Multinational enterprises and the global economy

1. Multinational enterprises and the global economy A perspective on regional and global strategies of multinational enterprises A.Rugman and A.Verbeke, 2004 Group 3

2. Nature of globalization • Globalization is a phenomenon of trade liberalization (the increased circulation of goods) and financial liberalization (the expanded circulation of capital) around the globe. • Semi-globalization: region matters

3. Dimensions of globalization • Geographic (concept of Triad) • Mode of entry (products, licensing, FDI) • Process under globalization (factors of production, sales)

4. MNE • Multinational enterprise produces and/or distributes products and/or services across national boundaries • 500 largest MNE are responsible for 90% of FDI and 50% of international trade ARE THEY GLOBAL?

5. Why globalize? • To recover innovation costs of engineered commodities (innovative and differentiate products, resulting from high capital investment and knowledge development) • To benefit from economy of scale • To exploit national differences

6. Definitions • Global (9): 20-50% sales in every region of Triad • Bi-regional(25): 20-50% sales in two regions • Home region oriented (320): more then 50% in the region of origin • Host region oriented (11): more then 50% in the region other then region of origin • No data (135)

7. Global companies (9) Data are for 2001

8. Bi-regional (25) Data are for 2001

9. Home-region based (320) Data are for 2001

10. Host-region oriented (11) Data are for 2001

11. Firm specific advantages (FSA) • Location-bound: benefit a company only in particular location • LB FSA are limited to home region • Growth of home region is a benefit and a threat • Learning process in host region is needed • Non location-bound: easy transferable across borders as an intermediate product • Level of transferability determines success • Balance in FSA can be achieved through regional headquarters

12. Type comparison

13. Production chain • Upstream activities: offshore sourcing, rational manufacturing • Easy to organize due to similarities in management • Mainly usage of incomplete integration of factor markets (international arbitrage) • Downstream activities: distribution channels, branding • Regional organizing principals limit number of distribution strategies • Asymmetry

14. Example: Nike • 99% of production in Asia • 58.2% of sales in Americas • 60.2% of employees in Americas • BUT 660,000 independent contract employees Strategy Brand name is a dominant FSA (downstream) also ability to link attractive host country production factors with upstream FSA

15. Effect on structure • Different market positions, regional environment require specific strategies • Decentralization reflects involvement of regional units to corporate planning for successful downstream activities • Centralization is appropriate for planning upstream activities given information availability and reduction both production and coordination costs

16. Effect on performance • Some benefits (taxes, cheap labor, common purchasing) are easy to realize • Expansion to home region is easy to absorb • Broader geographic scope strains absorbing capacity, especially in short run • Broader expansion promises broader benefits, but difficult to manage

17. Conclusions • A few companies are truly global • Necessity to balance NLB FSA and LB FSA for every activity in every region • Easier to benefit from globalization in upstream activities then downstream one • For successful operation regional headquarters are essential • Performance increases in expansion of home region and decreases in broader expansion (short term)