Module 2- FGB

A multinational corporation (MNC) or transnational corporation (TNC), also called

multinational enterprise (MNE), is a corporation or an enterprise that manages production or
delivers services in more than one country. The International Labor Organization (ILO) has
defined an MNC as a corporation which has its management headquarters in one country
known as the home country and operates in several other countries known as host countries.

Movement of organization from one region to another region and from one country to another
country is actually governed by the viable opportunities available in that particular region or
country. Availability of large customer base, cheap labour force, supply of raw materials and
other natural resources actually motivate the business organizations to undertake business
operations in that particular country.

The first modern MNC is generally thought to be the Dutch East India Company. Nowadays
many corporations have offices, branches or manufacturing plants in different countries than
where their original and main headquarter is located. This often results in very powerful
corporations that have budgets that exceed some national GDPs. Multinational corporations
can have a powerful influence in local economies as well as the world economy and play an
important role in international relations and globalization.

The presence of such powerful players in the world economy is reason for much controversy.
There are two fundamental ways for companies and individuals to own assets in foreign
countries viz. portfolio investment and direct investment. Portfolio investment gives
companies and individuals a claim on profit of companies in foreign countries in which they
have purchased shares. However, they do not have right to participate in the management.

On the other hand, direct investment is nothing but a sort of buying and management of
assets in foreign countries. The major difference between the portfolio investment and direct
investment is the management and permanent ownership of assets through foreign outfits.
Thus, portfolio investment is an investment in foreign assets whereby a company purchases
shares in companies that own those assets. But direct investment is an investment in foreign
assets whereby a company purchases assets that it manages directly. Eagerness of companies
of home countries to purchase, control and manage the assets in host countries is the basis for
the development of multinational corporations.

James C. Baker defines a multinational corporation as a company- (i) which has direct
investment base in several countries; (ii) which generally derives 20 to 50 per cent of its net
profit from foreign operations; and (iii) whose management makes policy decisions based on
the alternatives available anywhere in the world.

According to Bartlett and Ghoshal “the multinational organization is defined by the following
characteristics- a decentralized federation of assets and responsibilities, a management
process defined by simple financial control system overlaid on informal personal
coordination and a dominant strategic mentality that viewed the company’s worldwide
operations as a portfolio of national business. In a multinational organization the decision
obviously are decentralized.”

Thus, on the basis of above definitions Multinational Corporation can be defined as a

corporation that produces goods or services in several countries and manages its global
activities from organizational headquarter located in one country.

Conceptual Framework of MNCs

“The multinational is a business unit which operates simultaneously in different parts of the
world. In some cases, the manufacturing unit may be in one country, while the marketing and
investment may be in other countries. In other cases, all the business operations are carried
out in different countries, with the strategic headquarters in any part of the world.”

Few multinationals have a total employee force that is larger than the population of a country
and may even have the power to bring down governments. Multinationals have money
power, muscle power, managerial power, technology power and political power through
which they influence many economies in the world.

At one time American based multinationals ruled the world. Today, many Japanese, Korean,
European and Indian multinationals have spread their wings in many parts of the world. The
strategic nerve centre is the company’s headquarters, where major decisions are taken and
policies are formulated.

For example, the Manhattan based company, Colgate Palmolive Inc., which manufactures
and markets dental care, health care, hair care and skin care products, in more than 120
countries. Procter and Gamble, based in Cincinnati also has similar product lines and
operates in more than 150 countries. There are multinationals that have a total turnover
exceeding the GDP of many small or developing nations. The Minnesota Mining and
Manufacturing Company, called for short, 3M, has more than a thousand product lines. The
top three multinationals in the world today, could combine to purchase a small nation
Every multinational has to operate through its satellite units, called subsidiaries. Therefore,
multinationals have headquarters and a number of subsidiaries. As an expansion process, few
multinationals are fast expanding their operations in developing countries. While doing so,
the Headquarter is involved in a serious risk analysis and finally select the country where
they are comfortable to do business. At the headquarters, the experts from political science,
economics, accountancy, sociology and diplomacy are advising the top management on
different issues prior to entry into any country.

Categorization of operations of MNCs

1. Branches:

The easiest form of expanding business operations is to set up overseas branches. These
branches are generally foreign outfits of the parent company located in the host countries.
Legally, these branches are dependent on their parent company. As per the Indian Companies
Act, 1956, all those companies, which are incorporated outside India and have developed
business interest in India, are called as foreign companies.

2. Subsidiaries:

It is the popular method of direct investment generally used to start up or overtake total
ownership and control of another company making the second company as a wholly owned
subsidiary (developed in host country) of the parent company (headquartered in the home
country).

“Wholly owned subsidiary involves more investment, ownership control and risk than having
only a partial interest in another company. But it can also allow the parent company the
freedom to take whatever actions are necessary to make subsidiary perform as expected and
to provide the parent with needed resources to improve its performance.”

3. Joint Venture Companies:

“A joint venture is an arrangement in which two or more organizations cooperatively

develop, produce or sell goods or services. The parent firms are independently of each other
but share control over the joint venture. In some cases, one company supplies the materials
and the products expertise, while the other supplies the knowledge to do business in the
country they are targeting.”
Thus, joint venture is a business enterprise or system in which domestic and foreign
companies share the cost of developing new products or building production facilities in a
foreign country.

“A joint venture may be the only way to enter certain countries. Where by law, foreigners
cannot own business. In other situations, joint ventures let companies pool technological
knowledge and share the expense and risk of research that may not produce marketable
goods.”

4. Franchise Holders:

It is fastest growing form of international licensing in which the licensor supplies a complete
package of goods, services and materials generally accompanied by a well-known brand
name to the licensee. It is also a special kind of arrangement by which an affiliate working in
the host country produces or markets the products of a multinational corporation after
obtaining a license from it.

5. Global Strategic Partnership:

It is an alliance formed by an organization with one or more foreign countries generally with
an eye towards exploiting the other countries opportunities and towards assuming leadership
in either supply or production.

Pre-requisites for successful partnership

(i) Each partner must believe the other has something it needs.

(ii) The partners must choose a strategy before they start to do business not afterward.

(iii) They must share the same attitude towards control of new business.

(iv) Working of partners should be effective in terms of operating styles, corporate cultures
and moral values.

(v) They must agree to discard whatever organization forms that do not work

(vi) There must be some ultimate decision maker and some of making decision stick.

