Why Firms become Multinational Enterprises

Why Firms become Multinational EnterprisesIntroduction wholeness of the important aspects of orbicularization is the external transformation of the companies nigh the world. The companies train evolved from cosmos a domesticated sure to a transnational corporation and being present almost everywhere in the world either physically or via internet. These international companies argon regarded as true MNCs only if they make made substantial send investment in exotic countries and have actively and continuously proposen part in the management of these assets (Barlett, Ghoshal, p2). though the companies had cacographyed the internationalization process as early as in the ordinal and the eighteenth century when the developed nations moved towards the down the stairs developed atomic number 53s for acquiring key resources and in search for markets, just the latter part of the 20th century and the beginning of twenty-first century witnessed a huge enlargement in the extent to which the smasheds go international(Barlett, ghoshal, p1). The internationalization process has alter greatly due to the evolution of the motives and the way firms integrate and fly off the handle their businesses around the world. in that location are both proactive and reactive motivations for a firm to go international. Proactive motivations are evident in firms that see a need for a strategical change and want to go international whereas reactive firms are those that go international because they have to in place to deal with the competition from the domestic firms growing internationally as sanitary as the outside(prenominal) players entering the domestic market. (Czinkota, The Export Marketing Imperative, 2004, pg 4). This bear witness discusses these motives for firms to become MNEs and how they go about it.Why firms become Multinational EnterprisesIn the increasingly global business environment, legion(predicate) companies arousenot afford to be under the assum ption that their domestic markets provide always be profitable. For this reason, many companies start with selling their existing harvest-tides to the countries which have more number of consumers (e.g. China and India) or where consumers have more purchasing power (e.g., USA) (Rennie, Michael W, 193). This arises from the primary profit-seeking motive of the companies but withal divine services them to increase their brand identity and global presence (Czinkota, p4). These companies consequently customize their product line according to the region in which they are selling in order to expand their customer base and meet the competition from the domestic players. So increased sales are a major motive for a come withs expansion, and in fact, many of the worlds largest companies including Volkswagen (Germany), Ericsson (Sweden), IBM (United States), Michelin (France), Nestle (Switzerland), and Sony (Japan) go down more than half their sales from outside their home countries (UN Conference Promoting Linkages, 2001). other(prenominal) motive, which arose from the firms going international, was seeking damage effective resources to propel production for topical anaesthetic and foreign markets. As the firms expanded geographically, they needed to attain competitive utility over other foreign as well as the domestic companies. This drove them to invest abroad in countries where resources needed for production were accessible at low cost (Cosmin Sabau). In the earlier days, these resources embroild principally the natural resources like rubber, steel, aluminum, etc., for example, crude oil was sourced from gulf countries to meet the deficit in the domestic supply of crude oil. Today, it includes low cost land, moil and capital as well. This careed in lowering their cost of production and pass competitive prices to the customer. Sports good companies like Rawlings rely largely on labor in Costa Rica, a country that hardly plays baseball, to produc e baseballs (Philip Hersh, 2009).The motivations to expand internationally however changed gradually in response to the great organisational and technological forces (Barlett, ghoshal, p6). One of the major contemporary motives is achieving economies of scale. It was first noted by manufacturers in the military aircraft manufacture in the 1920s and 1930s that choose labor costs decreased by a constant constituent as the cumulative number of aircraft produced doubled. By increasing the cumulative make and exporting to a larger market, the companies can bring down their cost of production by 20-30 percent (Ghemawat).Many companies establish foreign seek and development (RD) facilities to tap additional scientific resources, sometimes acquiring effective companionship in the process (Heather Berry, 2006, p 151-168). Avon, for instance, applies know-how from its Latin American marketing experience to help sell to the US Hispanic market (Nery Ynclan, July 23, 2002EI). insofar an other motive for companies going international was shortening PLCs (Barlett, ghoshal, p6). As the manners of a product became shorter, adequate returns for all the research and development through with(p) for the product could be made only by introducing the product to nonuple larger markets. In addition companies nowadays aim to launch the product simultaneously in as many markets as possible to enchant the maximum returns before more firms start producing substitutes.How firms become Multinational Enterprisesinternationalization is a very crucial and strategic decision that a political party takes in its lifetime. Certain prerequisites need to be met before a firm can think of nationalizing and becoming an MNC. The first one is high country attractiveness. The country should be able to offer something that will promise a competitive advantage for the social club or something that can help the social club rear its existing competitive advantage. Another prerequisite is the will power of strategic competencies. The beau monde should have some competencies that will help it counter eternal rest the incognizance of foreign markets and environmental conditions. Also, the company should have some organizational capabilities that will increase the ROI by leveraging the companys strategic strengths intensively. These three prerequisites are indwelling for selecting the mode of internationalization and the mode of country entry that will help the company compete in world business. (Barlett, Ghoshal)There are many method acting actings adopted by companies to internationalize and conquer foreign markets. The earliest method used by firms in their process of becoming MNEs was exports and imports. This may include both merchandise exports and imports and service exports and imports. Service exports and imports may be touristry and transportation, service performance and asset use. Some services earn honorarium for the companies for the performance of those services. For example, the companies may pay fees for turnkey projects which are transferred to the owner at one time they are operational. Management contracts also earn the companies fees for the performance of general and vary management functions for another. Asset use includes Licensing, Franchising, etc. Licensing is the process of allowing another company to use its intangible assets like patents, trademarks, copyrights, or expertise, under contracts known as licensing agreements for which they earn royalties. Example. Franchising is the process of business in which a company permits another company to use the trademark as an asset of the franchisees business. The franchisor will help the franchisee by supplying raw materials, management services etc. and also will lay down guidelines and standards that are to be followed by the franchisee. For example, McDonalds has franchised its outlets in many countries like UK, India, etc. In many circumstances, a multinational with a n exclusive technology may fear that a licensing contract allow for to dissipation of its proprietary knowledge. In that case, setting up a foreign subsidiary is a preferable strategy. (http//cep.lse.ac.uk/pubs/download/CP167.pdf)Another method of expanding globally is by making investments on the foreign countries. Foreign investment implies ownership of foreign property in exchange for a financial return. There are two forms of foreign investment direct and portfolio. The foreign direct investments (FDIs) confer the investor with a controlling stake in the company. For example, when Nintendos CEP bought the Seattle Mariners, the baseball aggroup became a Japanese FDI in the US. Although the control in the foreign company need not be full even with a nonage stake and the remaining ownership widely dispersed, the foreign investor can take decisions that cannot be vetoed by any other owner. When the ownership of the company is interpreted by more than one company, it is called as a joint venture. Today, at least 61,000 companies worldwide control over 900,000 FDIs in every industry (UN Conference FDI from Developing and Transition Economies, 2006, p 30-31). On the other hand, the foreign portfolio investment is a non controlling interest in a company or ownership of a loan made to another party. This can be in the form of stocks in a company or loans to a company in the forms of bonds, bills, or notes purchased by the investor. They are comparatively safer than FDIs in terms of risk.ConclusionThe changing extent, character and geography of MNE body process over the past two decades is itself a reflection of a serial publication of path-breaking technological, economic and political events. But internationalization is not a one size fits all approach have different motives to go global and do it in the way that best suits their business models and gives them maximum returns. Whichever method a company adopts, it goes through a learning process and increases i ts knowledge throughout the process. Internationalization has indeed become the need of the hour for companies to sustain their businesses in the long run and develop companys strategic and organizational capabilities.