The Multinational Enterprise

Introduction

Understanding the role and influence of multinationals in international business is crucial to learning how companies remain the determinants of international trade. One might say that governments and bilateral agreements are the first issues that should be considered while developing business beyond borders. Yet, multinationals could be those organisations that are drivers of international business. Seen from today’s perspective, one might reasonably say that multinationals are those that influence trade. Names like Amazon, Mc Donald’s, Gillette, Alibaba, etc. are so commonly heard and seen worldwide that it looks like such businesses are at the forefront of world trade with market capitalisations of billions of dollars. In this context, it is important to approach this lecture by underpinning the influence of the multinational business in international trade.

Apparently, all multinationals are companies that have originated as small businesses locally and have reaped success through years of investment in business. Based on the core product and service that they offer, multinationals have developed subsequently over the years to become large organisations and eventually grow up into conglomerates. With greater involvement outside the home border, they have decentralised and based their operations initially in one or a few international environments. Then, their expansion looks like a tentacle strategy depending on the size and scope of the business. Today multinationals can have different appellations as well; transnationals or even supranational.

The multinational enterprise is an illustration of an organisation that is involved in international business. In almost every country in the world, a multinational carries out its operations or trades with the country. Multinationals may not be present in all the countries, yet they can have an influence in trade at international level. The history of multinationals can originate since the early days of the industrial revolution that started in Great Britain in the 1870s.

Initially, the big companies operated in the home market where they dominated smaller businesses. With the advent of the industrial revolution, there was a major change since the companies got industrialised and made a more extensive use of industrial machinery to produce their goods.

Mass production then became something possible and the large organisations that employed many people dominated further business at the local level. However, the local market posed several constraints to them. For example, all the goods could not be channelled in the home market because there was an excess production with industrialisation. Further, the supply exceeded the demand level, and it was possible to think of international business in different countries.

The impact of air and sea routes

At the start of the century, it was difficult to trade goods in an effective way. Transport was mainly maritime by nature and it took a long time for organisations to trade in different countries. In the early thirties, there was a development of air links and this developed trade faster. In the same line, multinationals started to have a foothold in various international markets. The local companies, most of them US-based, started to move to Europe where there was the possibility to trade since Europe was the major trade partner during these times. The domestic companies then grew as multinationals and they started business on the European mainland, initially, in affluent countries, then a little later, all over Europe.

Evolution of multinationals

Pre-Second World War-The Era of European multinationals

During the early decades of the twentieth century, European multinationals like Unilever, Royal Dutch/Shell, ICI, Philips and Courtaulds, were pioneers of international business. Bartlett and Ghoshal describe them as multinational federations, each subsidiary permitted a high level of operational independence from the parent company, undertaking its own product development, manufacturing and marketing. International transport and communication were slow, costly, unreliable and national markets were highly differentiated. Parent company control involved the appointment of senior managers to subsidiaries, the authorisation of capital expenditure and the flow of dividends from subsidiary to parent.

Post-Second World War-The Era of American multinationals

The emergence of the United States as the world’s dominant industrial nation at the end of World War II was followed by two decades during which companies like Ford, General Motors, IBM, Coca-Cola, Caterpillar, Gillette, and Procter and Gamble became clear international leaders in their respective industries. Although the subsidiaries of these companies typically operated with a high degree of autonomy in terms of product introduction, manufacturing, and marketing, the US parent companies occupied a dominant position within the groups. Since the US was the largest and most affluent market in the world, the home base acted as the source of new products and process technology for the company.

The 70’s and 80’s-The Japanese Challenge

During the 70’s, Japanese companies emerged as leading global players across a number of manufacturing industries from steel to ship building to electronics and automobiles. A distinguishing feature of Japanese multinationals was their pursuit of global strategies from centralised domestic companies. Companies like Honda, Toyota, Matsushita, and NEC concentrated on R&D and manufacturing in Japan, while the overseas subsidiaries were initially for sales, distribution and customer support. By building plants of unprecedented scale to service growing world demand, Japanese companies were able to exploit substantial scale and experience advantages.

The millennium and today

Multinationals still predominate over international business. The coming up of China and India as well as emerging economies in international business has prompted such countries to have their businesses in the Top 100 listed companies. Some other giants come from South Korea like Samsung or Kia while some emerging companies could be Alibaba, Ten cent or Indian Oil. There is also the development of new multinationals coming from the digital area namely Apple and online businesses like Amazon, e-bay, Aliexpress. In a similar way, some digital companies have international presence through their applications like Facebook or Twitter. In some sense, product-based multinationals seem to lose ground compared to emerging companies in the service sector both from the developed and the developing world.