Otherwise, the new venture suffers from unclear lines of authority, poor communication and
slow decision making.
FEATURES OF MULTINATIONAL CORPORATIONS

(i) Huge Assets and Turnover:

Because of operations on a global basis, MNCs have huge physical and financial assets. This
also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many
MNCs are bigger than national economies of several countries.

(ii) International Operations Through a Network of Branches:

MNCs have production and marketing operations in several countries; operating through a
network of branches, subsidiaries and affiliates in host countries.

(iii)  Unity of Control:

MNCs are characterized by unity of control. MNCs control business activities of their
branches in foreign countries through head office located in the home country. Managements
of branches operate within the policy framework of the parent corporation.

(iv) Mighty Economic Power:

MNCs are powerful economic entities. They keep on adding to their economic power through
constant mergers and acquisitions of companies, in host countries.

(v) Advanced and Sophisticated Technology:

Generally, a MNC has at its command advanced and sophisticated technology. It employs
capital intensive technology in manufacturing and marketing.

(vi) Professional Management:

A MNC employs professionally trained managers to handle huge funds, advanced technology
and international business operations.

(vii)Aggressive Advertising and Marketing:

MNCs spend huge sums of money on advertising and marketing to secure international
business. This is, perhaps, the biggest strategy of success of MNCs. Because of this strategy,
they are able to sell whatever products/services, they produce/generate.

(viii) Better Quality of Products:

A MNC has to compete on the world level. It, therefore, has to pay special attention to the
quality of its products.

Advantages of MNCs from the Viewpoint of Host Country:

We propose to examine the advantages and limitations of MNCs from the viewpoint of the
host country. In fact, advantages of MNCs make for the case in favour of MNCs; while
limitations of MNCs become the case against MNCs.

(i) Employment Generation:

MNCs create large scale employment opportunities in host countries. This is a big advantage
of MNCs for countries; where there is a lot of unemployment.

(ii) Automatic Inflow of Foreign Capital:

MNCs bring in much needed capital for the rapid development of developing countries. In
fact, with the entry of MNCs, inflow of foreign capital is automatic. As a result of the entry
of MNCs, India e.g. has attracted foreign investment with several million dollars.

(iii) Proper Use of Idle Resources:

Because of their advanced technical knowledge, MNCs are in a position to properly utilise
idle physical and human resources of the host country. This results in an increase in the
National Income of the host country.

(iv) Improvement in Balance of Payment Position:

MNCs help the host countries to increase their exports. As such, they help the host country to
improve upon its Balance of Payment position.

(vi) Technical Development:

MNCs carry the advantages of technical development 10 host countries. In fact, MNCs are a
vehicle for transference of technical development from one country to another. Because of
MNCs poor host countries also begin to develop technically.

(vii) Managerial Development:
MNCs employ latest management techniques. People employed by MNCs do a lot of
research in management. In a way, they help to professionalize management along latest lines
of management theory and practice. This leads to managerial development in host countries.

(viii) End of Local Monopolies:

The entry of MNCs leads to competition in the host countries. Local monopolies of host
countries either start improving their products or reduce their prices. Thus , MNCs put an end
to exploitative practices of local monopolists. As a matter of fact, MNCs compel domestic
companies to improve their efficiency and quality. In India, many Indian companies acquired
ISO-9000 quality certificates, due to fear of competition posed by MNCs.

(ix) Improvement in Standard of Living:

By providing super quality products and services, MNCs help to improve the standard of
living of people of host countries.

(x) Promotion of international brotherhood and culture:

MNCs integrate economies of various nations with the world economy. Through their
international dealings, MNCs promote international brotherhood and culture; and pave way
for world peace and prosperity.

LIMITATIIONS OF MNCs FROM THE VIEWPOINT OF HOST COUNTRY

(i) Danger for Domestic Industries:

MNCs, because of their vast economic power, pose a danger to domestic industries; which
are still in the process of development. Domestic industries cannot face challenges posed by
MNCs. Many domestic industries have to wind up, as a result of threat from MNCs. Thus,
MNCs give a setback to the economic growth of host countries.

(ii) Repatriation of Profits:(Repatriation of profits means sending profits to their country).

MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign
exchange reserves of the host country; which means that a large amount of foreign exchange
goes out of the host country.
(iii) No Benefit to Poor People:

MNCs produce only those things, which are used by the rich. Therefore, poor people of host
countries do not get, generally, any benefit, out of MNCs.

(iv) Danger to Independence:

Initially MNCs help the Government of the host country, in a number of ways; and then
gradually start interfering in the political affairs of the host country. There is, then, an implicit
danger to the independence of the host country, in the long-run.

(v) Disregard of the National Interests of the Host Country:

MNCs invest in most profitable sectors; and disregard the national goals and priorities of the
host country. They do not care for the development of backward regions; and never care to
solve chronic problems of the host country like unemployment and poverty.

(vi) Misuse of Mighty Status:

MNCs are powerful economic entities. They can afford to bear losses for a long while, in the
hope of earning huge profits-once they have ended local competition and achieved monopoly.
This may be the dirtiest strategy of MNCs to wipe off local competitors from the host
country.

(vii) Careless Exploitation of Natural Resources:

MNCs tend to use the natural resources of the host country carelessly. They cause rapid
depletion of some of the non-renewable natural resources of the host country. In this way,
MNCs cause a permanent damage to the economic development of the host country.

(viii) Selfish Promotion of Alien Culture:

MNCs tend to promote alien culture in host country to sell their products. They make people
forget about their own cultural heritage. In India, e.g. MNCs have created a taste for synthetic
food, soft drinks etc. This promotion of foreign culture by MNCs is injurious to the health of
people also.

(ix) Exploitation of People, in a Systematic Manner:

MNCs join hands with big business houses of host country and emerge as powerful
monopolies. This leads to concentration of economic power only in a few hands. Gradually ,
these monopolies make it their birth right to exploit poor people and enrich themselves at the
cost of the poor working class.

Advantages from the Viewpoint of the Host Country

(i) MNCs usually get raw-materials and labour supplies from host countries at lower prices;
specially when host countries are backward or developing economies.

(ii) MNCs can widen their market for goods by selling in host countries; and increase their
profits. They usually have good earnings by way of dividends earned from operations in host
countries.

(iii) Through operating in many countries and providing quality services, MNCs add to their
international goodwill on which they can capitalize, in the long-run.

Limitations from the Viewpoint of the Home Country

(i) There may be loss of employment in the home country, due to spreading manufacturing
and marketing operations in other countries.

(ii) MNCs face severe problems of managing cultural diversity. This might distract
managements’ attention from main business issues, causing loss to the home country.

