Multinational

Enterprises (MNEs)

LEARNING OBJECTIVES
At the end of this chapter, the reader should be
able to:
Describe several terms of MNEs
Explain Traditional MNEs
Discuss DMNEs advantages and constraints
Discuss motivations for SMIES to

internationalize
Describe International Direct Venture Firm
(IDVF)

Basic Concepts and Definition

Multinational Enterprises (MNEs) :
Large company with plants or other direct

investment in one or more foreign

countries, international sales and a
multinational mix of managers and
owners (shareholders).
E.g. Ford, Toyota, GE, IBM, Intel, and Sony
with headquarters both in New York and
Tokyo.

Terms describing a company with

significant international operations:
(i) Transnational Firm
A transnational firm implies a flexible

approach: standardize where feasible;

adapt where appropriate.
This type of company normally has

subsidiaries that fulfill a variety of

strategic roles typically performed by
HQ.

Cont.
The overseas components are integrated into the

overall corporate structure across several

dimensions, and each of the components is
empowered to become a source of specialized
innovation.
It is a management approach in which an
organization integrates its global business
activities through close cooperation and
interdependence
among
its
headquarters,
operations, and international subsidiaries, and its
use of appropriate global information technologies.
Transnational firms have higher degrees of
coordination with low control dispersed
throughout the organization.

 A transnational model represents a compromise between

local autonomy and centralized decision making.

It achieves this balance by pursuing a distributed strategy
which is a hybrid of the centralized and decentralized
strategies.
Under the transnational model, a multinational corporation's
assets and capabilities are dispersed according to the most
beneficial location for a specific activity.
Simultaneously, overseas operations are interdependent,
and knowledge is developed jointly and shared worldwide.

The five implementation tactics (Vitalari and

Wetherbe, 1996) used for implementing the
transnational model are:
mass customization-synergies through global

research and development (e.g., American

Express, Time Warner, Frito-Lay, MCI)
global sourcing and logistics (e.g., Benetton,
Citicorp)
global intelligence and information resources
(e.g., Andersen Consulting, McKinsey Consulting)
global customer service (e.g., American Express)
global alliances (e.g., British Airways and US Air;
KLM and Northwest

(ii) Multi-Domestic Firm

A company with several international

subsidiaries that is independent from

each other.
It sees customers as being unique.
A multi-domestic company modifies a
product
to
accommodate
the
wants/needs of the market.

Cont.
Multi-domestic firm has a market orientation

strategy and aim to be responsive to the

local and market needs.
Enable firms to customize their products and
services to match the local conditions.
Each of its foreign-country operations to act
fairly independently
The companys subsidiaries in their respective
local markets have the authority to design,
produce, and market products that directly
respond to local customers preferences.

(iii) Global Firm

Has

integrated
international
subsidiaries
controlled by headquarters
Usually operates beyond national borders and in
more than one country sees the globe as one
single market without borders.
Emphasizes greater central coordination
and control, with various product or business
managers having worldwide responsibility
Pushes companies to think in terms of creating
products for a world market, manufacturing
them on a global scale and marketing them
through a few focused distribution channels.

(iv) Multinational Firm

Another common name for this term is multinational

corporation (MNC) and this term has been used

interchangeably with multinational enterprise.
This type of company generally engages in Foreign
Direct Investment (FDI) and owns or controls
value adding activities in more than one country.
Multinational firm usually has facilities in several
countries and obtain a large portion of revenues
from its foreign operations.
Multinational firm also has subsidiaries which posses
a common strategic vision and usually deals with
expatriates.

Summary:
Types

Coordinatio
n

Decision
Making

Control

Transnational

High

Low

Low

Multi-Domestic

Low

High

High

Global

High

Low

Low

MNC

Low

High

High

Traditional Multinational
Enterprises (MNEs)
The traditional MNE is a large company with

plants or other direct investment in one or

more foreign countries, international sales
and a multinational mix of managers and
owners.
It is mostly located on developed
countries and in almost every part of
the world.
E.g. Johnson & Johnson, Procter & Gamble
and BP.

