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8/6/2019 IB Chapter 2
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LOGO
International Business
Prof.Dr. Habiballah Al-Torkistani
8/6/2019 IB Chapter 2
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THE MULTINATIONALENTERPR ISE
Chapter 2
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What is Multinational Enterprises (MNEs).
MNE are firms that are headquarteredin one country but have operations inone or more other countries.
Some of them you know by namebecause you have used their products
or seen their advertising.
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� Sometime it is difficult to know if a firm is an MNEbecause multinationals often downplay the fact thatthey are foreign held.
�For example, many people are unaware that Bayer,the drug company, is German owned; Nestlé, thechocolate manufacturer, is a Swiss company.
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� Similarly, approximately 25% of banks inCalifornia are Japanese owned, but this isoften not evident from their names.
� Simply put, many large MNEs have worldholdings far beyond that what is known to
the casual observer.
� A closer look at the MNEs will reveal
the impact they have on internationalbusiness and the world economy.
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The Nature of Multinational Enterprises
The United States has identified over 60,.000 MNEs,but the largest 500 accounts for 80% of the world'sforeign direct investment.
Table 2.1 shows the distribution of the world¶s largest
500 MNEs.Of these, 424 are from the ³triad´.
There are; 189 from the United States, 153 from theEU, and 82 from Japan.
The fact that over 80% of the world¶s largest MNEs arefrom the core triad is highly significant.
It means that the triad is the basic unit of analysis for MNE strategy.
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Country Number of MNEs
United States 189
European Union 153
Japan 82
China 15
Canada 13Switzerland 12
South Korea 11
Australia 7
India 4
Brazil 3
Russia 3
Norway 2
Venezuela 1
Mexica 1
Taiwan 1
Thailand 1
Singapore 1
Malaysia 1
Total 500
Table 2.1 The world¶s largest 500 multinationalenterprises, 2003
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The Nature of Multinational Enterprises
Also, about 80-85% of the wor ld¶s top MNEs have beenfrom the triad for the last 20-30 years.
Total annual sales of these 500 firms are in excess of
$14
.9 trill
ion.These firms are engaged in a wide variety of operationsincluding: autos,
chemicals,
computers,consumer goods,
financial services,
industrial equipment, and
oil and steel production.
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MNEs grossed more than $100 billion in 2003.
1.Wal-Mart (US)2. BP (Britain)
3. ExxonMobile (US)
4. Royal Dutch/Shell Group (Britain/Nether lands)
5. GeneralMotors (US)
6. Ford (US)
7. DaimlerChrysler (Germany)
8.Toyota (Japan)
9. General Electric (US)
10. Total (France)11. Allianz (Germany)
12. ChevronTexaco (US)
13. AXA (France)
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Where are they came from?
Each of these companies comes fromone of three geographic locales:
United States, (Six Companies).
-EU. (Six Companies)
-Japan, ( One Company)
- We call this the core ³Triad´.
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What MNE are doing?
Most of their activity could be classifiedinto two major categories.
1.Export and Import
2.Foreign Direct Investment.
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The International Process
- Not all international business is done by MNEs.- Indeed, setting up a wholly-owned subsidiary isusually the last stage of doing business abroad, asit is shown in Figure 2.2.
- Figure 2.2 outlines the typical process by which afirm producing a standardized product will seek toinvolve itself in a foreign market.
This, however, is a generalization as firmsultimately make decisions depending on their particular circumstances.
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Figure 2.2 Entry into foreign markets:The internationalization process
epth of
in ol ement
in foreign
markets
F
icense
E port ia agent or istri utor
E port through o n sales
representati e or sales su si iary
ocal packaging an /or
assem ly
Time
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Internationalization, the process by which acompany enters a foreign market.
License, a contractual arrangement in whichone firm (the licensor) provides access to someof its patents, trademarks, or technology toanother firm in exchange for a fee or royalty.
Licensor, a company that provides access to
some of its patents, trademarks, or technology toanother firm in exchange for a fee or royalty.
Licensee, a firm given access to some of thepatents, trade marks, or technology to another
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Why firms become multinational enterprises?
Companies becomeMNEs for a number of reasons.1. Is to diversify themselves against the risk and uncertainties of
the domestic business cycle.
2. Is to tap the growing wor ld market for goods and services.
3. To increase foreign competition and a desire to protect their
home market share.4. Is to reduce price.
5. Is to overcome protective devices such as tariff and non-tariff barriers by serving a foreign market from within.
6. Is to take advantage of technological expertise by
manufacturing goods directly (by FDI) rather than allowingothers to do it under a license.
Firms become multinational enterprises for the same reasonsthey engage in FDI.
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Theory of MNEs
Three conditions that must be met if a firm is toengage in foreign operations. Firm-specificadvantage (FS As),country-specific advantages(CS As) and internationalization advantage.
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Figure 2.4 The basic components of internationalbusiness
Firm FS s Countr FS s
Strateg
What changes
StructureWhat a justment
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The competitive advantage matrix
To help formulate the strategic options of theMNE, it is useful to identify the relative strengthand weaknesses of the CS As and FS As theyprocess.
Figure 2.5, the competitive advantage matrix,provides a useful framework for discussionof these issues.
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Figure 2.5 The competitive advantage matrix
Strong
Weak
Weak StrongFirm peci ic
advanta e
o u n t r
p e c i i c
a d v a n t a g e
2
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Successful MNEs rely on strategic managementProcess
It has five major phases1. Identification of firms mission
2. External and internal environment
analysis
3. Formulation of objectives and overall plan
4. Implementation of these plans5. Evaluation and control of operations
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Home work
What is the source of firm-specificadvantage and country- specificadvantage, when they engage in FDI?
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