(iii) MNCs may face severe competition from bigger MNCs in international markets. Their
attention and finances might be more devoted to wasteful counter and competitive
advertising; resulting in higher marketing costs and lesser profits for the home country.

Rationale for Multinational Corporations in International Business

1. Financial Strength:

Finance is the lifeblood of a company; huge financial resources are available with the MNCs.
They are quite efficient in generation of funds in one country and investing them in another
country. Thus, by this action, they are able to improve the level of investment in the host
country. They are also successful in raising resources at international level as they hold good
reputation in the market.

2. Product Innovation:
Product innovation is necessary to remain stay in the market for a long period. MNCs incur
huge expenditure on developing R&D facilities in the host country as R&D facilities are
required to provide for developing new products and superior design of existing products.
Consumers can also be satisfied with the products and services being provided by the MNCs
in the host country.

3. Effective Technological Background:

In most of the cases host countries are the underdeveloped or developing economies. They
need accelerated pace of technological development in the country. Host countries need
transfer of technology from MNCs to exploit their local resources in profitable way. In
practice, MNCs are quite sensitive to these requirements and they transfer their technology to
produce goods and services in the host countries. 

4. Marketing Strength:

Since, MNCs are professionally managed; they hold more reliable and latest market
information system. Market reputation of MNCs is also generally good and they feel less
problem in selling their products. Effective advertising and sales promotion techniques also
provide an additional advantage to these MNCs in marketing of their product or service in the
host country.

5. Market Expansion:

Generally, MNCs operate their activities on large-scale basis and having a large sized
structure, they try to build up international image of the host countries. With the help of their
production bases and service network in the host country, they provide better export
potentialities for the product being produced in the host countries. Thus, MNCs help the host
country in its expansion of market territory.

Role of Multinational Corporations in the Indian Economy

1. Promotion of Foreign Investment:

In the recent years, external assistance to developing countries has been declining. This is
because the donor developed countries have not been willing to part with a larger proportion
of their GDP as assistance to developing countries. MNCs can bridge the gap between the
requirements of foreign capital for increasing foreign investment in India.
The liberalised foreign investment pursued since 1991, allows MNCs to make investment in
India subject to different ceilings fixed for different industries or projects. However, in some
industries 100 per cent export-oriented units (EOUs) can be set up. It may be noted, like
domestic investment, foreign investment has also a multiplier effect on income and
employment in a country.

For example, the effect of Suzuki firm’s investment in Maruti Udyog manufacturing cars is
not confined to income and employment for the workers and employees of Maruti Udyog but
goes beyond that. Many workers are employed in dealer firms who sell Maruti cars.

Moreover, many intermediate goods are supplied by Indian suppliers to Maruti Udyog and
for this many workers are employed by them to manufacture various parts and components
used in Maruti cars. Thus , their incomes also go up by investment by a Japanese
multinational in Maruti Udyog Limited in India.

2. Non-Debt Creating Capital inflows:

In pre-reform period, in India when foreign direct investment by MNCs was discouraged, we
relied heavily on external commercial borrowing (ECB) which was of debt-creating capital
inflows. This raised the burden of external debt and debt service payments reached the
alarming figure of 35 per cent of our current account receipts.

As direct foreign investment by multinational corporations represents non-debt creating

capital inflows we can avoid the liability of debt-servicing payments. Moreover, the
advantage of investment by MNCs lies in the fact that servicing of non-debt capital begins
only when the MNC firm reaches the stage of making profits to repatriate. Thus, MNCs can
play an important role in reducing stress strains and on India’s balance of payments (BOP).

3. Technology Transfer:

Another important role of multinational corporations is that they transfer high sophisticated
technology to developing countries which are essential for raising productivity of working
class and enable us to start new productive ventures requiring high technology.

Whenever, multinational firms set up their subsidiary production units or joint- venture units,
they not only import new equipment and machinery embodying new technology but also
skills and technical know-how to use the new equipment and machinery.
As a result, the Indian workers and engineers come to know of new superior technology and
the way to use it. In India, the corporate sector spends only few resources on Research and
Development (R&D). It is the giant multinational corporate firms (MNCs) which spend a lot
on the development of new technologies can greatly benefit the developing countries by
transferring the new technology developed by them. Therefore, MNCs can play an important
role in the technological up-gradation of the Indian economy.

4. Promotion of Exports:

With extensive links all over the world and producing products efficiently and therefore with
lower costs multinationals can play a significant role in promoting exports of a country in
which they invest. For example, the rapid expansion in China’s exports in recent years is due
to the large investment made by multinationals in various fields of Chinese industry.

Historically in India, multinationals made large investment in plantations whose products

they exported. In recent years, Japanese automobile company Suzuki made a large investment
in Maruti Udyog with a joint collaboration with Government of India.

Maruti cars are not only being sold in the Indian domestic market but are exported in a large
number to the foreign countries. As a matter of fact until recently, when giving permission to
a multinational firm for investment in India, Government granted the permission subject to
the condition that the concerned multinational company would export the product so as to
earn foreign exchange for India.

However, in case of Pepsi, a famous cold -drink multinational company, while for getting a
product license in 1961 to produce Pepsi Cola in India it agreed to export a certain proportion
of its product, but later it expressed its inability to do so. Instead, it ultimately agreed to
export things other than what it produced such as tea.

5. Investment in Infrastructure:

With a large command over financial resources and their superior ability to raise resources
both globally and inside India it is said that multinational corporations could invest in
infrastructure such as power projects, modernisation of airports and posts,
telecommunication. The investment in infrastructure will give a boost to industrial growth
and help in creating income and employment in the India economy.

The external economies generated by investment in infrastructure by MNCs will therefore

crowd in investment by the indigenous private sector and will therefore stimulate economic
growth.

In view of above, even Common Minimum Programme of the present UPA government
provides that foreign direct investment (FDI) will be encouraged and actively sought,
especially in areas of (a) infrastructure, (b) high technology and (c) exports, and (d) where
domestic assets and employment are created on a significant scale.

A CRITIQUE OF MULTINATIONAL CORPORATIONS

1.Capturing Markets:

First, it is alleged that multinational corporations invest their capital and locate their
manufacturing units on their own or in collaboration with local firms in order to sell their
products and capture the domestic markets of the countries where they invest and operate.

With their vast resources and competitive strength, they can weed out their competitive firms.
For example, in India if corporate multinational firms are allowed to sell or produce the
products presently produced by small and medium enterprises, the latter would not be able to
compete and therefore would be thrown out of business. This will lead to reduction in
employment opportunities in the country.