Conditions for developing a subsidiary

When the multinationals developed their business abroad, they would initially look for conditions that would satisfy their requirements. Investment at international level was heavy and risks were inherent in countries with different political and social environments. The multinationals looked for subsidiaries the following conditions:

  1. There would be no political influence in their business abroad.
  2. The overseas partner or government would provide suitable inducements and attractions.
  3. The market segment would be sufficient to exploit and sell profitably the goods.
  4. There would be sufficient incentives to expand the business and repatriate the profit home.

The popular multinationals

As stated earlier, the most popular multinationals are American companies that are established in many countries in the world. The USA had the people, the technology, the marketing infrastructure and the know-how to conquer international markets. The companies established themselves initially across Europe, then moved to different markets like Japan and Latin America.

Japan rose to economic advancement after the Second World War. Companies like Honda, Toyota, Sony, among others moved to the United States where they challenged the strong and established US companies while snatching their rivals’ market share. In this way, Japanese multinationals are nowadays popular all over the world.

Below is provided a list of popular multinationals in different categories.

The end of the multinational?

The multinational corporation is a concept that is familiar to international business, but the term now looks a little outmoded. International business, in the contemporary world, is characterised by globalisation and the term ‘multinational’ does not look appropriate.

Different terminologies have been developed and differences will be accounted:

The domestic company

The original form of the multinational. It exists in the home market and has no overseas subsidiary. Demand at international level is one-off, incipient or latent.

The multinational corporation

It is the large company that has its head-quarters in one country and subsidiaries in strategic places in the world like Europe, Japan, Singapore. There is one main policy and strategy that is applied from the home market and followed abroad, like KFC, Coca-Cola.

The international company

The company operates in various environments but it can apply different philosophies and strategies in the international markets that it serves. Sometimes, even the company name can different in various markets.

The global company or the transnational

The company considers the world as one market where there is little differentiation and more homogeneity. Of course, there can be modifications and slight changes as and where expected. Most established multinationals are now following this concept. Nestlé is a transnational which sells its products worldwide while some can be marketed in particular market segments as well. Unilever is organised primarily on a geographical basis with subsidiaries in each country responsible for a particular business. In the food category for instance, there are global fast foods (hamburgers, fried chicken, soft drinks), international foods (Indian, Chinese and Italian foods sold in many national markets), and national foods (steak and kidney pies in Britain).

A global company has a foothold in multiple countries but the offerings and processes are consistent in each country. For example, a major soft drink brand can set up business in different countries, but the recipe does not change in the global model. The company uses the same ingredients and manufacturing processes, regardless of local culture. In a global model, the business does not adapt to local norms, but rather, it imposes its existing business model on the country. The only exception within the global model is the marketing approach to drive sales in individual countries. The product is consistent but messaging must adapt to work within the cultural norms.

Some of the companies in emerging countries are slowly moving up to become global multinationals by expanding in countries outside of their home market. As these companies gain technological know-how and look for ways to deploy excess capital, it is only normal for them to try to imitate their developed world companies. Hence the once-dominant developed world multinationals are seeing their leadership position weakened and have to compete fiercely to maintain or expand market share in their respective industries.

As the global economic balance is projected to shift from West to East, some of the emerging companies from Asia can be expected to reach leadership positions and become truly global multinationals. In addition, some of the major companies in Latin America and South Africa are also expanding their footprint in other countries and would rise up the ranks of global multinationals in the future.

Below is provided a list of popular multinationals in emerging economies

Case Study: Emerging market multinationals: New giants on the block

The familiar story of the rise of multinational corporations focuses on the usual suspects: longstanding powerhouses, mostly based in the United States and Western Europe, like Walmart, IBM, General Electric, Exxon, BP and Volkswagen. Japan’s massive post-WWII investment in modernisation allowed it to become a leader in the automobile and electronics industries.

In the last twenty years, that story–and the multinational map of corporate power, as it were–has undergone a fundamental shift: away from established companies in the developed world and toward ambitious upstarts in the developing world. In their book Emerging Markets Rule: Growth Strategies of the New Global Giants, Wharton management professor Mauro Guillen and co-author Esteban García-Canal shine needed light on this new twist in the story, one that has been largely underreported in the mainstream press.

The Emerging Market Multinationals Revolution

Definitions aside, the dramatic surge of EMMs certainly represents a sizable geopolitical shift. Yet just as significant as the fact of companies in developing countries asserting global dominance are the methods by which they have done so. This is a revolution not just in who but in how. EMMs have made their mark by moving boldly, swiftly, strategically and often stealthily; by nimbly negotiating the often volatile political and economic landscapes of other emerging markets; and by treating joint ventures and other initial forays into acquisition and expansion as learning experiences. This approach, the authors contend, stands in stark contrast to the more plodding, rigid, top-down methods traditionally employed by entrenched multinationals.

