Mnc_Course

Introduction As the globalisation intensifying, the world is becoming a single market place for many Multinational Corporations (MNCs). This forces many domestic firms to reassess their positions. Restricting themselves to domestic trade will mean that they may be eventually “crowded out” by the more powerful and aggressive MNCs. Therefore, the need to expand internationally becomes fundamental to survival and growth for firms today. For example, McDonald’s after three decades of rapid growth in U.S. fast food market, faced slowdown in 1980’s and as result expanded abroad rapidly. Since then McDonald’s foreign revenues and profits have growth at 22 percent per year (Hill, 1998). Steps involved in developing a global expansion strategy for MNCs For global expansion, MNCs may need to have a global strategic planning which consist of four steps (Hott, 1998) (i) A clearly define purpose of the firm, mission and philosophy for strategic intent and define major objectives. (ii) Environmental analysis; conduct SWOT(Strength, Weaknesses, Opportunities and Threats) analysis, to evaluate its industry and competitors and environmental scanning for global opportunities. (iii) Formulation of strategy from the result of environmental analysis. (iv) Strategy implementation. By having the global strategic planning, the firm could sufficiently identify its standing globally. This global strategic planning may also identify the ability of the firm in selecting various mode of entry to foreign markets. According to Shapiro 1999, there are five interrelated elements in developing a global expansion strategy; (i) Awareness of profitable investment, (ii) selecting a mode of entry, (iii) auditing the effectiveness of entry modes, (iv) using appropriate criteria and (v) estimating the longevity of a competitive advantage. (i) Awareness of profitable investments It suggests that the MNC needs to identify potential profitability project for investments. The basic technique for the MNC to identify profitable investments is by using the investment appraisal technique. For example, MNC could use NPV (Net Present Value), IRR ( Internal Rate of Return ), DCF (Discounted Cash Flow) and Payback methods to identify profitable investments. This step should focus on building the firm competitive advantages and should improve the wealth of the shareholders However, some investment may not be viable even though the investment appraisal techniques indicated that there is a profitability investment. For example, investment in Indonesia may not be good for both long-term and short-term to any American firms as too high political risk element involved. On the other hand, investments with low return or negative NPV should not be considered isolated as it may create excess value for future investment projects. MNC owns core competence play a crucial role in evaluating and planning profitable investments in this step. (ii) Selecting of mode of entry MNCs could make use of foreign direct investment (FDI), international joint venture or strategic alliances, contracting, franchising, licensing and exporting. It is necessary to systematically evaluate the entry strategies. The selection of mode of entry depends on the factors like political and economical environment, speed of market entry, costs to include direct and indirect costs and profit objectives (Paliwoda, 1998). An example for political environment is the host government allowed only joint venture as a means of entrance or having high tariff barriers of entrance, thus, MNCs have no choice unless to form joint ventures with the locals even though other modes is better than joint ventures. For example, China and South Korea policy formerly favour joint ventures. (iii) Auditing the effectiveness of entry modes The best entry strategy presently implemented may not be appropriate for the future. Thus, auditing the effectiveness of current entry mode is necessary. As the knowledge of foreign market increases or sales potential grow, the MNC might need to consider the appropriateness of the present entry strategy. For example, MNCs which presently exporting its products globally might need to set up foreign sales subsidiaries in countries where sales are growing rapidly. The setting of wholly owned foreign subsidiary may provide a better and efficient support to the sales and follow up services for its product. (iv) Using appropriate evaluation criteria Using appropriate evaluation criteria to evaluate the entry strategy is essential for MNC to remain competitive advantages. The initial projected positive NPV to match the present actual cash flow return is a way to evaluate the effectiveness of the entry strategy. Benchmarking against the market share of competitors may indicate to the MNC of effectiveness of its expansion strategy. i.e. comparing the competitors who used different expansion strategy in the same market. If the competitors are better in market share, MNC needs to analyse and study the appropriateness of its present strategy. (v) Estimating the longevity of a competitive advantage MNC also need to constantly monitor its competitive advantage and estimate the longevity of its competitive advantage. If the competitive advantage could be easily be duplicate by the local competitors or other MNC, it is very important for the MNC to innovate new competitive advantage to ensure survival and create barriers of entry for others. For example, Microsoft embarks to continuously developing new windows software from Windows 1995, 1998 and 2000 with better features on each. This development may make other competitors hard to catch up with Microsoft, thus Microsoft retain its competitive advantage and created barrier for potential new entrants. MNCs should also frequently evaluate its competence by carrying out value chain analysis. Joint Venture (JV) There are many means of expanding their operations for MNCs. For example, wholly owned subsidiary, joint venture, contracting, franchising, licensing and exporting. JV is by far the common or popular means for MNCs in expanding its operation JV usually involve formalised relationship of at least two partners entering into an agreement specifying sharing of distribution of profit, assets and others terms of joint venture. Both the organisations remain independent instead a newly created organisation jointly owned by the venture partners will be set up. There are many forms of joint ventures, for example Spider's-web strategy, go-together then split