2. Use of Capital-intensive Techniques:

It has been seen that increasing capital intensity in modern manufacturing sector is
responsible for slow growth of employment opportunities in India’s industrial sector. These
capital-intensive techniques may be imported by large domestic firms but presently they are
being increasingly used by multinational corporations which bring their technology when
they invest in India.

Emphasising this factor, Thirwall rightly writes, “In this case the technology may be
inappropriate not because there is not a spectrum of technology or inappropriate selection is
made but because the technology available is circumscribed by the global profit maximising
motives of multinational companies investing in the less-developed country concerned

3. Encouragement to Inessential Consumption:

The investment by multinational companies leads to overall increase in investment in India
but it is alleged that they encourage conspicuous consumption in the economy.

These companies cater to the wants of the already well-to-do people. For example, in India
very expensive cars (such as City Honda, Hyundai’s Accent, Mercedes, Opal Astra, etc.) the
air conditioners, costly laptops, washing machines, expensive fridges, 29″ and Plasma TVs
are being produced/sold by multinational companies. Such goods are quite inappropriate for a
poor country like India. Besides, their consumption has a demonstration effect on the
consumption of others. This tends to raise the propensity to consume and adversely affects
the increase in savings of the country.

4. Import of Obsolete Technology:

Another criticism of MNCs is based on the ground that they import obsolete machines and
technology.  As mentioned above, some of the imported technologies are inappropriate to the
conditions of Indian economy. It is alleged that India has been made a dumping ground for
obsolete technology.

Moreover, the multinational corporations do not undertake Research and Development

(R&D) in India to promote local technologies suited to the Indian factor-endowment
conditions. Instead, they concentrate R&D activity at their headquarters.

5. Setting up Environment-Polluting Industries:

It has been found that investment by multinational corporations in developing countries such
as India is usually made for capturing domestic markets rather than for export promotion.
Moreover, in order to evade strict environment control measures in their home countries they
set up polluting industrial units in India.

A classic example of this is a highly polluting chemical plant set up in Bhopal resulting in gas
tragedy when thousands of people were either killed or made handicapped due to severe
ailments. “With the tightening of environmental measures in the such countries, there is a
tendency among the MNCs to locate the polluting industries in the poor countries, where
environmental legislation is non-existent or is not properly implemented, as exemplified in
the Bhopal gas tragedy”.

6. Volatility in Exchange Rate:

Another major consequence of liberalised foreign investment by multinational corporations is
its impact on the foreign exchange rate of the host country. Foreign capital inflows affect the
foreign exchange rate of the Indian rupee. A large capital inflow through foreign investment
brings about increase in the supply of foreign exchange say of US dollars.

With demand for foreign exchange being given, increase in supply of foreign exchange will
lead to the appreciation of exchange rate of rupee. This appreciation of the Indian rupee will
discourage exports and encourage imports causing deficit in balance of trade.

For example, in India in the fiscal years 2004-05 and 2005-06, there were large capital
inflows by FII (giant financial multinationals) in the Indian economy to take advantage of
higher interest rates here and also booming of the Indian capital market.

On the other hand, when interest rates rise in the parent countries of these multinationals or
rates of return from capital markets go up or when there is loss of confidence in the host
country about its capacity to make payments of its debt as happened in case of South-East
Asia in the late nineties there is large outflow of capital by multinational companies resulting
in the crisis and huge depreciation of their exchange rate.

Thus, capital inflows and outflows by multinationals have been responsible for large
volatility of exchange rate. Then there is the question of repatriation of profits by the
multinationals. Though a part of profit is reinvested by the multinational companies in the
host country, a large amount of profits are remitted to their own parent countries.

This has a potential disadvantage for the developing countries, especially when they are
facing foreign exchange problem. Commenting on this Thirwall writes “FDI has the
potential disadvantage even when compared with loan finance, that there may be outflow of
profits that lasts much longer.

7.Transfer Pricing and Evasion of Local Taxes:

Multinational corporations are usually vertically integrated. The production of a commodity

by multinational firm comprises various phases in its production the components used in the
production of a final commodity may be produced in its parent country or in its affiliates in
other countries.

Transfer pricing refers to the prices a vertically integrated multinational firm charges for its
components or parts used for the production of the final commodity, say in India. These
prices of components or parts are not real prices as determined by demand for and supply of
them.

They are arbitrarily fixed by the companies so that they have to pay less taxes in India. They
artificially inflate the transfer prices for intermediate products (i.e., components) produced in
their parent country or their overseas affiliates so as to show lower profits earned in India. As
a result, they succeed in evading corporate income tax.

REASONS FOR GOING GLOBAL

Traditionally many companies have stayed focused in their domestic markets and have
refrained from competing globally.

They know their domestic markets better and understand that they have to make fundamental
changes in the way they work to be able to compete globally. But increasingly companies are
choosing or are being forced to sell their products in markets other than their domestic
markets.

It has become imperative for most companies to compete in foreign markets.

i. Domestic markets are saturated and there is pressure to raise sales and profits. Most
companies have very ambitious sales and profit targets. If such figures have to be
realized, companies have to move out of their domestic markets.

ii. Domestic markets are small. Companies which have ambitions to become big will have to
look for bigger markets outside their boundaries.

iii. Domestic markets are growing slowly. Most companies are no longer content to grow
incrementally. If such companies have to achieve high growth rates, they have to obtain
some of their sales from international markets

iv. In some industries like advertising, customers want their suppliers to have international
presence so that suppliers can contribute in most of the markets where the buyer is operating.