Advantages:
1. MNEs provide knowledge, capital, technology,
expertise, global affiliations, contributions to
national productivity and exports, innovation,
employment, and societal change.
2. Global
spread
provides
MNEs
with
diversification so
they can disperse risks to other subsids.
3. Global spread also allowing them to overcome
entry
barriers in the form of high start up costs.

Cont.
4.
Dynamic
capabilities
such
as
technological assets,
patents, trademarks, designs, products, and
process
innovation to
ensure its survival in
international
market e.g. Body Shops franchising skills
and IBM
voice recognitions technology.
5. Superior managerial skills
6. International experience.

MNEs from Developing and

Emerging Economies (DMNEs)
Multinational

enterprises from developing

nations or emerging markets typically
dominate the global business transactions
today.
Samsung from South Korea now has been
aggressively marketing and selling their
electronics products in United States and
Europe.
The Samsung brand is almost as popular as
the Sony brand from Japan in global consumer
electronic markets.

Advantages:
a. Home government support.
b. Lower production scale of DMNEs permits

flexibility and adaptation.

c. DMNEs are often newly formed, flexible
and can leapfrog into cutting-edge
technologies

Constraints of DMNEs
a. Lack of capital investment.
b. Lack of reputation and brand recognition.
c. Lack of knowledge and management

experience in foreign operations.

d. DMNES also have been sheltered in their
domestic market for a long time.

Differences Between
Traditional & Developing
MNEs
Traditional MNEs

Developing MNEs

Developed
Countries

Developing
Countries

Knowledge

High

Moderate & Low

Capital

Huge

Limited

Advanced

Limited

Expertise

Highly Skillful

Limited

Innovation

High

Limited

Global

Limited

High

Limited

No

Yes

Location

Technology

Managerial Skills
Experience
Gov. Support

Features of DMNEs
Focus on developing and gaining ownership

advantages and skill advantages on the host

countries.
DMNEs usually serve as intermediaries in the

flow of technology
developing countries.

from

industrialized

to

DMNEs also have to internationalize to overcome

import quotas in developed markets.

Cont.
DMNEs

usually
diversification.

try

to

reduce

risk

via

DMNEs normally rely on third party.

DMNEs are focusing more in manufacturing.
DMNEs is said to be lacking in bargaining power in

host country.
DMNEs generally have high tendency in competing

on lower price than on product differentiation.

Small and Medium Sized

International Enterprises(SMIEs)
SMIEs do not qualify as MNEs because

they only engage in international

business activities, but they do not have
substantial Foreign Direct Investment
(FDI)
presence
abroad
through
the
acquisition of profitable assets such as
opening branches in various countries.

Advantages:
More innovative
Creative
Have high entrepreneurial spirit
Have lower overhead costs
Have the ability to move fast to take

advantage of new opportunities

Have
the
ability
to
leapfrog
technologically

Constraints:
Small scale and limited reach of the

SMIEs constraints its production and

services.
Lack of knowledge and track record in
exporting and foreign investment.
Lack of market power

What Motivate SMIEs

Internationalize?
Find low cost countries
Compensate with the decline in domestic

demand.
Pull factors - higher market growth rate,
more incentives and lower production costs.
Managerial commitment and resources
devoted to international activity
Unforeseen circumstances that create
internationalization opportunities

International Direct Venture Firm

(IDVF)
Launch

international
business
activities right from their initial startup.
It can also be defined as business
organizations that went abroad right
from the point of inceptions.
For example one of Malaysias successful
restaurant franchise called Jom Makan
launched its first venture in a competitive
food business directly in overseas market in
London without ever having a presence in
Malaysian market.

Advantage:
Capability in leveraging its knowledge and

innovativeness to achieve considerable market

success early in their phases of evolution.

Constraint:
Lacking in capital, and tangible resources

that characterize most of new business

ventures.