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C h a p t e r2THE MULTINATIONAL ENTERPRISEContentsIntroductionThe nature of multinational enterprisesStrategic management and multinational enterprisesA framework for global strategies: the FSA- CSA matrixIt’s regional, not flatMultinationals in actionAppendix A to Chapter 2Appendix B to Chapter 2▪ACTIVE LEARNING CASEDisneyland in Europe▪INTERNATIONAL BUSINESS STRATEGY IN ACTIONItalian family firmsNestlé▪REAL CASESStarbucksSonyObjectives of the chapterMost of the best-known companies in the world are multinational enterprises, and many of their names are easily recognized because their products and services are so popular. This is true for US MNEs, such as General Motors, Exxon, and IBM, but for others as well. Consider, for example,some of the largest industrial multinationals headquartered in the European Union: Unilever (Britain/Netherlands), Fiat (Italy), Nokia (Finland), Volkswagen (Germany), Philips (Netherlands), Peugeot (France), and in Japan: Sony, Fuji, and Toyota. There are also MNEs from non-triad areas such as Samsung (South Korea), Codelco (Chile), AngloGold (South Africa), and Bombardier (Canada). The primary objective of this chapter is to examine the nature and operations of multinational enterprises.[PHOTO near here]The objectives of this chapter are to:1. Describe the characteristics of multinational enterprises.2. Explain the internationalization process.3. Explain why firms become multinational enterprises.4. Discuss the strategic philosophy of these firms.5. Introduce a country/firm framework for examining a firm’s competitiveness.6. Study some of the ways in which these firms use strategic management.large number of visitors. Simply put, the company was making a great deal of money from its parks. However, the Tokyo park was franchised to others—and Disney management felt that it had given up too much profit with this arrangement. This would not b e the case at Euro Disneyland. The company’s share of the venture was to be 49 per cent for which it would put up $160 million. Other investors put in $1.2 billion, the French government provided a low-interest $900 million loan, banks loaned the business $1.6 billion, and the remaining $400 million was to come from special partnerships formed to buy properties and to lease them back. For its investment and management of the operation, the Walt Disney Company was to receive 10 per cent of Euro Disney’s admi ssion fees, 5 per cent of food and merchandise revenues, and 49 per cent of all profits.The location of the amusement park was thoroughly researched. The number of people who could be attracted to various locations throughout Europe and the amount of money they were likely to spend during a visit to the park were carefully calculated. In the end, France and Spain had proved to offer the best locations. Both countries were well aware of the park’s capability for creatin g jobs and stimulating their economy. As a result, each actively wooed the company. In addition to offering a central location in the heart of Europe, France was prepared to provide considerable financial incentives. Among other things, the French government promised to build a train line to connect the amusement park to the European train system. Thus after carefully comparing the advantages offered by both countries, France was chosen as the site for the park.At first things appeared to be off to a roaring start. Unfortunately, by the time the park was ready to open, a number of problems had developed, and some of these had a very dampening effect on early operations. One was the concern of some French people that Euro Disney was nothing more than a transplanting of Disneyland into Europe. In their view the park did not fit into the local culture, and some of the French press accused Disney of ―cultural imperialism.‖Others objected to the fact that the French government, as promised in the contract, had expropriated the necessary land and sold it without profit to the Euro Disneyland development people. Signs reading ―Don’t gnaw away our national wealth‖ and ―Disney go home‖ began appearing along roadways. These negative feelings may well have accounted for the fact that on opening day only 50,000 visitors showed up, in contrast to the 500,000 that were expected. Soon thereafter, operations at the park came under criticism from both visitors and employees. Many visitors were upset about the high prices. In the case of British tourists, for example, because of the Franc exchange rate, it was cheaper for them to go to Florida than to Euro Disney. In the case of employees, many of them objected to the pay rates and the working conditions. They also raised concerns about a variety of company policies ranging frompersonal grooming to having to speak English in meetings, even if most people in attendance spoke French. Within the first month 3,000 em ployees quit. Some of the other operating problems were a result of Disney’s previous experiences. In the United States, for example, liquor was not sold outside of the hotels or specific areas. The general park was kept alcohol free, including the restaurants, in order to maintain a family atmosphere. In Japan, this policy was accepted and worked very well. However, Europeans were used to having outings with alcoholic beverages. As a result of these types of problems, Euro Disney soon ran into financial problems.In 1994, after three years of heavy losses, the operation was in such bad shape that some people were predicting that the park would close. However, a variety of developments saved the operation. For one thing, a major investor purchased 24.6 per cent (reducing Disney’s share to 39 per cent) of the company, injecting $500 million of much needed cash. Additionally, Disney waived its royalty fees and worked out a new loan repayment plan with the banks, and new shares were issued. These measures allowed Euro Disney to buy time while it restructured its marketing and general policies to fit the European market.In October 1994, Euro Disney officially changed its name to ―Disneyland Paris.