This article provides an introduction to the topic of multinational management. Multinational management employs a set of principles, theories, and models to form a systematic framework for managing organizations in a global context. This introduction will serve to demystify the term "multinational management" and to show that, while there are similarities between multinational management and its domestic counterpart, significant differences and challenges exist. As a foundational step, a working definition of two key concepts will be provided: multinational management and the multinational corporation. Likewise, we will identify the key drivers of multinational management activity and examine the location determinants of foreign direct investment (FDI) choices. Specifically, we will highlight the two principal means of FDI: mergers and acquisitions (M&A) and green-field investment. In conclusion, a close examination of the multinational strategic management process will be provided, with particular emphasis placed on environmental scanning and strategy formulation.
Keywords Foreign Direct Investment (FDI); Green-field Investment; Mergers & Acquisitions (M&A); Multinational Corporation; Multinational Enterprise; Multinational Management; Transnational Corporation; Triad
Management: Multinational Management
Globalization of the world economy has been spurred by regional trade agreements, speedier modes of intercontinental travel, and the ubiquitous nature of global telecommunications networks. While these developments represent unprecedented opportunities for growth into new and untapped markets, a concomitant downside is the growing threat from foreign competition. Therefore, a global mindset is imperative in order to achieve a sustainable competitive advantage. Organizations that fail to do so risk being overrun by existing and emergent competitive threats. To assist in this regard, it is important to know the global context in which multinational management operates and its relative influence in the global economy.
In a general sense, multinational management may be defined as integrated global management systems by multinational companies (MNCs) designed to achieve corporate objectives around the globe. Specifically, multinational management is the systematic planning, leading, organizing, and controlling of organizational resources (human, financial, technical, and informational) designed to take advantage of global opportunities in order to achieve organizational objectives. In essence, what sets multinational management apart from its domestic counterpart is the control of value-adding assets (in foreign affiliates) in countries around the globe.
Likewise, the inherent complexity of multinational management lies in the varying socio-cultural factors encountered when operating in foreign countries. For this reason, the MNC must maintain an ongoing knowledge base of the numerous environmental variables likely to impact the global firm, such as technology, laws, economic policies, cultural norms and attitudes, and societal expectations. Thus, it is incumbent that MNCs have a firm grasp of the external environment of the host country in which they intend to operate. For this reason, the process of multinational management is infinitely more complicated than operating solely in one's home country.
Multinational Management Context
Any discussion of multinational management must begin with a definition of a multinational corporation (MNC). Note that the labels multinational corporation (MNC), multinational enterprise (MNE),and transnational corporation (TNC) are often used interchangeably, depending on the context or the user of the term. For example, the United Nations' Conference on Trade and Development prefers TNC (UNCTAD, 2013), while the Organization for Economic Co-operation and Development, favors use of MNE (OECD, 2000). While there are subtle nuances of difference between the definitions of these terms, each one requires the following: 1) operational presence in at least two countries and 2) substantial managerial control over their respective foreign affiliate(s). For our purposes, we will use the acronym MNC and define it as a parent company that partially or wholly owns foreign affiliates over which they exercise substantial managerial control (Phatak, 1992).
In 2010, MNCs numbered around 103,789 parent companies with 892,114 foreign affiliates (UNCTAD, 2011). In the year 2012, MNC foreign affiliates generated approximately $6.6 trillion in value, employed roughly 72 million workers, and exported goods and services worth more than $7 trillion (UNCTAD, 2013). Furthermore, the 2012 figures show that ninety of the world's top one hundred non-financial MNCs, ranked by foreign assets, were based in the Triad (UNCTAD, 2013). The Triad consists of the European Union, Asia (primarily Japan), and North America (Ohmae, 1987).
The most direct means of transforming a domestic company into an MNC is through foreign direct investment, or FDI. It is important to understand that there are various means a firm may utilize to gain entry into global markets, such as joint ventures, licensing, franchising, management contracts, and turnkey operations, among others. However, by definition, it is through FDI that a domestic company directly transitions into a multinational corporation.
Let us examine FDI more closely. FDI occurs when a company acquires at least 10% ownership and substantial managerial control of a foreign firm. The acquiring firm is known as the parent company, and the acquired firm is the foreign affiliate. When a parent firm lacks the requisite control, the investment is known as foreign portfolio investment, or FPI, which is the act of buying stock and/or bonds in foreign firms without substantial managerial control (OECD, 1999).
FDI can be done via one of two methods: purchasing a foreign company's assets by cross-border mergers and acquisitions (M&A) or building new production facilities, which is known as a green-field FDI. In later sections, we will examine the motives for FDI location choices, various strategies used when making FDI investments, and the key influential factors MNCs face when choosing between green-field FDI and cross-border M&A FDI.
Given the understanding that domestic firms become MNCs by way of FDI, a useful context can be gleaned in knowing the flow of FDI activity. Global inflows of FDI grew substantially between 2003 and 2007, but they began to decrease around the same time as the global financial crisis of 2008. FDI flows increased again between 2009 and 2011 before dropping once more, from $1.652 trillion in 2011 to $1.351 trillion in 2012. Also in 2012, for the first time ever, FDI flow to developing countries was greater than the flow to developed countries. The value of cross-border M&As also decreased between 2011 and 2012, from $555 billion to $308 billion, and the value of green-field FDI projects worldwide decreased from $914 billion to $612 billion (UNCTAD, 2013).
An example of FDI via acquisition is US-based Ford Motor Company's purchase of UK-based sport utility vehicle maker Land Rover. On the other hand, a green-field example is Korean-based Hyundai Motor's decision to build an engine-manufacturing plant in Montgomery, Alabama (CNBC, 2007).
FDI Location Determinants
MNCs engage in FDI investment for various reasons, including low-cost labor, lower transportation costs, favorable tax treatment, favorable business environments, and dwindling home market opportunities. Based on the results of UNCTAD's global survey of MNCs, published in 2006, there are four main underlying motives for FDI location decisions (UNCTAD, 2006, pp. 158-163):
Market-Seeking: to gain access to new regional and global markets. Market-seeking FDI is by far the most common motive, especially for developing-country MNCs in the process of internationalizing operations. A large percentage of survey responses (51%) chose market-seeking as their primary motive for FDI location decisions. Corresponding percentages for the other motivational factors are listed below.
Efficiency-Seeking: to achieve lower costs for resources (e.g., labor, transportation, minerals, etc.). Twenty-two percent (22%) of survey responses indicate efficiency-seeking as their primary motive.
Asset-Seeking: to obtain technological, managerial, and physical infrastructure, a motive chosen by 14% of respondents.
Resource-Seeking: to acquire land, lower lease rates, raw materials, low-cost unskilled labor, skilled labor and management expertise, and so on. Of all of the motives, resource-seeking is the least favored, with only 13% of responses choosing it as a motive.
FDI Preferences: Green-Field FDI or M
When choosing between green-field investment and cross-border...
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