For instance, a multinational will choose an advertising agency which has a presence in all
the markets where the multinational is selling its product. The customer does not want the
hassle of hiring a separate advertising agency for each of its markets. This process will be
replicated in more industries.
A multinational company seeking materials and equipment’s would want its supplier to
supply to all its international manufacturing locations. The supplier is forced to develop
competencies and resources at many international locations to be able to serve the
international manufacturing locations of its buyer.

v. Some companies will have to move out of their domestic markets when their competitors
have done so, if they want to maintain their market share. If the competitor is allowed to
pursue its international growth alone, the competitor is likely to plough back some of the
earnings from its international operations to the domestic market, making it difficult for the
companies which refrained from pursuing international markets, to focus on the domestic
market. In other cases, a domestic player would start operations in the home country of its
global competitor, to divert the attention and resources of its competitor towards operations at
home to safeguard its home market.

vi. Developed markets have high-cost structures and companies may move their operations to
regions and countries where costs of production are lower. Once a company starts operating
in a geographical region, it becomes easier and profitable to market their products in that
area.

vii. Countries and regions are at different stages of development, and their growth rates and
potential are different. Companies do not like to concentrate all their efforts in limited regions
and want to spread out their risk. Such companies will look for markets which are likely to
behave differently from their existing ones in terms of economic parameters like growth rate,
size, affluence of customers, stage of market development, etc. A company would not like all
its markets to be under recession or inflation simultaneously, and would not like all its
markets to be in mature stage, or in growth stage. Having different type of markets will make
revenues and profits more consistent. The investment requirements would also be more
balanced.

viii. Even if a company decides to concentrate on its domestic market, it will not be allowed
to pursue its goals unhindered. Multinational companies will enter its market and make a dent
in its market share and profit. The company has no choice but to enter foreign markets to
maintain its market share and growth.

ix. Companies are realizing that it is no longer an option to stay put in one’s domestic market.
The ability to compete successfully in domestic markets will depend upon their ability to
match the resources and competencies of multinational companies, with whom they have to
compete in their domestic markets.

ELEMENTS OF MULTI_NATIONAL STRATEGY

Exporting is the marketing and direct sale of domestically produced goods in another country.
Exporting is a traditional and well-established method of reaching foreign markets. Since it
does not require that the goods be produced in the target country, no investment in foreign
production facilities is required. Most of the costs associated with exporting take the form of
marketing expenses. While relatively low risk, exporting entails substantial costs and limited
control. Exporters typically have little control over the marketing and distribution of their
products, face high transportation charges and possible tariffs, and must pay distributors for a
variety of services.

What is more, exporting does not give a company first-hand experience in staking out a
competitive position abroad, and it makes it difficult to customize products and services to
local tastes and preferences.

Exporting is a typically the easiest way to enter an international market, and therefore most
firms begin their international expansion using this model of entry. Exporting is the sale of
products and services in foreign countries that are sourced from the home country.

The advantage of this mode of entry is that firms avoid the expense of establishing operations
in the new country. Firms must, however, have a way to distribute and market their products
in the new country, which they typically do through contractual agreements with a local
company or distributor.

When exporting, the firm must give thought to labelling, packaging, and pricing the offering
appropriately for the market. In terms of marketing and promotion, the firm will need to let
potential buyers know of its offerings, be it through advertising, trade shows, or a local sales
force.

Among the disadvantages of exporting are the costs of transporting goods to the country,
which can be high and can have a negative impact on the environment. In addition, some
countries impose tariffs on incoming goods, which will impact the firm’s profits. In addition,
firms that market and distribute products through a contractual agreement have less control
over those operations and, naturally, must pay their distribution partner a fee for those
services
Firms export mostly to countries that are close to their facilities because of the lower
transportation costs and the often greater similarity between geographic neighbours. For
example, Mexico accounts for 40 percent of the goods exported from Texas. The Internet has
also made exporting easier. Even small firms can access critical information about foreign
markets, examine a target market, research the competition, and create lists of potential
customers. Even applying for export and import licenses is becoming easier as more
governments use the Internet to facilitate these processes.

Because the cost of exporting is lower than that of the other entry modes, entrepreneurs and
small businesses are most likely to use exporting as a way to get their products into markets
around the globe. Even with exporting, firms still face the challenges of currency exchange
rates. While larger firms have specialists that manage the exchange rates, small businesses
rarely have this expertise.

One factor that has helped reduce the number of currencies that firms must deal with was the
formation of the European Union (EU) and the move to a single currency, the euro, for the
first time. As of 2011, seventeen of the twenty-seven EU members use the euro, giving
businesses access to 331 million people with that single currency.

Licensing and Franchising

A company that wants to get into an international market quickly while taking only limited
financial and legal risks might consider licensing agreements with foreign companies.

An international licensing agreement allows a foreign company (the licensee) to sell the

products of a producer (the licensor) or to use its intellectual property (such as patents,
trademarks, copyrights) in exchange for royalty fees.

Here’s how it works: You own a company in the United States that sells coffee-flavoured
popcorn. You’re sure that your product would be a big hit in Japan, but you don’t have the
resources to set up a factory or sales office in that country. You can’t make the popcorn here
and ship it to Japan because it would get stale.

So , you enter into a licensing agreement with a Japanese company that allows your licensee
to manufacture coffee-flavoured popcorn using your special process and to sell it in Japan
under your brand name. In exchange, the Japanese licensee would pay you a royalty fee.
The licensee pays a fee in exchange for the rights to use the intangible property and possibly
for technical assistance as well. Because little investment on the part of the licensor is
required, licensing has the potential to provide a very large return on investment. However,
because the licensee produces and markets the product, potential returns from manufacturing
and marketing activities may be lost.

Thus, licensing reduces cost and involves limited risk. However, it does not mitigate the
substantial disadvantages associated with operating from a distance. As a rule, licensing
strategies inhibit control and produce only moderate returns.

Another popular way to expand overseas is to sell franchises. Under

an international franchise agreement, a company (the franchiser) grants a foreign company
(the franchisee) the right to use its brand name and to sell its products or services. The
franchisee is responsible for all operations but agrees to operate according to a business
model established by the franchiser. In turn, the franchiser usually provides advertising,
training, and new-product assistance.

Franchising is a natural form of global expansion for companies that operate domestically
according to a franchise model, including restaurant chains, such as McDonald’s and
Kentucky Fried Chicken, and hotel chains, such as Holiday Inn and Best Western.

Contract Manufacturing and Outsourcing

Because of high domestic labour costs, many U.S. companies manufacture their products in
countries where labour costs are lower. This arrangement is
called international contract manufacturing or outsourcing. A U.S. company might contract
with a local company in a foreign country to manufacture one of its products. It will,
however, retain control of product design and development and put its own label on the
finished product.

Contract manufacturing is quite common in the U.S. apparel business, with most American
brands being made in a number of Asian countries, including China, Vietnam, Indonesia, and
India. Thanks to twenty-first-century information technology, nonmanufacturing functions
can also be outsourced to nations with lower labour costs.

U.S. companies increasingly draw on a vast supply of relatively inexpensive skilled labour to
perform various business services, such as software development, accounting, and claims
processing. For years, American insurance companies have processed much of their claims-
related paperwork in Ireland. With a large, well-educated population with English language
skills, India has become a centre for software development and customer-call centres for
American companies.

