PAMANTASAN NG LUNGSOD NG MAYNILA

(University of the City of Manila)

THE MULTINATIONAL FIRM

Submitted to:
Professor: Dr. Carlos Manapat
DBA 725-2 STRATEGIC ISSUES AND DECISIONS

Submitted by:
MASACAYAN, Earl Louie M.
OUTLINE

8.1. The multinational firm

8.1.1. Concept of multinational firm

8.1.2. Reasons for internationalization

8.2. Global competition: determinant factors and strategies

8.2.1. Concept of global and multi-domestic industries

8.2.2. Determinant factors for globalization

8.2.3. Strategies for international competition

8.1.1. Concept of Multinational Firm

A multinational firm is a business organization wherein its activities are located in more

than two countries and derives 25% or more of its revenues from out-of-home country

operations.

It also includes firms with foreign subsidiaries with at least 51% ownership with control over

the production of goods or services in at least one country other than its home

country notwithstanding whether those foreign affiliates generate only a few percent of its

revenue.

Multinational firm may also be referred as multinational corporation (MNC), multinational

enterprise (MNE), transnational enterprise (TNE), transnational corporation (TNC),

international corporation, or stateless corporation.

Models of multinational firms are the following:

1. Centralized

In the centralized model, companies put up an executive headquarters in their home

country and then build various manufacturing plants and production facilities in other

countries. Its most important advantage is being able to avoid tariffs and import quotas

and take advantage of lower production costs.

2. Regional

The regionalized model states that a company keeps its headquarters in one country that

supervises a collection of offices that are located in other countries. Unlike the

centralized model, the regionalized model includes subsidiaries and affiliates that all

report to the headquarters.

3. Multinational
 In the multinational model, a parent company operates in the home country and puts up

subsidiaries in different countries. The difference is that the subsidiaries and affiliates are

more independent in their operations.

The characteristics of a multinational firm are the following:

1. Very high assets and turnover

To become a multinational corporation, the business must be large and must own a huge

amount of assets, both physical and financial. The company’s targets are high, and they

are able to generate substantial profits.

2. Network of branches

Multinational companies maintain production and marketing operations in different

countries. In each country, the business may oversee multiple offices that function

through several branches and subsidiaries.

3. Control

In relation to the previous point, the management of offices in other countries is

controlled by one head office located in the home country. Therefore, the source of

command is found in the home country.

4. Continued growth

Multinational corporations keep growing. Even as they operate in other countries, they

strive to grow their economic size by constantly upgrading and by conducting mergers

and acquisitions.

5. Sophisticated technology

When a company goes global, they need to make sure that their investment will grow

substantially. In order to achieve substantial growth, they need to make use of capital-

intensive technology, especially in their production and marketing activities.

Multinational companies aim to employ only the best managers, those who are capable

of handling large amounts of funds, using advanced technology, managing workers, and

running a huge business entity.

7. Forceful marketing and advertising

One of the most effective survival strategies of multinational corporations is spending a

great deal of money on marketing and advertising. This is how they are able to sell every

product or brand they make.

8. Good quality products

Because they use capital-intensive technology, they are able to produce top-of-the-line

products.

As of September 2020, the top global MNCs are the following:

1. Microsoft

2. Nestle

3. PepsiCo

4. HP- Hewlett & Packard

5. Coca-Cola

6. Sony

7. Procter & Gamble

8. Citigroup

9. Nike

10. Apple. Inc

The following are the reasons for internalization:

1. Access to lower production costs

Setting up production in other countries, especially in developing economies, usually

translates to spending significantly less on production costs. Though outsourcing is a way

of achieving the objective, setting up manufacturing plants in other countries may be

even more cost-efficient.

Due to their large size, MNCs can take advantage of economies of scale and grow their

global brand. The growth is done through strategic manufacturing/service placement,

which allows the corporation to take advantage of undervalued services across the globe,

more efficient and inexpensive supply chains, and advanced technological/R&D

capacity.

2. Proximity to target international markets

It is beneficial to set up business in countries where the target consumer market of a

company is located. Doing so helps reduce transport costs and gives multinational

corporations easier access to consumer feedback and information, as well as to

consumer intelligence.

International brand recognition makes the transition from different countries and their

respective markets easier and decreases per capita marketing costs as the same brand

vision can be applied worldwide.

3. Access to a larger talent pool

Multinational corporations are also known to hire only the best talent from around the

world, which allows management to provide the best technical knowledge and innovative

thinking to their product or service.

When a company produces or manufactures its products in another country where they

also sell their products, they are exempt from import quotas and tariffs.

8.2. GLOBAL COMPETITION: DETERMINANT FACTORS AND STRATEGIES

8.2.1. Concept of global and multi-domestic industries

Global Industries Multi-Domestic Industries

Competitors compete in all markets and Firms compete in each national market

offer uniform (standardized) products. independently of other markets.

Providing the same product for each Producing products/services tailored to

market, strong centralized control, individual countries.

identifying customer needs and wants Following this strategy innovation comes

across international borders, and locating from local R&D; managers decentralize

value adding activities where they can decision making; and encourage local

achieve the lowest cost. sourcing.