‖ This made the park more Fre nch and permitted it to capitalize on the romanticism that the word ―Paris‖ conveys. Most importantly, the new name allowed for a new beginning, disassociating the park from the failure of Euro Disney. This was accompanied with measures designed to remedy past failures. The park changed its most offensive labor rules, reduced prices, and began being more culturally conscious. Among other things, alcohol beverages were now allowed to be served just about anywhere.The company also bega n making the park more appealing to local visitors by giving it a ―European‖ focus. Ninety two per cent of the park’s visitors are from eight nearby European countries. Disney Tomorrowland, with its dated images of the space age, was jettisoned entirely and replaced by a gleaming brass and wood complex called Discoveryland, which was based on themes of Jules Verne and Leonardo da Vinci. In Disneyland food services were designed to reflect the fable’s country of origin: Pinocchio’s facilit y served German food, Cinderella’s had French offerings, and at Bella Notte’s the cuisine was Italian. The company also shot a 360-degree movie about French culture and showed it in the ―Visionarium‖ exhibit.These changes were designed to draw more visitors, and they seemed to have worked. Disneyland Paris reported a slight profit in 1996, and the park continued to make a modest profit through to the early 2000s. In 2002 and 2003, the company was once again making losses, and new deals had to be worked out with creditors. This time, however, it wasn’t insensitivity to local customs but a slump in the travel and tourism industry, strikes and stoppages in France, and an economic downturn in many of the surrounding markets.INTRODUCTIONA multinational enterprise (MNE)1is a company that is headquartered in one country but has operations in one or more other countries. Sometimes it is difficult to know if a firm is an MNE because multinationals often downplay the fact that they are foreign held. For example, many people are unaware that Bayer, the drug company, is German owned; Nestlé, the chocolate manufacturer, is a Swiss company; Northern Telecom is Canadian; and Ford Motor now owns Jaguar, the British-based auto maker. Similarly, approximately 25 per cent of banks in California are Japanese owned, but this is often not evident from their names. Simply put, many large MNEs have world holdings far beyond that what is known to the casual observer. A closer look at these MNEs will reveal the impact they have on international business and the world economy.1Multinational enterprise (MNE) A company headquartered in one country but having operations in other countriesTHE NATURE OF MULTINATIONAL ENTERPRISESThe United Nations has identified over 60,000 MNEs, but the largest 500 account for 80 per cent of the world‘s foreign direct investment.i Table 2.1 shows the distribution of the world‘s largest 500 firms, most of which are MNEs. Of these, 391 are from the ―triad.‖ There are 162 from the United States, 162 from the EU, and 67 from Japan. The fact that nearly 80 per cent of the world‘s largest 500 MNEs are from the core triad is highly significant. It means that the triad is the basic unit of analysis for MNE strategy. Also, about 80–85 per cent of the world‘s top MNEs have been from the triad for the last 20–30 years.ii Total annual sales of these 500 firms are in excess of $15 trillion.iii These firms are engaged in a wide variety of operations including autos, chemicals, computers, consumer goods, financial services, industrial equipment, and oil and steel production.The names of the largest triad-based MNEs, as well as those from non-triad countries, are listed in Appendix, Tables 2A–2E. There are now 44 MNEs from the emerging economies of China, Korea, and India, as well as several others from similar economies. Students should become familiar with at least some of these MNEs as we proceed through this book. We provide the websites for all the MNEs we discuss in the case boxes.Characteristics of multinational enterprisesOne way of identifying the characteristics of MNEs is by looking at the environment in which they operate. Figure 2.1 shows some of the major forces in this environment. Notice that an MNE has two major areas of concern: the home country of its headquarters and the host countries in which it does business. Stakeholders are not included within these two areas of Figure 2.1 because they can come from anywhere in the world. For example, an investor in Switzerland can purchase stock in Sears Roebuck even though the company does not do business in Switzerland.Table 2.1 The world's largest 500 multinational enterprises, 2007Country Number ofMNEsUnited States 162EU(15) 162Japan 67China 24Canada 16South Korea 14Switzerland 13Australia 8India 6Taiwan 6Brazil 5Mexico 5Russia 4Norway 2Others 6Total 500Source: Author's calculations and adapted from Fortune, The Global 500, July 23, 2007.One characteristic of MNEs is that their affiliates must be responsive to a number of important environmental forces, including competitors, customers, suppliers, financial