Partnerships and Strategic Alliances

Another way to enter a new market is through a strategic alliance with a local partner. A
strategic alliance involves a contractual agreement between two or more enterprises
stipulating that the involved parties will cooperate in a certain way for a certain time to
achieve a common purpose.

To determine if the alliance approach is suitable for the firm, the firm must decide what value
the partner could bring to the venture in terms of both tangible and intangible aspects. The
advantages of partnering with a local firm are that the local firm likely understands the local
culture, market, and ways of doing business better than an outside firm.

Partners are especially valuable if they have a recognized, reputable brand name in the
country or have existing relationships with customers that the firm might want to access. For
example, Cisco formed a strategic alliance with Fujitsu to develop routers for Japan. In the
alliance, Cisco decided to co-brand with the Fujitsu name so that it could leverage Fujitsu’s
reputation in Japan for IT equipment and solutions while still retaining the Cisco name to
benefit from Cisco’s global reputation for switches and routers. 

Similarly, Xerox launched signed strategic alliances to grow sales in emerging markets such
as Central and Eastern Europe, India, and Brazil. Strategic alliances and joint ventures have
become increasingly popular in recent years.

They allow companies to share the risks and resources required to enter international markets.
And although returns also may have to be shared, they give a company a degree of flexibility
not afforded by going it alone through direct investment. There are several motivations for
companies to consider a partnership as they expand globally, including

(a) facilitating market entry,

(b) risk and reward sharing,

(c) technology sharing,

(d) joint product development, and

 (e) conforming to government regulations.

Other benefits include political connections and distribution channel access that may depend
on relationships.

Such alliances often are favourable when

(a) the partners’ strategic goals converge while their competitive goals diverge;

(b) the partners’ size, market power, and resources are small compared to the industry
leaders; and

(c) partners are able to learn from one another while limiting access to their own
proprietary skills.

What if a company wants to do business in a foreign country but lacks the expertise or
resources?

Or what if the target nation’s government doesn’t allow foreign companies to operate within
its borders unless it has a local partner?

In these cases, a firm might enter into a strategic alliance with a local company or even with
the government itself.

A strategic alliance is an agreement between two companies (or a company and a nation) to

pool resources in order to achieve business goals that benefit both partners. For example,
Viacom (a leading global media company) has a strategic alliance with Beijing Television to
produce Chinese-language music and entertainment programming

An alliance can serve a number of purposes:

 Enhancing marketing efforts

 Building sales and market share

 Improving products

 Reducing production and distribution costs

 Sharing technology

Alliances range in scope from informal cooperative agreements to joint ventures—alliances

in which the partners fund a separate entity (perhaps a partnership or a corporation) to
manage their joint operation. Magazine publisher Hearst, for example, has joint ventures with
companies in several countries.

So, young women in Israel can read Cosmo Israel in Hebrew, and Russian women can pick
up a Russian-language version of Cosmo that meets their needs. The U.S. edition serves as a
starting point to which nationally appropriate material is added in each different nation.

This approach allows Hearst to sell the magazine in more than fifty countries. Strategic
alliances are also advantageous for small entrepreneurial firms that may be too small to make
the needed investments to enter the new market themselves. In addition, some countries
require foreign-owned companies to partner with a local firm if they want to enter the market.

For example, in Saudi Arabia, non-Saudi companies looking to do business in the country are
required by law to have a Saudi partner. This requirement is common in many Middle
Eastern countries.

Even without this type of regulation, a local partner often helps foreign firms bridge the
differences that otherwise make doing business locally impossible. Walmart, for example,
failed several times over nearly a decade to effectively grow its business in Mexico, until it
found a strong domestic partner with similar business values.

The disadvantages of partnering, on the other hand, are lack of direct control and the
possibility that the partner’s goals differ from the firm’s goals. David Ricks, who has written
a book on blunders in international business, describes the case of a US company eager to
enter the Indian market: “It quickly negotiated terms and completed arrangements with its
local partners.

Certain required documents, however, such as the industrial license, foreign collaboration
agreements, capital issues permit, import licenses for machinery and equipment, etc., were
slow in being issued. Trying to expedite governmental approval of these items, the US firm
agreed to accept a lower royalty fee than originally stipulated.

Despite all of this extra effort, the project was not greatly expedited, and the lower royalty fee
reduced the firm’s profit by approximately half a million dollars over the life of the
agreement.” Failing to consider the values or reliability of a potential partner can be costly, if
not disastrous. To avoid these missteps, Cisco created one globally integrated team to oversee
its alliances in emerging markets. Having a dedicated team allows Cisco to invest in training
the managers how to manage the complex relationships involved in alliances. The team
follows a consistent model, using and sharing best practices for the benefit of all its alliances.

The key issues to consider in a joint venture are ownership, control, length of agreement,
pricing, technology transfer, local firm capabilities and resources, and government intentions.
Potential problems include (a) conflict over asymmetric new investments, (b) mistrust over
proprietary knowledge, (c) performance ambiguity, that is, how to “split the pie,” (d) lack of
parent firm support, (e) cultural clashes, and (f) if, how, and when to terminate the
relationship.

Ultimately, most companies will aim at building their own presence through company-owned
facilities in important international markets. Acquisitions or greenfield start-ups represent this
ultimate commitment. Acquisition is faster, but starting a new, wholly owned subsidiary
might be the preferred option if no suitable acquisition candidates can be found.

Acquisitions

An acquisition is a transaction in which a firm gains control of another firm by purchasing its
stock, exchanging the stock for its own, or, in the case of a private firm, paying the owners a
purchase price.

In our increasingly flat world, cross-border acquisitions have risen dramatically. In recent
years, cross-border acquisitions have made up over 60 percent of all acquisitions completed
worldwide. Acquisitions are appealing because they give the company quick, established
access to a new market.

However, they are expensive, which in the past had put them out of reach as a strategy for
companies in the undeveloped world to pursue. What has changed over the years is the
strength of different currencies. The higher interest rates in developing nations has
strengthened their currencies relative to the dollar or euro.

If the acquiring firm is in a country with a strong currency, the acquisition is comparatively
cheaper to make.