strategy and successive integration strategy. JV often represent the only legal or compulsory way MNCs can expand their business into foreign countries like China, Mexico, Brazil, India, Indonesia etc. These governments mandate that MNCs can operate within their borders only in combination with local equity interests (Hott,1998). Many governments tend to favour JV due to the fear of a loss in control over their economies if majority of their industries are foreign-owned. However, with the globalisation and the WTO agreements , many governments for example, China has allowed MNCs to set up wholly owned subsidiary within its boundary. In certain industries that are regarded as politically sensitive, such as aircraft industries, transportation, utility services and petroleum, MNCs will need to joint venture with locals in order to embark in these industries in the host country. Without local participant as partner, it would be impossible to invest in such industries (Phatak, 1997). JVs are popular as a means for doing business in emerging market economies.. For example, more than 3000 JVs agreements were signed in Eastern Europe and former republics of the Soviet Union in the early 1990s with foreigners. ( Hodgetts and Luthans, 1997). Jain, 1996 adds that it is hard to find a Fortune 1000 company active overseas does not have at least one joint venture. One typical example of popularity of joint venture is the car industry. For example, General Motors joint ventures with Volvo, Toyota Motor, Isuzu Motors and Suzuki Motors, Ford Motor Co. joint venture with Autolatina and Madza etc. (Appendix 1) Benefits of Joint Venture for MNCs On the other hand, MNCs benefit in that the local partner is able to circumvent the red tape and bureaucratic harassment which afflict MNCs in many countries. Local partner through the right channel often will be able to obtain important permits and licenses for imports, foreign exchange, water and electricity supply etc ( Phatak, 1997). On top of these, the local partner will provide expertise, for example, knowledge in market conditions in the host country. The local partner is also better in cultural awareness which will benefit the MNCs as culture play an important role in penetrating host nation markets. For example, Macdonald’s entered to Japan in 1971 and manage to be a leading restaurant in Japan due to the local partner, Fujita which have substantial knowledge of home country requirements.(Jeannet and Hennessary, 1998) Where market are too competitive or crowed to admit a new operation, JVs may be the only way to break into. For example, many Japanese firms like Fujitsu, a large computer manufacturer found it almost impossible to break into the competitive U.S. market by itself without local partner. ( Perpstra and Sarathy, 1997). MNCs with limited resources or capital outlay may expand its operation through JV. JV generally, required a lower capital outlay compared with the wholly owned subsidiary. This will be of a greater advantage if expansion is into a number of high-profit and high-risk areas. Under such circumstances risk is limited in a JV. In country where nationalism is high, a JV with a local firm or government agency could help lower the governmental and societal hostility against the MNC (Phatak,1997). Besides, JV may improve the sales prospect of the MNCs especially sales to the host government (Brooke, 1992), for example, government contracts. JV may enable MNCs to obtain local currency loans and attract tax relief or incentives for the host government. In order to attract foreign investors, host government often give tax holiday and incentives for successful establishment of local entity. JV is a committed local establishment providing jobs opportunity and expertise, for example, transfer of technological knowledge to local. MNCs could make the best use of this tax holiday and incentives to reduce the tax burden of the group. Local financial institutions may favour and approve the local currency loans by virtue of the fact that JV is a local establishment (Shapiro, 1999). JV also benefits the MNCs through sharing of success and quality management. For example, Fuji-Xerox. Xerox in U.S. was running all sorts of problem in 1980s. Competitors like Canon, Ricoh and Kodak began to take market share from Xerox. To recapture the market, Xerox began to sell a product of Fuji-Xerox's FX 3500 copier in United States. FX 3500 was a product produced by total quality control produce to sell in Japan and broken the Japanese record for the number of copiers sold in 1979. It opened Xerox's eyes to the benefit of Fuji-Xerox TQC and Xerox has learned from this joint venture (Hill, 1998). JVs may result in an intangible effect on local employees of a joint venture. It was reported a wholly owned subsidiary in India disposed 10 percent of the stock to the Indian public and this had a significant positive impact on the morale of Indian staff (Phatak, 1997). No doubt MNCs do derive substantial benefits from JV. However some JVs had end in a divorce. For example, General Motors and the Daewoo Group. General Motors is interested in the cheap labour of Korea but the strikes have forced Deawoo to increase the wages more than double. This resulted cheaper to build Opels in Germany than Korea. The financial losses of eight years resulted the JV collapsed (Hill, 1998). A studied by Harrigan 1987, indicated JVs failed because they are far more complex to manage than many firms have recognised. It goes awry when partners forget their purpose, role in firms' strategies and inflexibility on using their venture. Other factors which may influence the success or failure of a JV is the trust, similar business interests, non-conflicting goals, compatible in size and culture of the partners in joint venture. The venture formed by partners of similar cultures stands a greater chance of succeeding than one between dissimilar cultures (Mead, 1999). Conclusion The intensity of globalisation is impacting many countries. For example, China has opened its door to FDI by joining the WTO (World Trade Organisation). The mode of entry for the future might be the Foreign Direct Investment (FDI) as barriers of entry is removed. JVs that were once the legitimate mode of entry in China is now not so. However, MNCs may still need joint ventures as a mode of entry as it reduces risk and produce a greater chance of success, as there is still existence of cultural, economical and political differences. (Word count: 2048 words)