institutions, and government (again see Figure 2.1). In some cases the same forces are at work in both the home and host-country environments. For example, many of General Motors‘ competitors in the US market are the same as those in Europe: BMW, Ford, DaimlerChrysler, Honda, and Volkswagen, among others. Similarly, MNEs often use the same suppliers overseas that they employ domestically, and it is common to find home-country-based suppliers following their MNE customer to other geographic locales in order to provide the same types of services worldwide. In other cases,however, these same environmental factors can be very different on each of the markets in which the firm operates.A second characteristic of an MNE is that it draws on a common pool of resources, including assets, patents, trademarks, information, and human resources. Because the affiliates are all part of the same company, they have access to assets that are often not available to outsiders. For example, both Ford and General Motors compete vigorously in Europe and many of the design and styling changes developed for their European cars have now been introduced in US models. The flow of information and technology between European and US affiliates has led to success in the worldwide market for many MNEs. Similarly, if an affiliate needs expansion funds, an MNE will often help out by working with the affiliate to raise the money. If a loan is needed, the affiliate is likely to find many financial institutions that are willing to provide the money because the MNE will back the loan.A third characteristic of an MNE is that it links together the affiliates and business partners with a common strategic vision. Simply put, all of the firms with whom the MNE works fit into the company‘s overall plan of what it wants to do and how it intends to go about implementing this strategy. General Motors (GM) is a good example. The auto giant has announced that it is now going to rely heavily on partnerships to help it grow.iv GM realizes that no auto maker has all of the resources for achieving leadership in every region of the world or in every product segment. As a result, the company has formed a manufacturing partnership with Toyota to conduct research and development on fuel cell and gas-electric hybrid vehicles. GM also has created an alliance with Fuji Heavy Industries and its Subaru brand that allows GM to benefit from Fuji‘s strengths in small sport utility vehicles, continuously variable transmissions, and all-wheel-drive systems and, in turn, gives Fuji access to GM‘s vehicle platforms and other important manufacturing tech nologies. These types of arrangements are part of GM‘s new strategic vision—one that is not limited just tobuilding cars. Today the company is looking into ways of providing customers with other auto-related services as seen by its Onstar communications program with wireless phone service that allows drivers to be in constant contact with someone who can give them information and assistance.The internationalization processNot all international business is done by MNEs. Indeed, setting up a wholly-owned subsidiary is usually the last stage of doing business abroad, as is shown in Figure 2.2.[Figure 2.2 near here]Figure 2.2 outlines the typical process by which a firm producing a standardized product will seek to involve itself in a foreign market.v This, however, is a generalization as firms ultimately make decisions depending on their particular circumstances. The process we illustrate here,however, is important because it is based on how the firm perceives risk and how it deals with it. In this internationalization2process the firm regards foreign markets as risky due to the fact that, as these markets are unknown to it, the firm faces export marketing costs. To avoid such information costs and risk, its strategy is to go abroad at a slow and cautious pace, often using the services of specialists in international trade outside the firm. Over time, familiarity with the foreign environment will reduce the information costs and help to alleviate the perceived risk of foreign involvement. There is a ―learning‖ effect as firms become familiar with a foreign market.vi Initially the firm may seek to avoid the risks of foreign involvement by arranging a joint venture or a license. A license3is a contractual arrangement in which one firm, the licensor,4 provides access to some of its patents, trademarks, or technology to another firm, the licensee,5in exchange for a fee or royalty. This fee often involves a fixed amount upon signing the contract and then a royalty of 2–5 per cent on sales generated by the agreement. A typical licensing contract will run from five to seven years and be renewable at the option of either or both parties. This strategy is most suitable for a standardized product where there is no risk of dissipation of the firm‘s technological or managerial advantages. Otherwise, licensing will be reserved for a much later stage of entry. Indeed, when it is important for the firm to retain control over its firm-specific advantage in technology (as in internalization theory),vii licensing will be the last stage of entry. The firms involved in the process of internationalization, on the other hand, typically are not concerned about losing their firm-specific advantages. Rather, they want to avoid exposure to an uncertain foreign environment. Abstracting from the licensing option (and the more complex problem of joint ventures), the major types of foreign entry for a firm are as follows:2Internationalization The process by which a company