A global strategy is effective when This strategy may result in higher

differences between customers in countries production costs because of tailored

are small and competition is global. products and duplication of effort across

countries.

8.2.2. Determinant factors for globalization

Globalization is a process of doing business worldwide, so strategic decisions are made based

on global profitability of the firm rather than just domestic considerations.

Its determinants are the following:

2. Government are removing international business restrictions.

3. Institutions provides services to ease the conduct of international business.

4. Consumers know about and want foreign goods and services.

5. Competition has become more global.

6. Political relationships have improved among some major economic powers.

7. Countries cooperate more on transnational issues.

8. Cross-national cooperation and agreements have increased.

8.2.3. Strategies for international competition

Porter Diamond Theory of National Advantage

It is a model that is designed to help understand the competitive advantage that nations or

groups possess due to certain factors available to them, and to explain how governments

can act as catalysts to improve a country's position in a globally competitive economic

environment. It is a proactive economic theory, rather than one that simply quantifies

competitive advantages that a country or region may have.

Those are the conditions that can create for itself country’s economy, such as: a large pool

of skilled labor, technological innovation, infrastructure, and capital.

Demand conditions

Those Refers to size and nature of the customer base for products, which also drives

innovation and product improvement. Larger, more dynamic consumer markets will

demand and stimulate a need to differentiate and innovate, as well as simply greater market

scale for businesses.

Related and Supporting Industries

Those refer to upstream and downstream industries that facilitate innovation through

exchanging ideas. They can spur innovation depending on the degree of transparency and

knowledge transfer.

Firm strategy, structure, and rivalry

Those refer to the basic fact that competition leads to businesses finding ways to increase

production and to the development of technological innovations. The concentration of

market power, degree of competition, and ability of rival firms to enter a nation's market

are influential here.

Strategic options for entering and competing in international markets:

1. Maintain a national (one-country) production base and export goods to foreign markets.

Advantages Disadvantages

● Low capital requirements ● Maintaining relative cost advantage

● Economies of scale in utilizing of home-based production

existing production capacity ● Transportation and shipping costs

● No direct investment risk ● Tariffs\import duties

● Loss of channel control

2. License foreign firms to produce and distribute the firm’s products abroad and employ

an overseas franchising strategy.

Advantages Disadvantages

● Low resource requirements ● Maintaining control of proprietary

● Income from royalties and know-how

franchising fees ● Loss of operational and quality

● Rapid expansion into many markets control

● Adapting to local market tastes and

expectations

3. Establish a wholly-owned subsidiary by either acquiring a foreign company or through

a “greenfield” venture.

Foreign subsidiary Strategies

Advantages Disadvantages

● High level of control ● Costs of acquisition

● Quick large-scale market entry ● Complexity of acquisition process

● Avoids entry barriers ● Integration of the firms’ structures,

● Access to acquired firm’s skills cultures, operations and personnel

• Creating an internal startup is cheaper than making an acquisition.

• Adding production capacity will not adversely impact the supply–demand

balance in the local market.

• A startup subsidiary has the ability to gain good distribution access.

• A startup subsidiary will have the size, cost structure, and resource strengths to

compete head-to-head against local rivals.

Greenfield Strategies

Advantages Disadvantages

● High level of control over venture ● Capital costs of initial development

● “Learning by doing” ● Risks of loss due to political

in the local market instability or lack of legal protection

● Direct transfer of the firm’s of ownership

technology, skills, business ● Slowest form of entry due to

practices, and culture extended time required to construct

facility

4. Rely on strategic alliances or joint ventures with foreign companies.

Benefits Risks

● Gaining partner’s knowledge of local ● Outdated knowledge and expertise of

market conditions local partners

● Cultural and language barriers

through joint operations arrangement

● Gaining technical expertise and local ● Conflicting objectives and strategies

market knowledge and/or deep differences of opinion

● Sharing distribution facilities and about joint control

dealer networks, and mutually ● Differences in corporate values and

strengthening each partner’s access ethical standards.

to buyers. ● Loss of legal protection of

● Directing competitive energies more proprietary technology or

toward mutual rivals and less toward competitive advantage

one another ● Over dependence on foreign partners

● Establishing working relationships for essential expertise and

with key officials in the host-country competitive capabilities.

government

REFFERENCES:

https://www.investopedia.com/terms/p/porter-

diamond.asp#:~:text=The%20Porter%20Diamond%2C%20properly%20referred,catalysts%20to%

20improve%20a%20country's

https://corporatefinanceinstitute.com/resources/knowledge/strategy/multinational-corporation/

https://en.wikipedia.org/wiki/International_business

https://www.academia.edu/12955710/STRATEGIES_FOR_COMPETING_IN_INTERNATIO

NAL_MARKETS

http://www.opentextbooks.org.hk/ditatopic/7200
https://link.springer.com/chapter/10.1007/978-3-322-90999-2_5

Black’s Law Dictionary