a. Must have “substantial direct investment” in foreign countries.
b. Must have “active management” of overseas operations.
2. Scope
a. “Active, coordinating management of operations” is key differentiating characteristic of an MNE (from other organizations)
b. True MNEs have systems in place to handle cross-border tasks internally.
3. Influence a. Some statistics according to the UN:
i. Over 65,000 MNEs ii. Approx $16 trillion in revenues B. MOTIVATIONS TO INTERNATIONALIZE
Some reasons why companies are motivated to expand overseas 1. Traditional Motivations – Historical motivations (pre-1980’s) include:
a. Secure key supplies – e.g. Aluminum companies seeking bauxite. b. Market-seeking behavior
i. To take advantage of an intrinsic advantage (e.g. technology, brand recognition, R&D capabilities)
ii. To seek additional sales to exploit economies of scale and scope
c. Access low-cost factors of production, especially: i. Labor ii. Capital
B. MOTIVATIONS TO INTERNATIONALIZE (continued)
NOTE: Prior to the 1980s, the product life cycle (PLC) theory could explain much of a company’s motivation to internationalize.
2. Emerging Motivations (i.e. motivations post-1980s) a. Foreign operations no longer seen as only strategic and organizational “appendages” to domestic operations
b. Factors influencing a company’s motivation to internationalize (i.e. why overseas operations became more important):
i. Increasing scale economies, R&D investments, and a shortened PLC. ii. The MNE’s global scanning and learning capabilities – alternatives regarding labor, technology, etc.
iii. Increased competitive positioning allowing cross-subsidization of markets Note: Cross-subsidization of markets – using profits of a subsidiary in one market to subsidize an unprofitable subsidiary in another. C. MEANS OF INTERNATIONALIZATION Examines the requirements and processes of going international (i.e. how)
1. Domestic Firms vs. MNEs (advantages/disadvantages) a. Advantages of domestic firms i. Know national culture, structure of industry, etc ii. Have existing relationships with suppliers, customers, regulators
b. Advantages of MNEs i. Likely has advanced technology ii. Scale economies (in R&D, production, etc) NOTE: Above listed advantages of MNEs does not mean they will enter the market through their own offshore operations. 2. Prerequisites for Becoming an MNE (3 conditions) a. Must have motivation to invest overseas 2. Prerequisites