enters a foreign market3License A contractual arrangement in which one firm (the licensor) provides access to some of its patents, trademarks, or technology to another firm in exchange for a fee or royalty4Licensor A company that provides access to some of its patents, trademarks, or technology to another firm in exchange for a fee or royalty5Licensee A firm given access to some of the patents, trademarks, or technology of another firm in exchange for a fee or royalty1.The firm sees potential extra sales by exporting and uses a local agent or distributor to enter aparticular market. Often the firm uses exporting as a ―vent‖ for its surplus production and may have no long-run commitment to the international market. If it does well abroad, however, it may then set up its own local sales representative or marketing subsidiary, in the hope ofsecuring a more stable stream of export sales.2.As exports come to represent a larger share of sales, the firm may increase its capacity to servethe export market. It will set an office for its sales representative in a major market, or set up a sales subsidiary. This stage marks an important departure for the firm from simply viewing exports as a marginal contributor to sales volume or as a vent for surplus in times of excess capacity. At this stage the firm will often set up a separate export department to manageforeign sales and production for such markets and product design and the production process itself may be modified to tailor products for export markets.3.After the firm has become more familiar with the local market, some of the uncertaintyassociated with foreign involvement has been overcome. Now the firm may begin to move on the foreign production side. Initially it may start to use host-country workers to engage in local assembly and packaging of its product lines. This is a crucial step, because the firm is now involved in the host-country factor market and must deal with such environmental variables as wage rates, cultural attitudes, and worker expectations in its new labor force.4.The final stage of foreign involvement comes when the firm has generated sufficientknowledge about the host country to overcome its perceptions of risk. Because it is morefamiliar with the host-country environment, it may now consider a foreign direct investment activity. In this it produces the entire product line in the host nation and sells its output there, or it may even be able to re-export back to the home country. These decisions depend on therelative country-specific costs; for example, if labor is inexpensive in the host nation (as inSoutheast Asia), more exporting takes place than if it is expensive (as in Western Europe and the United States).It has become clear that the internationalization process is more complicated than it seems at first glance. Like all generalizations, this schematic path of export commitment relies on simplifications. In reality, the process of foreign entry is sufficiently complicated to depend on a careful weighing of many firm-specific and country-specific factors. A framework to model these firm-specific advantages (FSAs) and country-specific advantages (CSAs) is developed in the next section.Why firms become multinational enterprisesCompanies become MNEs for a number of reasons. One is to diversify themselves against the risks and uncertainties of the domestic business cycle. By setting up operations in another country,multinationals can often diminish the negative effects of economic swings in the home country. This is a form of international diversification, and it has been widely used by Japanese MNEs, for example, which have found that, while their home economy has been in an economic slump since the 1990s, their US operations have done quite well.A second reason is to tap the growing world market for goods and services. For example, many MNEs have targeted the United States because of its large population and high per capita income. It is the world‘s single largest market in terms of gross domestic product. And since Americans have both a desire for new goods and services and the money to buy them, the United States can be an ideal market. MNEs are also targeting China. Although per capita gross domestic product is not very high, the country‘s large population and growing economy make it very attractive to multinationals. In 2001, China entered the World Trade Organization, and this acceptance of international rules made China more attractive for MNEs.Firms also become MNEs in response to increased foreign competition and a desire to protect their home market share. Using a ―follow the competitor‖ strategy, a growing number of MNEs now set up operations in the home countries of their major competitors. This approach serves a dual purpose: (1) it takes away business from their competitors by offering customers other choices, and (2) it lets competitors know that, if they attack the MNE‘s home market, they will face a similar response. This strategy of staking out global market shares is particularly important when MNEs want to communicate the conditions under which they will retaliate.A fourth reason why companies become an MNE is to reduce costs. By setting up operations close to the foreign customer, these firms can eliminate transportation expenses, avoid the overhead associated with having intermediaries handle the product, respond more accurately and rapidly to customer needs, and take advantage of local resources. This process, known as ―internalization‖ of control within the MNE, can help to reduce overall costs.A fifth reason is to overcome protective