Bring in FDI Bring in FDI Transfer of technology Transfer of technology Promote competition Promote competition Promote research and development Promote research and development Benefit customers Benefit customers Promote exports in the host economies Promote exports in the host economies

Oxford University Press International Business R. M. Joshi 10 Negative Effects of MNEs Influencing host-country government decisions Influencing host-country government decisions Transfer of inappropriate technology Transfer of inappropriate technology Cultural imperialism Cultural imperialism Exploitation of host country resources Exploitation of host country resources Perceived as agents of neo-colonialism Perceived as agents of neo-colonialism Promotes unhealthy market competition Promotes unhealthy market competition Promotes hostile mergers & acquisitions Promotes hostile mergers & acquisitions Crowding out domestic entrepreneurship Crowding out domestic entrepreneurship Limited benefits to host countries Limited benefits to host countries Circumventing host countries’ regulatory framework Circumventing host countries’ regulatory framework

Oxford University Press International Business R. M. Joshi 11 Measuring the Extent of MNE’s Internationalization Size : It is generally believed that firm size has a positive influence on its internationalization, though not accepted universally. Major criteria used for determining the size of a firm include sales revenue, profits, market value, return of equity, etc.

Oxford University Press International Business R. M. Joshi 12 Structure: Structure implies the number of countries an MNE operates in and the citizenship of its top managers and corporate owners influence the level of its internationalization.

Oxford University Press International Business R. M. Joshi 13 Performance: The extent of commitment of the firm’s resources to foreign operations and the reward from these commitments. Various performance based parameters, such as foreign sales, profits, assets, etc., may be used to gauge the extent of a firm’s internationalization.

Oxford University Press International Business R. M. Joshi 14 Management Orientation Attitude and behaviour of top management towards internationalization, though abstract, are crucial factors in determining the extent of a firm’s internationalization.

Oxford University Press International Business R. M. Joshi 15 Ethnocentrism: A predisposition where all strategic decisions are guided by the values and interests of the parent firm Ethnocentrism: A predisposition where all strategic decisions are guided by the values and interests of the parent firm Polycentrism: A predisposition where strategic decisions are made to suit the countries of the firm’s operations Polycentrism: A predisposition where strategic decisions are made to suit the countries of the firm’s operations Regiocentrism: A predisposition that tries to blend the interest of the parent firm with that of subsidiaries on a regional basis Regiocentrism: A predisposition that tries to blend the interest of the parent firm with that of subsidiaries on a regional basis Geocentrism: A predisposition that seeks to integrate diverse subsidiaries through a global systems approach to decision-making. Geocentrism: A predisposition that seeks to integrate diverse subsidiaries through a global systems approach to decision-making.

Oxford University Press International Business R. M. Joshi 16 Indices for Measuring the Extent of MNE’s Internationalization Transnationality Index (TNI): The average of the ratios of foreign assets to total assets; foreign sales to total sales; foreign employment to total employment Transnationality Index (TNI): The average of the ratios of foreign assets to total assets; foreign sales to total sales; foreign employment to total employment Internationalization Index (II): The ratio of the number of foreign affiliates to the total number of affiliates in the firm Internationalization Index (II): The ratio of the number of foreign affiliates to the total number of affiliates in the firm

Oxford University Press International Business R. M. Joshi 17 Emerging MNEs from Rapidly Developing Economies Companies from rapidly developing economies (RDEs) are on the fast track to become major multinationals. These firms are fast gaining global market share, making worldwide acquisitions and emerging as important customers, business partners, and competitors for the world’s largest companies, which include: Bharat Forge (India) Bharat Forge (India) Ranbaxy Pharmaceuticals (India)Ranbaxy Pharmaceuticals (India) Wipro (India)Wipro (India) ONGC (India)ONGC (India) Infosys (India)Infosys (India) Johnson Electric (China)Johnson Electric (China) Pearl River Piano Group (China)Pearl River Piano Group (China) Techtronic Industries Company (China)Techtronic Industries Company (China) Cemex (Mexico)Cemex (Mexico)

Oxford University Press International Business R. M. Joshi 18 Advent of Indian Multinationals Consequent to economic liberalization Indian companies are fast expanding overseas to become multinationals eg. Hindalco industries, Infosys technologies, Larsen & Toubro, ONGC, Ranbaxy, Reliance, Tata steels, Videocon, Wipro etc.