Guillén and García-Canal suggest a number of reasons why EMMs as a group seem to exhibit a different approach, and an entirely different institutional culture. Most of these companies, and their owners, cut their teeth in environments characterised by political and institutional instability, and a range of limitations in infrastructure, technology and capital. Early on, they learned to make more out of less and to be comfortable with risk, volatility and uncertainty. As well, many are either family-or government-owned, are free from the second-guessing of stockholders, and thus able to keep their eyes on the long-term prize, even if their strategy results in some short-term bumps in the road.

Suzlon of India listened to the market in a different way. Founded as a textile company, the company grew tired of the erratic and inefficient service provided by India’s state-owned electricity network. It began looking into developing its own wind-power generators and, with no background or expertise in the field, had to learn the technology from scratch. Recognising the huge potential in the market for alternative energy, it sold off its textile business in 2001 and is now exclusively devoted to the development of wind farms. Suzlon has risen to the top of the market in India, is number two in the United Kingdom and third in France and Germany.

Speed and Scale

Upstart EMMs have managed to leapfrog entrenched companies, not through cautious and incremental growth, but by thinking big and acting boldly. A number of them have spent years and even decades consolidating their position in their home countries. But when they made the move to go global they have done so at near lightning speed, and with a varied attack utilising vertical integration, joint ventures, rapid expansion and strategic acquisitions. By contrast, ‘even after entering foreign markets, old-line multinationals tended to escalate their commitment of resources slowly.’

Samsung Electronics of South Korea exemplifies a bold and swift commitment to scale. Founded in 1969 as a subsidiary of the larger Samsung Group, its early years were devoted to manufacturing contracts outsourced by American brands. In the mid-1970s, Samsung moved aggressively into the semiconductor business, thereafter focusing on its own brands and proprietary technologies. In each market it has entered, it has scaled rapidly. The company started making batteries for digital devices in 2000; ten years later it was the global leader. In 2002, Samsung invested in the manufacture of the flash-memory chips that drive iPhones and iPads; in less than five years, it was Apple’s top supplier. By the end of the decade, the company’s revenues had surpassed those of rivals Panasonic and Sony. A top executive describes the key to Samsung’s success as ‘aggressive investments and faster decisions’.

Perspective

The rise of emerging market multinationals

Emerging economies have gained ground in wealth and influence over the past two decades, bringing about radical changes in the global economic landscape. The rise of their multinationals, the so-called emerging market multinationals (eMNCs), are an illustration of this phenomenon.

The overseas expansion of eMNCs has indeed been remarkable: for instance, about 20% of global outward investment flows today are accounted for by a group of 20 top emerging economies, the E20; who’s share was 2% at the turn of the century. Not only have emerging market multinationals significantly increased their investment abroad; but they have also made significant inroads in the global corporate world.

For instance, today, about 30% of the firms in the Fortune Global 500 list (based on revenues) are enterprises from emerging markets; less than 10% of their value, ten years ago. True, China leads the trend: with 98 companies, it ranked in 2015 second in term of number of Fortune 500 firms – not that far from the US (128), and much more than the number 3, Japan (54). However, a wide array of emerging economies is represented: 14 countries of the above are mentioned in the E20 grouping, although sometimes with only one entry in the list. The new players come mainly from China, Korea, India, Brazil, Russia, Mexico and Indonesia.

Beyond the fact that emerging market multinationals significantly increased their presence among the largest corporations in the world, perhaps as remarkable is the fact that several have made it to the very top, becoming world leaders in their own sector. Let’s take eight key industries: banking, logistics, automobile, telecom, engineering and construction, petroleum refining, mining, crude oil production and mining. In 2004, based on the Fortune Global 500 ranking, there was no emerging market multinational among the top 5 world leaders in these industries while, in 2015, 40 % of such leaders came from emerging economies, largely dominated by China.

Points to ponder

Emerging economies have gained ground in wealth over the past two decades, bringing about radical changes in the global economic landscape. Emerging market multinationals have significantly increased their presence among the largest corporations in the world, to become world leaders in their own sector. In 2015, 40 % of such leaders came from emerging economies, largely dominated by China.

Becoming digital leaders

Emerging-market companies have grown faster than companies in developed markets in most industries over the past decade. One big reason is their embrace of digital technologies. Nowhere is the trend toward digitisation more evident than among the 100 companies that we call global challengers, many of which are leveraging digital technologies both to win in emerging markets and to compete globally with multinationals.

A growing number of global challengers are digital leaders. Almost 60% of the companies on the 2018 global challenger list are either digital natives or significant digital adopters, compared with only 17% that made significant use of digital technologies in 2012.