As Wharton professor Lawrence G. Hrebiniak explains, “Mergers fail because people pay too
much of a premium. If your currency is strong, you can get a bargain

When deciding whether to pursue an acquisition strategy, firms examine the laws in the target
country.
China has many restrictions on foreign ownership, for example, but even a developed-world
country like the United States has laws addressing acquisitions. For example, you must be an
American citizen to own a TV station in the United States. Likewise, a foreign firm is not
allowed to own more than 25 percent of a US airline

Acquisition is a good entry strategy to choose when scale is needed, which is particularly the
case in certain industries (e.g., wireless telecommunications). Acquisition is also a good
strategy when an industry is consolidating. Nonetheless, acquisitions are risky. Many studies
have shown that between 40 percent and 60 percent of all acquisitions fail to increase the
market value of the acquired company by more than the amount invested.

Foreign Direct Investment and Subsidiaries

Many of the approaches to global expansion that we’ve discussed so far allow companies to
participate in international markets without investing in foreign plants and facilities. As
markets expand, however, a firm might decide to enhance its competitive advantage by
making a direct investment in operations conducted in another country.

Also known as foreign direct investment (FDI), acquisitions and greenfield start-ups involve
the direct ownership of facilities in the target country and, therefore, the transfer of resources
including capital, technology, and personnel. Direct ownership provides a high degree of
control in the operations and the ability to better know the consumers and competitive
environment. However, it requires a high level of resources and a high degree of
commitment.

Foreign direct investment refers to the formal establishment of business operations on foreign

soil—the building of factories, sales offices, and distribution networks to serve local markets
in a nation other than the company’s home country.

On the other hand , offshoring occurs when the facilities set up in the foreign country replace
U.S. manufacturing facilities and are used to produce goods that will be sent back to the
United States for sale. Shifting production to low-wage countries is often criticized as it
results in the loss of jobs for U.S. workers.

FDI is generally the most expensive commitment that a firm can make to an overseas market,
and it’s typically driven by the size and attractiveness of the target market. For example,
German and Japanese automakers, such as BMW, Mercedes, Toyota, and Honda, have made
serious commitments to the U.S. market: most of the cars and trucks that they build in plants
in the South and Midwest are destined for sale in the United States.

A common form of FDI is the foreign subsidiary: an independent company owned by a

foreign firm (called the parent). This approach to going international not only gives the
parent company full access to local markets but also exempts it from any laws or regulations
that may hamper the activities of foreign firms. The parent company has tight control over
the operations of a subsidiary, but while senior managers from the parent company often
oversee operations, many managers and employees are citizens of the host country.

Not surprisingly, most very large firms have foreign subsidiaries. IBM and Coca-Cola, for
example, have both had success in the Japanese market through their foreign subsidiaries
(IBM-Japan and Coca-Cola–Japan). FDI goes in the other direction, too, and many
companies operating in the United States are in fact subsidiaries of foreign firms. Gerber
Products, for example, is a subsidiary of the Swiss company Novartis, while Stop & Shop and
Giant Food Stores belong to the Dutch company Royal Ahold.

All these strategies have been successful in the arena of global business. But success in
international business involves more than merely finding the best way to reach international
markets.

Doing global business is a complex, risky endeavour. As many companies have learned the
hard way, people and organizations don’t do things the same way abroad as they do at home.
What differences make global business so tricky? That’s the question that we’ll turn to next.

Wholly Owned Subsidiaries

Firms may want to have a direct operating presence in the foreign country, completely under
their control. To achieve this, the company can establish a new, wholly owned subsidiary
(i.e., a greenfield venture) from scratch, or it can purchase an existing company in that
country.

Some companies purchase their resellers or early partners (as Vitrac Egypt did when it
bought out the shares that its partner, Vitrac, owned in the equity joint venture). Other
companies may purchase a local supplier for direct control of the supply. This is known as
vertical integration.
Establishing or purchasing a wholly owned subsidiary requires the highest commitment on
the part of the international firm, because the firm must assume all of the risk—financial,
currency, economic, and political.

The process of establishing of a new, wholly owned subsidiary is often complex and
potentially costly, but it affords the firm maximum control and has the most potential to
provide above-average returns. The costs and risks are high given the costs of establishing a
new business operation in a new country.

The firm may have to acquire the knowledge and expertise of the existing market by hiring
either host-country nationals—possibly from competitive firms—or costly consultants.

An advantage is that the firm retains control of all its operations. Cautions When Purchasing
an Existing Foreign Enterprise. As we’ve seen, some companies opt to purchase an existing
company in the foreign country outright as a way to get into a foreign market quickly.

When making an acquisition, due diligence is important—not only on the financial side but
also on the side of the country’s culture and business practices. The annual disposable income
in Russia, for example, exceeds that of all the other BRIC countries (i.e., Brazil, India, and
China).

For many major companies, Russia is too big and too rich to ignore as a market. However,
Russia also has a reputation for corruption and red tape that even its highest-ranking officials
admit.

In a BusinessWeek article, presidential economic advisor Arkady Dvorkovich (whose office

in the Kremlin was once occupied by Soviet leader Leonid Brezhnev), for example, advises,
“Investors should choose wisely” which regions of Russia they locate their business in,
warning that some areas are more corrupt than others.

Corruption makes the world less flat precisely because it undermines the viability of legal
vehicles, such as licensing, which otherwise lead to a flatter world. The culture of corruption
is even embedded into some Russian company structures.

In the 1990s, laws inadvertently encouraged Russian firms to establish legal headquarters in
offshore tax havens, like Cyprus. A tax haven is a country that has very advantageous (low)
corporate income taxes.
Businesses registered in these offshore tax havens to avoid certain Russian taxes. Even
though companies could obtain a refund on these taxes from the Russian government, “the
procedure is so complicated you never actually get a refund,” said Andrey Pozdnyakov,
cofounder of Siberian-based Elecard, in the same BusinessWeek article.

This offshore registration, unfortunately, is a danger sign to potential investors like Intel. “We
can’t invest in companies that have even a slight shadow,” said Intel’s Moscow-based
regional director Dmitry Konash about the complex structure predicament.

FACTORS WHICH DECIDE A FIRM’S ENTRY INTO A PARTICULAR MARKET

Regardless of which entry strategy a company chooses, several factors are always
important.

 Cultural and linguistic differences. These affect all relationships and interactions

inside the company, with customers, and with the government. Understanding the
local business culture is critical to success.

 Quality and training of local contacts and/or employees. Evaluating skill sets and
then determining if the local staff is qualified is a key factor for success.

 Political and economic issues. Policy can change frequently, and companies need to
determine what level of investment they’re willing to make, what’s required to make
this investment, and how much of their earnings they can repatriate.

 Experience of the partner company. Assessing the experience of the partner

company in the market—with the product and in dealing with foreign companies—is
essential in selecting the right local partner.

