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A multinational
enterprise (MNE) can be defined as an enterprise that is based in its home country,
but operates across a number of different countries (REF). MNEs are in control
of ‘value-added activities in more than one country’.  (Dunning and Lundan, 2008, p.3). Often, domestic
firms come to a point where they wish to expand internationally. They may wish to
keep up with competitors, access additional customers or broaden their customer
base. There are a number of actions that businesses can take to expand into
international markets, and usually their expansion opportunities vary in terms
of the risks that they incur as well as the amount of control that businesses
have. In this essay, I will explore these factors, analyse the motives that
encourage an organisation to involve in international business and their
approach towards internationalisation.

 

MNEs play a major role in
the globalised economy. The rationales of internationalisation of the firm can
be categorised into four types: marketing, financial, operational and
relational purposes. Market diversification via internationalisation is an
excellent strategy for the firm to seek opportunities for growth. For example,
Gong Cha ‘the fastest-growing tea brand in Asia’ first originated in Taiwan and
now sells its products, such as bubble tea, in European markets. Other key
reasons may be to better serve key customers that have located abroad. It is
vital to remember that the nature of their products and services are linked
with the end-users who are their consumers. Zara, a Spanish retailing company,
was originally only based in Galicia and is now located worldwide. In addition,
some firms may wish to become multinational to confront their competitors more
effectively or preventing their competitors’ growth in specific markets; they
are far more proactive. For example, Samsung invested a large amount of money
by building multiple subsidiaries worldwide in order to compete with Apple in
the global market place.

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Focusing on the financial
aspect, the primary objective of firms to go international is to make a large
revenue. They internationalise in hope to receive higher margins and profits.
In this case, the nature of the foreign market is the key for firms to
internationalise. Many high-tech firms with research and development focus (R)
prefer to internationalise in advanced markets as they are convinced they can
earn high profits by selling products or services to more rich consumers. On
the other hand, traditional firms with the focus on mass production, such as
clothing, may wish to internationalise in the developing or emerging markets as
they can source lower costs for higher profit margins. This type of cost-driven
purpose is relevant to the next motive. Often firms wish to gain the economies
of scale in sourcing, production, marketing as well as R. This suggest that
the per-unit cost of production is much lower than the previous or average cost,
thus firms can save a large amount of money while operating or manufacturing in
low-cost country. For example, countries in South-Eastern Asia are known as the
‘world factory’ as they are the concurrent popular destination for foreign
investments. Some countries have lower company tax rates which allows the firm to
retain a higher share of their post-tax, resulting in higher tax revenues. Research
indicates that in year 2017, Ireland had a low statutory corporate tax rate of
12.5% – this figure has not changed since year 2003. Other examples include
Hungary, which has reduced its corporate income tax rate from 19% to 9% in
2017. In addition, lower tax rates encourage firms to avoid using tax avoidance
schemes.  

 

Another benefit is the
global differences in wage rates and government regulations that allows for cheaper
wages, the absence of minimum wages and exploitation of lax environmental laws.
Similarly, they can take advantage of ‘special economic zones’ (SEZ). This is
an area in which business and trade laws differ from the rest of the country.
SEZs are located within a country’s national borders, and their aims include:
increased trade, increased investment, job creation and effective
administration. Special zones are set up with lower company tax rates, lax
environmental laws and no minimum wages.

 

Operational purposes of
the firm focus on convenience. Companies, such as Alcoa and Adora, are involved
in extractive industries like petroleum or mining. These industries are often
located near to their sources of raw materials to prevent the high costs of
transporting raw materials and production. In addition, firms go international
to receive better-value factors of production. Taiwanese computer manufacturers,
such as Acer Inc. and Asus, establish subsidiaries in the US, in order to
access low-cost capital and better-value investors. The US is home to many capital
sources in the high-sector, such as Silicon Valley. This makes it more
efficient for firms to find investors and capital through venture capital or
stock exchange. Furthermore, there are cases where firms go international as
they wish to learn new ideas about products, services and business methods. For
example, car manufacturers, such as Yamaha, opened their subsidiaries in Japan
as they want to learn from Toyota about Just-in-time production to lower down
their costs and serve customers much faster.

 

Focusing on relational, international
collaborative relationships via strategic alliances have always been useful
internationalisation strategy for firms, as they can help in building
competitive global value chains either by integration with potential
competitors or integrations with potential customers and suppliers of the firm.

 

I will now the discuss
the ways in which a business chooses to internationalise. Many businesses start
as an exporting business – a business which sells domestic products overseas.
In terms of risk, it is the most limited as capital requirements are low. In
addition, risk is minimised as it is an easy procedure to leave this business. For
example, no leases have been purchased and there is no need to get accustomed
to a particular culture. With an exporting business comes an independent agent
who sells the products and services overseas. This is beneficial to the firm as
the independent agent will be familiar with the culture and traditions of that
country.

 

Focusing on licensing and
franchising, they increase a business’s level of involvement in
internationalisation when compared to an exporting business. Licensing and
franchising both give an individual the authority to produce or market a
particular product of a firm. However, franchises are given certain operating
requirements. McDonald’s, a popular franchisor, has a set of strict operating
procedures which franchisors must abide by. This may be instructions on how to
assemble a burger or perhaps how to address customers. This is an excellent way
for the business to minimise inconsistencies and is often found to be
characteristics with many fast-food restaurants, such as Burger King. In addition,
it minimises their risks and ensures their brand is being portrayed in a
positive light regardless of the geographical location.

 

Another opportunity in
the international arena is to utilise direct investments. Direct investment refers
to the actual company acquiring some type of business internationally or
developing their own facilities. Common types of direct investment include
joint ventures, which is reaching an agreement with a particular company that
already operates internationally. This may be a domestic firm and then joining
forces with them for the purpose to service a particular consumer base. This is
excellent for a business as they have the ability to take advantage of their
expertise in that market.

 

Looking at the
relationship between risk and control, Starbucks is an exemplar firm to have
struggled with this. Starbucks expanded internationally, extending the reach of
their particular brand as they considered franchising to be a viable option. As
the franchisee will be investing heavily in the business, the upfront cost for
the business will remain low. However, Starbucks wanted to maintain trust with their
partners and stakeholders, thus knew taking a licensing or franchising route
per say would not be beneficial to what they are trying to accomplish.

 

‘The Diamond Model’ developed
by Michael Porter was published in 1990 in his book ‘The Competitive Advantage
of Nations’. The model illustrates why a nation becomes the home base for successful
international competitors in a particular industry. He suggests the old theories
proposed by Adam Smith and David Ricardo are not sufficient to explain
competitiveness between technology advantage in the nations of today. In his
model, there are four determinants responsible for such diversity, as well as
two external variables. The related and supporting industries determinant
suggests the presence of internationally competitive supplier industries in a
nation creates advantages in downstream industries. It gives efficient early
rapid and sometimes preferential access to the most cost-effective inputs. Firms
gain quick access to information to new ideas and insights and to supplier
innovations. The demand conditions determinant suggests early saturation forces
companies to continue innovating and upgrading as well as using international
markets for their products. The structure and rivalry determinant indicates
that vigorous local competition not only sharpens advantages at home but
pressures domestic firms to sell abroad in order to grow.

 

 

In conclusion, it is
evident that there are multiple motives for international expansion. Some are
strategic in nature, while others are reactive to the market demand and
competition.  

 

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