International Business

Chapter 2
THE MULTINATIONAL ENTERPRISE
• A multinational enterprise (MNE) is a company that is headquartered
in one country but has operations in one or more other countries.
Characteristics of multinational enterprises
• One way of identifying the characteristics of MNEs is by looking at the
environment in which they operate.
• An MNE has two major areas of concern: the home country of its
headquarters and the host countries in which it does business.
 Characteristics of multinational enterprises (cont.)
• One characteristic of MNEs is that their affiliates must be responsive to a
number of important environmental forces, including competitors,
customers, suppliers, financial institutions, and government.
• A second characteristic of an MNE is that it draws on a common pool of
resources, including assets, patents, trademarks, information, and human
resources. Because the affiliates are all part of the same company, they
have access to assets that are often not available to outsiders.
• A third characteristic of an MNE is that it links together the affiliates and
business partners with a common strategic vision. Simply put, all of the
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
 A typical internationalization process
• Not all international business is done by MNEs.
• Indeed, setting up a wholly-owned subsidiary is usually the last stage of
doing business abroad, as is shown in Figure 2.2.
• Figure 2.2 outlines the typical process by which a firm producing a
standardized product will seek to involve itself in a foreign market.
• This, however, is a generalization as firms ultimately make decisions
depending on their particular circumstances.
• In this internationalization process the firm regards foreign markets as
risky due to the fact that, as these markets are unknown to it, the firm
faces export marketing costs.
• To avoid such information costs and risk, its strategy is to go abroad at a
slow and cautious pace, often using the services of specialists in
international trade outside the firm.
• Over time, familiarity with the foreign environment will reduce the
information costs and help to alleviate the perceived risk of foreign
involvement.
• There is a “learning” effect as firms become familiar with a foreign market.
• Initially the firm may seek to avoid the risks of foreign involvement by
arranging a JV or a license.
 License, licensor, licensee
• A license is a contractual arrangement in which one firm, the licensor, provides access to some of its
patents, trademarks, or technology to another firm, the licensee, in exchange for a fee or royalty.
• This fee often involves a fixed amount upon signing the contract and then a royalty of 2–5 per cent on
sales generated by the agreement.
• A typical licensing contract will run from five to seven years and be renewable at the option of either
or both parties.
• This strategy is most suitable for a standardized product where there is no risk of dissipation of the
firm’s technological or managerial advantages. Otherwise, licensing will be reserved for a much later
stage of entry.
• Indeed, when it is important for the firm to retain control over its firm-specific advantage in
technology (as in internalization theory), licensing will be the last stage of entry.
• The firms involved in the process of internationalization, on the other hand, typically are not
concerned about losing their firm-specific advantages.
• Rather, they want to avoid exposure to an uncertain foreign environment.
• Abstracting from the licensing option (and the more complex problem of joint ventures), the major
types of foreign entry for a firm are as follows:
1. The firm sees potential 2. As exports come to 3. After the firm has become 4. The final stage of
extra sales by exporting represent a larger share of more familiar with the local foreign involvement
and uses a local agent or sales, the firm may increase its
capacity to serve the export market, some of the comes when the firm has
distributor to enter a market. It will set an office for uncertainty associated with generated sufficient
particular market. its sales representative in a foreign involvement has been knowledge about the host
• Often the firm uses major market, or set up a overcome. country to overcome its
exporting as a “vent” for sales subsidiary. • Now the firm may begin to perceptions of risk.
its surplus production and • This stage marks an important move on the foreign Because it is more familiar
may have no long-run departure for the firm from with the host-country
simply viewing exports as a production side. Initially it may
commitment to the marginal contributor to sales start to use host-country environment, it may now
international market. If it volume or as a vent for surplus workers to engage in local consider a foreign direct
does well abroad, in times of excess capacity. assembly and packaging of its investment activity. In this
however, it may then set • At this stage the firm will often product lines. This is a crucial it produces the entire
up its own local sales set up a separate export step, because the firm is now product line in the host
representative or department to manage foreign involved in the host-country nation and sells its output.
marketing subsidiary, in sales and production for such
factor market and must deal
the hope of securing a markets and product design
and the production process with such environmental
more stable stream of variables as wage rates,
itself may be modified to tailor
export sales. products for export markets. cultural attitudes, and worker
expectations in its new labor
force.
• Licensing is a business agreement involving two companies: one gives the
other special permissions, such as using patents or copyrights, in exchange
for payment.
• An international business licensing agreement involves two firms from
different countries, with the licensee receiving the rights or resources to
