Dr Zain Yusufzai The Multinational Enterprise Chapter # 2 (page35-65).

Introduction
How MNEs affect economies of host countries
Multinationals down play the fact that they are foreign
held
Example: - Bayer, (drug company) German owned.
Nestle (chocolate Manufacturer) Swiss owned.
Northern Telecom. (Communication) Canadian
Banks in California, 25% are Japanese owned.

The nature of multinational enterprise:

In US over 60,000 MNEs; but only 500 largest accounts
for 80% of all Foreign Direct Investment (FDI):

Majority owned by triad 430 companies;

Triad basic unit of analysis for MNEs strategy
Total annual sales of these 500 firms in excess of $12.5
trillion
Collectively employ 43 million people

These firms engage in wide variety of operations

Autos, computers, chemicals, consumer goods, financial
services, industrial equipment, and oil and steel
production
Large MNEs have a significant impact on international
business and the world economy

Characteristics of multi national enterprises

The environment they operate in;
MNEs have two major area of concern
1. the home country of its head quarters;
2. host countries in which it does business

Characteristic:-

1. affiliates responsive to a number of important

environmental forces, including competitors,
customers, suppliers, financial institutions, and
government
2. It draws on common pool resources, including
assets, patents, trademarks, information, and
human resources.
3. links together the affiliates and business partners
with common strategic vision;

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Means: - all firms with whom the MNE works fit into the
company’s overall plan of what it wants to do and how it
intends to go about implementing this strategy.

Internationalization process:
A process by which a company enters a foreign market:
Firm produce a standardized product will seek to involve
itself in foreign markets:
 Foreign markets regarded as risky, due to the fact
unknown territory’
 Faces export marketing costs

Some methods to avoid foreign risk and costs

License: a contractual arrangement in which one firm

(the licensor) provides access to some of its patents. ,
trademarks, or technology to another firm in exchange
for a fee or royalty;

Licensor: - a company that provides access to some of its

patents trademarks, or technology to another firm in
exchange for a fee or royalty

Licensee: - a firm has given access to some of the patents,

Trademarks, or technology of another firm in exchange
for a fee or royalty:

Major types of foreign entry for a firm are as follow

1. Firm sees potential extra sales by exporting and uses

local agent or distributors to enter particular market.
Often firm use exporting as a vent for its surplus,
production.
2. If successful abroad some firms set up local sales
representative or marketing subsidy.
3. Exports represent a larger share of sales firm sets up
an export department to manage foreign sales and
production for such markets, (design, and production
process).
4. Firms compatible with foreign environment starts
local production (engage in local assembly and
packaging).
5. Firm involved in Host countries: - Factor Market,
must deal with such variables as, wage rates, cultural

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attitudes and worker expectations in its new labor

force.
6. Final stage:-
i. Firm generated sufficient knowledge about
Host country environment.
ii. Consider a foreign direct investment activity.
iii. Production and sales in Host country.
iv. Cost of production low: re-export back to
Home country.

Why firms become multinational enterprises: (Reasons).

1. To diversify against the risks and uncertainties of
domestic business cycle (prosperity, recession,
depression, and recovery).
2. Tap into the growing world market for goods and
services. A process of growth in an integrated
world market called “Globalization”.
3. Firms become MNEs in response to increased
foreign competition and a desire to protect their
home market share by using “follow the
competitor”, strategy.

This approach serves dual purpose.

• Takes away business from their competitions
by offering customers other choices.
• Lets competitors know if they attack they
MNEs home market, the response will be
similar.
4. reduce costs:- setting operations close to foreign
customers , these firms,
• eliminate transportation cost ,
• avoid overhead associated with middle men,
• Respond more rapidly and accurately to
customer needs and take advantage of local
resources.

This process is known as “internationalization” of control

within the MNEs.
5. overcome protective devices such as tariff and
non tariff barriers,
• NAFTA for example eliminated tariff between
Canada, Mexico and US.
6. Take advantage of technological expertise by
manufacturing goods, directly by FDI, rather than

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allowing others on license. Quality and progress

easily monitored.

The strategic Philosophy of Multinational Enterprise:

• MNEs are different from local operators who

confine activities to domestic markets
• MNEs decisions based on what best for overall
company
• It will transfer jobs abroad, cut back on local
workforce
• Train and develop local managers to handle
overseas operations
• Hire workers in large numbers in overseas
countries

Multinationals in action
1. Cemex sa 2. Solectron 3. BMW 4. Levi Strauss
5. Canon

Strategic management of MNEs: (an introduction:)

Involves four major functions:
1. strategy formulation
2. strategy implementation
3. evaluation
4. control of operations

These four major functions encompasses wide range of

activities beginning with environmental analysis of
external and internal conditions and evaluation of
organizational strengths and weaknesses

Steps in the strategic management process:

Basic mission: The reason that a firm is in

existence.
Step one:- Strategic planning begins with review of the
company’s Basic Mission, is determine by answering
these questions:
• What is the firm’s business?
• What is the reason for existence?

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When these questions are answered a firm can decide in

which direction to proceed. Example:
• Shell, Amoco, Exxon are in the energy business not
in the oil business:
• AT&T, sprint, and MCI are in the communication
business not in the telephone business.
• Coca cola, PepsiCo see themselves in the food
business not in the soft drink business.

This focus helps them with they long range thinking.

Step two: - after mission determined, an MNE will
evaluate the external and internal environment:
• Goal of external environmental analysis is to
identify opportunities and threats that need to be
addressed
• Internal environment analysis is to evaluate the
company’s financial and personnel strengths and
weaknesses. What it can do in terms of expansion
and capital investment. By evaluating its
personnel, an MNE will be able to determine how
well it current workforce can meet the challenges
of the future and what types of people will have to
hired or fired.
• Internal and external analysis helps the MNE to
identify both long range goals (two or five year)
and short range goals (less than two years).

Step three: - The plan is broken down into major parts,

and affiliate and department assigned goals
and responsibilities
Step four: - This begins the implementation process,
Step five: - Progress periodically evaluated and changes
are make in the plan

Strategic management in action:

Analysis of Formulation Evalua

Identification
the external of objectives Implementation and
of the firm’s
and internal and overall of the plan control
basic mission
environment plan operati

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