1. How much of our resources are we willing to commit? The fewer the resources (i.e.,
money, time, and expertise) the company wants (or can afford) to devote, the better it
is for the company to enter the foreign market on a contractual basis—through
licensing, franchising, management contracts, or turnkey projects.

2. How much control do we wish to retain? The more control a company wants, the
better off it is establishing or buying a wholly owned subsidiary or, at least, entering
via a joint venture with carefully delineated responsibilities and accountabilities
between the partner companies.

• Four International Strategies

International Strategy

Firms pursuing an international strategy are neither concerned about costs nor adapting to the
local cultural conditions. They attempt to sell their products internationally with little to no
change. When Harley Davidson sells motorcycles abroad, they do not need to lower their
prices or adapt the bike to local motorcycle standards. People in other countries buy a Harley
particularly because it is different from the local motorcycles. Buyers want the American
look and the sound and power of a Harley, and will pay for that differentiation.

Belgium chocolate exporters do not lower their price when exporting to the American market
to compete with Hershey’s, nor do they adapt their product to American tastes. They use an
international strategy. Starbucks and Rolex watches are other examples of firms pursuing the
international strategy.

Multi-Domestic Strategy

Multidomestic strategy is a set of strategies used by companies that operate in more than one
country at a time.  Or simply defined as a business that uses a different approach in each of
the markets it operates in. This strategy can maximize local responsiveness by distributing the
decision-making authority to local business groups in each country.

Therefore, they can create products and services better developed to their local markets. It
also allows firms to compete more effectively in the local market to increase their share in
that market. One disadvantage of a multi-domestic strategy, however, is that the firm faces
more uncertainty because of the tailored strategies in different countries.
Also, because the firm is pursuing different strategies in different locations, it cannot take
advantage of economies of scale that could help decrease costs for the firm overall. For
example: “YUM! Brands (KFC, Pizza Hut, Taco Bell, A&W, and Long John Silver’s)

They have a strong incentive to compete internationally with its restaurant concepts. They
pursue multi-domestic strategy by trying to localize as much as possible. The firm doesn’t
open restaurants using only the US model.”(Williams, 2018)

A firm using a multi-domestic strategy does not focus on cost or efficiency but emphasizes
responsiveness to local requirements within each of its markets. Rather than trying to force
all of its American-made shows on viewers around the globe, Netflix customizes the
programming that is shown on its channels within dozens of countries, including New
Zealand, Portugal, Pakistan, and India. Similarly, food company H. J. Heinz adapts its
products to match local preferences.

Because some Indians will not eat garlic and onion, for example, Heinz offers them a version
of its signature ketchup that does not include these two ingredients. Outback Steakhouse uses
the multi-domestic strategy in the multiple countries where it operates, adapting to local
eating preferences but not lowering prices significantly.Figure 9.10: Baked beans flavored
with curry? This H. J. Heinz product is very popular in the United Kingdom.

Global Strategy

Global Strategy is when an organization treats the world as one market and one source of
supply with little local variation, which they believe maximizes global efficiency. Using this
strategy, products are more likely to be standardized rather than tailored to local markets.

Although pursuing a global strategy decreases risk for the firm, the firm may not be able to
gain as high a market share in local markets because the global strategy isn’t as responsive to
local markets. A firm using a global strategy sacrifices responsiveness to local requirements
within each of its markets in favor of emphasizing lower costs and better efficiency. This
strategy is the complete opposite of a multi-domestic strategy.
Some minor modifications to products and services may be made in various markets, but a
global strategy stresses the need to gain low costs and economies of scale by offering
essentially the same products or services in each market.

Microsoft, for example, offers the same software programs around the world but adjusts the
programs to match local languages. Similarly, consumer goods maker Procter & Gamble
attempts to gain efficiency by creating global brands whenever possible.

Global strategies also can be very effective for firms whose product or service is largely
hidden from the customer’s view, such as silicon chip maker Intel. Lenovo also uses this
strategy. For such firms, variance in local preferences is not very important, but pricing is.

Transnational Strategy

Transnational Strategy is when a business seeks a middle ground between a multi-domestic

strategy and a global strategy. A business tries to balance the desire for efficiency with the
need to adjust to local preferences within the various countries they operate.

One disadvantage is that it is difficult to simultaneously execute the dual goals of flexibility
and coordination. According to Beardsley (2012) ” Large fast-food chains such as
McDonald’s and Kentucky Fried Chicken (KFC) rely on the same brand names and the same
core menu items around the world.

These firms make some concessions to local tastes too. In France, for example, wine can be
purchased at McDonald’s. This approach makes sense for McDonald’s because wine is a
central element of French diets.”

WHY IT MATTERS

There are four primary benefits of using international strategies:

1. Increased market size

2. Greater returns on major capital investments or investments in new products and

processes

3. Greater economies of scale, scope, or learning

4. A competitive advantage through location (for example, access to low-cost labor or

critical resources)
By choosing appropriate global strategies, a business firm can locate its different operations
given the consumer market, low-cost labor supply and availability of raw materials and other
productive resources.

For example, a country like India may choose to count on software and R &D work because
of easy availability of highly skilled techno-geeks for relatively lower salaries. Finally, by
entering the global marketplace, a business can learn how to compete against foreign
companies and even learn to battle them for market share on their own territory.

EXAMPLES HERE IN UTAH

Utah is one of the few states in the nation with a trade surplus of $4 billion, and it ranks ninth
for export growth in the United States. These numbers show an impressive feat for a small,
landlocked state.

So what does this all mean for Utah? According to Miller (2016)  the state’s 2014
international goods exports generated $4.1 billion in earnings, supported more than 95,000
jobs and contributed almost $7.6 billion to the state’s gross domestic product. These impacts
represented 4.8 percent of total earnings in the state, 5.3 percent of total employment and 5.4
percent of total GDP. It is hard to argue with those economic benefits.”

A firm using a transnational strategy seeks a middle ground between a multi-domestic

strategy and a global strategy. Such a firm tries to balance the desire for lower costs and
efficiency with the need to adjust to local preferences within various countries.

For example, large fast-food chains such as McDonald’s and Kentucky Fried Chicken (KFC)
rely on the same brand names and the same core menu items around the world. These firms
make some concessions to local tastes too. In France, for example, wine can be purchased at
McDonald’s. This approach makes sense for McDonald’s because wine is a central element
of French diets. In Saudi Arabia, McDonalds serves a McArabia Chicken sandwich, and its
breakfast menu features no pork products like ham, bacon, or sausage.