manufacture in the foreign country.
• Rights or resources may include patents, copyrights, technology, managerial
skills, or other factors necessary to manufacture the good.
• Advantages of expanding internationally using international licensing include:
the ability to reach new markets that may be closed by trade restrictions and
the ability to expand without too much risk or capital investment.
• Disadvantages include the risk of an incompetent foreign partner firm and
lower income compared to other modes of international expansion.
 Licensing
• Licensing is a business arrangement in which one company gives another
company permission to manufacture its product for a specified payment.
• Licensing generally involves allowing another company to use patents,
trademarks, copyrights, designs, and other intellectual in exchange for a
percentage of revenue or a fee.
• It’s a fast way to generate income and grow a business, as there is no
manufacturing or sales involved.
• Instead, licensing usually means taking advantage of an existing company’s
pipeline and infrastructure in exchange for a small percentage of revenue.
• An international licensing agreement allows foreign firms, either exclusively
or non-exclusively, to manufacture a proprietor’s product for a fixed term in a
specific market.
• For a company looking to Under a licensing model, a company sells licenses
expand, franchising and licensing are to other (typically smaller) companies to use
often appealing business models. intellectual property (IP), brand, design or
business programs.
• In a franchising model, the franchisee These licenses are usually non-exclusive, which
uses another firm's successful means they can be sold to multiple competing
business model and brand name to companies serving the same market.
operate what is effectively an In this arrangement, the licensing company may
independent branch of the company. exercise control over how its IP is used but does
not control the business operations of the
• The franchiser maintains a licensee.
considerable degree of control over Both models require that the franchisee/lincensee
the operations and processes used by make payments to the original business that owns
the franchisee, but also helps with the brand or intellectual property.
things like branding and marketing There are laws that govern the franchising model
support that aid the franchise. and define what constitutes franchising; some
agreements end up being legally viewed as
• The franchiser also typically ensures franchising even if they were originally drawn up
that branches do not as licensing agreements.
cannibalize each other's revenues.
 Example
• Example of a Licensing Agreement
• In May 2018, Nestle and Starbucks entered into a $7.15 billion coffee licensing deal.
• Nestle (the licensee) agreed to pay $7.15 billion in cash to Starbucks (the licensor)
for exclusive rights to sell Starbucks’ products (single-serve coffee, teas, bagged
beans, etc.) around the world through Nestle’s global distribution network.
• Additionally, Starbucks will receive royalties from the packaged coffees and teas
sold by Nestle.
• The licensing agreement provided Starbucks with the ability to drive brand
recognition outside of its North American operations through Nestle’s distribution
networks. For Nestle, the company gained access to Starbucks’ products and 
strong brand image.
• To summarize, in this foreign market entry mode, a licensor in the home
country makes limited rights or resources available to the licensee in the
host country.
• The rights or resources may include patents, trademarks, managerial skills,
technology, and others that can make it possible for the licensee to
manufacture and sell in the host country a similar product to the one the
licensor has already been producing and selling in the home country
without requiring the licensor to open a new operation overseas. The
licensor’s earnings usually take the form of one-time payments, technical
fees, and royalty payments, usually calculated as a percentage of sales.
 Why do firms become MNEs?
• To diversify themselves against the risks and uncertainties of the
domestic business cycle;
• to tap the growing world market for goods and services;
• in response to foreign competition;
• to reduce costs;
• to overcome barriers to entry into foreign markets;
• to take advantage of technological expertise by manufacturing goods
directly.
 The strategic philosophy of MNEs
• MNEs make decisions based on what is best for the overall company,
even if this means transferring jobs to other countries and cutting
back the local workforce.
 Strategic management and MNEs
• The strategic management process involves four major functions:
strategy formulation, strategy implementation, evaluation, and the
control of operations.
• The following questions must be answered to determine the firm’s basic
mission:
• What is the firm’s business?
• What is the reason for its existence?
• Royal Dutch/Shell; BP Amoco and Texaco are in the energy business, not
the oil business.
• AT&T, Sprint and MCI are in the communications business, not the
telephone business.
Analysis of the external and internal environment
• The goal of external environmental analysis is to identify
opportunities and threats that will need to be addressed.
• The purpose of an internal environmental analysis is to evaluate the
company’s financial and personnel strengths and weaknesses.
Formulation of objectives and overall plan
• Internal and external analyses will help identify long-term (2–5 years)
and short-term (< 2 years) goals.
The implementation process
• Once goals have been established, the plan is then broken into major
parts and each affiliate and department is assigned goals and
responsibilities.
 Evaluation and control of operations
• Progress is periodically evaluated and changes are made in the plan to
accommodate changing circumstances and new information.
 Framework for global strategies: the FSA/CSA matrix