devices such as tariff and non-tariff barriers by serving a foreign market from within. The EU provides an excellent example. Firms outside the EU are subject to tariffs on goods exported to EU countries. Firms producing the goods within the EU, however, can transport them to any other country in the bloc without paying tariffs. The same is now occurring in North America, thanks to the North American Free Trade Agreement (NAFTA), which has eliminated tariffs among Canada, the United States, and Mexico.A sixth reason for becoming an MNE is to take advantage of technological expertise by manufacturing goods directly (by FDI) rather than allowing others to do it under a license. Although the benefits of a licensing agreement are obvious, in recent years some MNEs have concluded that it is unwise to give another firm access to proprietary information such as patents, trademarks, or technological expertise, and they have allowed current licensing agreements to lapse. This has allowed them to reclaim their exclusive rights and then to manufacture and directly sell the products in overseas markets.Firms become multinational enterprises for the same reasons they engage in FDI. The next chapter will provide a more detailed examination of some of the reasons introduced in this chapter.The strategic philosophy of multinational enterprisesMultinational enterprises make decisions based on what is best for the overall company, even if this means transferring jobs to other countries and cutting back the local workforce. In the lastdecade IBM, ABB, and Sony, for example, have spent considerable sums of money to train and develop local managers to handle overseas operations because the companies are finding that these managers are often much more effective than those sent from the home country. MNEs also hire large numbers of non-managerial workers in overseas countries. For example, US-based GM employs 66,000 workers in Europe and 11,000 workers in the Asia-Pacific region; and European Siemens has 83,400 workers in North America and 46,000 in the Asia-Pacific region.viii As a result there is a great deal of economic interaction in the international arena, giving business firms headquartered in one country a significant impact on the economies of other countries. This is true both when things are going well as well as when they are not. For example, with the recent slowdown of the world economy more and more MNEs are now trimming their workforces. Alcatel, the giant French telecommunications equipment maker, announced plans to cut 29 per cent of its workforce and to reduce its factories to a dozen, using outsourcing to handle all other production needs.ix Philips, the giant Dutch electronics firm, reacted to a severe slowdown in demand for mobile phones and semiconductors, and eliminated more than 7,000 jobs;x and Disney cut 4,000 positions, about 3 per cent of its worldwide workforce.xi These decisions were made to improve the situation of the company as a unit.This same worldwide approach to operations can be seen in the way MNEs team up to get things done. One example is Embraer of Brazil, the fourth largest airplane manufacturer in the world. The company teamed up with 22 of its main suppliers, many of which are Japanese, to introduce a new family of aircraft. Suppliers became risk investors and by funding Embraer‘s plan secured future contracts from the company.xii For more on Embraer, see the Real Case in Chapter 4. Another example is provided by the production of the V2500 engine by a consortium led by US Pratt & Whitney and British Rolls Royce. Other partners are Japanese Aero Engines andGermany‘s MTU Aero Engines.xiii Simply put, MNEs make whatever agreements are in their best interests, even if this means bringing in firms from three or four different countries.Table 2.2 The international expansion of four MNEsNumber of majority-owned foreign affiliatesMNE 1970 1985 2000Ford (US) 65 140 270Unilever (EU) 94 146 244Siemens (EU) 84 165 416Marubeni (Japan) 16 44 170Source: United Nations, World Investment Report 2001 (Geneva: United Nations Conference on Trade and Development, 2001).Table 2.2 reports the geographical expan sion between 1970 and 2000 of four of the world‘s largest MNEs, especially since 1985. The international scope of these MNEs is measured by the number of majority-owned foreign affiliates (subsidiaries) that they have.STRATEGIC MANAGEMENT AND MULTINATIONAL ENTERPRISES As noted earlier, one of the characteristics of MNE affiliates is that they are linked by a strategic plan. As a result, units that are geographically dispersed and/or have diverse product offerings all work in accord with a strategic vision. The formulation and implementation of strategy will be discussed in detail in Chapter 8. Here we will look at the basic nature of the strategic management process and how select MNEs use strategic planning in managing their far-flung enterprises.Strategic management of MNEs: an introductionThe strategic management process involves four major functions: strategy formulation, strategy implementation, evaluation, and the control of operations. These functions encompass a wide range of activities, beginning with an environmental analysis of external and internal conditions and an evaluation of organizational strengths and weaknesses. These activities serve as the basis for a well-formulated strategic plan; and by carefully implementing and controlling this plan, the MNE is able to compete effectively in the international arena. Figure 2.3 illustrates the five specific steps in this overall process.[Figure 2.3 near here]。