These companies are achieving their leadership positions by leapfrogging their developed-market counterparts. Some are innovators in digital technologies—bringing their inventions to market, building major businesses on new tech foundations, and taking share from developed-market competitors. Others innovate in their use of technology to develop new products and services in more traditional industries or to upend traditional ways of manufacturing or delivering products and services. The non-tech companies among the global challengers are using digital technologies to improve operations and overcome many of the physical, financial, and commercial hurdles to doing business in emerging markets, including those related to geography, logistics, and infrastructure.

Global challengers develop their digital capabilities in three main ways: They invest in internal innovation programs and research and development. They pursue partnerships and join digital ecosystems or establish their own. And they acquire digital capabilities through M&A and private investments in start-up companies and technologies. All are proving to be highly productive avenues to digital development.

Emerging market multinationals as strong market-driven innovators

Millions of Americans fly on planes made by Embraer. They may even know the name of the aircraft manufacturer. But if they had to guess what country Embraer is from, many would probably guess wrong.

Embraer is from Brazil. It is the largest manufacturer of regional jets in the world and among the top five aircraft manufacturers globally. “In a high-tech area as regional jets, the largest firm at present happens to be from Brazil. Who would have anticipated this a few years ago?” says Mauro Guillen, a Wharton professor of international management.

Increasingly, companies from developing countries such as Brazil, India, China and Mexico are becoming global leaders and eclipsing familiar brands in the developed world. Take Alibaba, the e-commerce giant from China. It has a market value greater than Yahoo, Netflix, eBay, Yelp, LinkedIn, Twitter and Groupon put together. Alibaba’s cloud service Aliyun is giving Amazon Web Services a run for its money. South Korea’s Samsung is the world’s largest consumer electronics firm, outselling Sony, Panasonic and Philips. Bimbo of Mexico is the largest bakery company; in 2010, Bimbo purchased Sara Lee’s North American bakery business. And on this year’s Forbes Global 2000 list, although the U.S. still claims the maximum spots, the top four are occupied by Chinese banking firms.

The phenomenon of emerging multinationals (EMs)—successful companies from the developing world—isn’t going away any time soon, according to a report from the World Economic Forum’s Global Agenda Council on Emerging Multinationals. The trend is being fuelled by the growth of emerging markets themselves: During 2000 to 2010, developing and emerging markets accounted for 60% of the incremental world GDP. And over the next decade, most of the world’s population growth will be located in emerging economies, giving rise to new consumers and larger markets.

Perspective

Beyond Commodities: How African multinationals are being transformed

Oil, gold, diamonds, palm oil, cocoa, timber: raw materials have long been linked to Africa in many business people’s minds. And in fact the continent is highly dependent on commodities: they constitute as much as 95% of some countries’ export revenues, according to the United Nations Conference on Trade and Development. But propping a country’s entire economy on commodities is risky business, like building a mountainside home on stilts. Given that reality, the African business landscape is transforming itself—both in reality and in the world’s perceptions — to provide a firmer economic foundation and grow multinational enterprises.

Leaping to Digital

The traditional image of African business is certainly changing. Not surprisingly, there’s a huge push around digital … digital everything: solutions, a variety of platforms. Africa has a ‘leapfrogging possibility’—unlike the West, it never accumulated layers of now-outdated technology and infrastructure, so it can start with the most advanced systems available.

Toward financial inclusion

Among the African entrepreneurs rising to the challenge, CWG has about 600 employees with operations in Nigeria, Ghana, Uganda and Cameroon, and an average yearly revenue of $130 million. The firm’s self-stated goal is to become the top cloud platform provider in Africa by 2020. Africa’s financial services sector, to which CWG belongs, is growing. The Initiative for Global Development and Dalberg Global Development Advisors recently published a list of the top 25 sub-Saharan multinational companies. Although the top three are commodities firms, a large number of the businesses, eleven, are in the financial services.

The Skills Gap, Africa-Style

One of the biggest business challenges is finding qualified individuals to hire. The idea of starting your own business, or being part of a start-up, is not something yet ingrained in African culture. Many talented students will aspire to become doctors, teachers, or to hold a government position, but not to ‘become Bill Gates’. The models largely are not there. Although many countries in Africa are making ‘huge strides’ in education, there is still a lot of rote learning.

CWG was recognised by the World Economic Forum in 2014 as a Global Growth Company, which the WEF describes as ‘medium-sized enterprises on the global scale that stand out due to their innovative business models, dynamic growth, corporate global citizenship and visionary leadership.’

Points to ponder

African business landscape is transforming itself both in reality and in the world’s perceptions to provide a firmer economic foundation and grow multinational enterprises. Africa has a ‘leapfrogging possibility’ where it can start with the most advanced systems available. One of the biggest business challenges is finding qualified individuals to hire.