• There are two basic building blocks in an international business course.

• Firm-specific advantages (FSAs): a unique capability proprietary to the
organization
• It may be built upon product or process technology, marketing or distributional
skills.
• Country-specific advantages (CSAs): country factors
• Natural resource endowments (minerals, energy and forests), the labor force
and associated cultural factors, etc.
• Managers of most MNEs use strategies that build on the interactions of
CSAs and FSAs.
• They do this so that they can be positioned in a unique strategic space.
 Framework for global strategies: the FSA/CSA matrix

• Using Porter’s terminology, the CSAs form the basis of the global
platform from which the multinational firm derives a home-base
“diamond” advantage in global competition.
• Tariff and non-tariff barriers to trade and government regulation also
influence CSAs.
• Building on these CSAs, the firm makes decisions about the efficient
global configuration and coordination between segments of its value
chain (operations, marketing, R&D, and logistics).
• The skill in making such decisions represents a strong, managerial firm-
specific advantage (FSA).
Framework for global strategies: the FSA/CSA matrix

• The FSAs possessed by a firm are based ultimately on its

internalization of an asset, such as production knowledge, managerial
or marketing capabilities, over which the firm has proprietary control.
• FSAs are thus related to the firm’s ability to coordinate the use of the
advantage in production, marketing, or the customization of services.
 The competitive advantage matrix
• To help formulate the strategic options of the MNE, it is useful to
identify the relative strengths and weaknesses of the CSAs and FSAs
they possess.
• Figure 2.5, the competitive advantage matrix, provides a useful
framework for discussion of these issues.
• The “strength” or “weakness” of FSAs and CSAs is a relative notion,
depending on the relevant market and the CSAs and FSAs of potential
competitors.
• A strong FSA implies that, under identical CSAs, a firm has a potential
competitive advantage over its rivals.
• Quadrants 1, 2, and 3 correspond broadly to the three generic strategies suggested: cost
leadership, differentiation and focus.
• Quadrant 1 firms are generally resource-based and/or mature, globally-oriented firms
producing a commodity-type product. Given their late stage in the product life cycle,
production FSAs flowing from the possession of intangible skills are less important than the
CSAs of location and energy costs, which are the main sources of the firm’s competitive
advantage. (cost leadership (Improving FSA can make them move to quadrant 3.)
• Quadrant 2 firms represent inefficient, floundering firms with no consistent strategy, nor any
intrinsic CSAs or FSAs. These firms are preparing to exit or to restructure.
• Quadrant 2 can also represent domestically-based small and medium-sized firms with little
global exposure.
• Quadrant 3 firms generally can choose to follow any of the generic strategies listed above
because of the strength of both their CSAs and FSAs. (both cost leadership & differentiation)
• Firms in quadrant 4 are generally differentiated firms with strong FSAs in marketing and
customization. These firms follow basically a differentiation strategy. In quadrant 4 the FSAs
dominate, so in world markets the home-country CSAs are not essential in the long run. Thus
these firms are following low-cost and price competition strategies.
• In terms of business strategy, quadrants 3 and 2 are unambiguous in
their implications.
• A quadrant 3 firm can benefit from strategies of both low cost and
differentiation.
• Such a firm is constantly evaluating its production mix. As a product line
matures and then declines it eventually graduates to quadrant 2.
• However, by adopting new product lines, developing dynamic
organizational capabilities, and maintaining an effective strategy, the
firm can maintain its overall position in quadrant 3.
• In quadrant 2 there is no alternative but to restructure or to eventually
leave the market.