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Globalization and MNCs

Rise of MNCs
World Economy becoming more integrated and interdependent National economies less isolated due to:
Lower cross-border trade and investment barriers Smaller geographic distance Fewer national g government regulations g Less idiosyncratic business systems

Historically distinct and separate markets are merging into a huge global marketplace Tastes and preferences of consumers converging Global Gl b l products, d companies i and d citizens ii

What is an MNC?
An MNC is a corporation that has operations in more than one country by way of FDI. The ILO has defined an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries and these subsidiaries are tightly or loosely controlled by the headquarter. The Th first fi modern d MNC is i generally ll thought h h to be b the h East E India Company. A company that has only exporting relationships with other countries is not a true MNC.

Global Operations: A Typical MNC

Headquarter Manufacturing



Sourcing & producing goods/services from locations around the world to take advantage of national differences in cost & quality factors. Ford has manufacturing operations in all the continents - in Europe alone there are around thirtyfive sites in nine separate countries. These include assembly plants, stamping plants, engine plants, and casting, ti f i and forging d aluminium l i i plants. l t Boeing 777, produced using global web of best-in-class suppliers 132000 components, 545 worldwide suppliers 8 Japanese cos, fuselage, doors, wings Landing gear from Singapore 3 Italian wing flaps

Globalization of Production
Individual MNCs disperse different parts of their operations to narrow set of locations around the world because of:
National advantages in factors of production key to the where to produce? decision Global web of suppliers

Feasibility: The Shrinking Globe

1500 -1840 1850 - 1930 1950s 1960s

Best average speed of horse-drawn coaches and sailing ships, 10 mph.

Propeller Jet Steam locomotives aircraft passenger average 65 mph mph. aircraft 300 - 400 aircraft, Steamships average mph. 500 - 700 36 mph. mph.

Advantages of MNCs
Economic Growth and development Employment generation Skills, production techniques and improvements in the quality of human capital Availability of quality goods and services Tax Revenues Improvements in Infrastructure Better management practices

Disadvantages of MNCs
Employment might not be as extensive as hoped - many jobs might go to skilled workers from other countries rather than to domestic workers. Some MNCs may be 'footloose'; they might locate in a country to gain the tax or grant advantages but then move away when these run out. As a result there might not be a long term benefit Investment into capital intensive production facilities might not bring as many jobs to an area as hoped. The Th size i and d power of f multinationals lti ti l can be b used d to t exploit l it weak k or corrupt governments to get better deals Pollution and environmental damage. Some companies might be producing goods that are not beneficial e.g. tobacco products and alcohol Profits might g g go back to the headquarters q of the MNC rather than the host country - the benefits, therefore, might not be as great.



Centralized Hub

Decentralized Federation



THE ETHNOCENTRIC ORGANIZATION Assumes uniformity in markets and hence parent country perspective dominates. Experience curve allows learning through repetition and thus facilitates economies of scale through h h standardization d di i of f product. d It entails effectively transferring knowledge of one market k t to t another. th Characterized by either exporting relationship or centralized headquarter-subsidiary headquarter subsidiary relationship. relationship Tight controls exercised by headquarter. Key decisions made centrally. centrally

THE POLYCENTRIC ORGANIZATION Assumes that marketing or production considerations favour geographic diversification and unique propositions. Individual differences and nuances mandate a unique i strategy for f each h market. k It is effective when MNE cannot transfer k knowledge l d of f markets. k t Consists of a set of freestanding divisions with loose simple headquarter controls merely for loose, coordinating strategic intent. Linked to each other and the parent on the basis of a shared portfolio and corporate identity.

THE GEOCENTRIC ORGANIZATION Assumes think global act local is the best strategy. Balance between multiproduct capabilities and scale economies. Worldwide integration of businesses through extensive networking, resource transfers and i f information ti sharing. h i Complex process of coordination in an environment of shared decision making. making Typically a matrix organization, characterized by large flows and interchange of people and resources among units.

Ethnocentric Polycentric Geocentric Host country dominance Think global act local Philosophy Home country dominance Strategic Experience Curve results in Scale economies are insufficient Balancing firms imperative declining costs, scale to offset freight and other costs of multiproduct capabilities economies & standardization. standardization Marketing Global product, promotion HR Staffed St ff d nationals exporting exporting. and scale economies. economies


pricing and Unique product , pricing and Mix and match/hybrid promotion with ith h t host country t Staffed St ff d i t internationally ti ll person).

with ith home h country t Staffed St ff d

(expatriates). nationals (locals). Compensation (best

Compensation to include cost according to host country norms. Compensation according of difficulty, dislocation to industry norms.

benefits etc. Finance Finance controlled by parent Financial and profits remitted to home are financial autonomy. flows Mainly Transfer by netting, of pooling funds, are


the bottom-line in evaluating parent (capital out, dividends in). common practices. foreign investment feasibility. Production Products designed for home Production technology optimises Network of production market and manufactured in small production runs, hence facilities, factories at low costs production is localised. distributed

resources, outsourcing.

Dimensions Leadership styles

Ethnocentric Dominance Managed of by home home

Polycentric culture Dominance culture. of

Geocentric host Global culture culture. with

country culture. Managed by host Managed

leadership styles. Key strategic country leadership styles. international leadership decisions made centrally. Company maximum enjoys perspective. freedom in

making decisions. Organization Centralised, Structure involvement at headquarter Decentralised, all levels, simple controls loose, Matrix or SBU type by structure.

typically organized on export or parent. parent Each subsidiary is functional basis. a distinct entity.

Advantages THE ETHNOCENTRIC ORGANIZATION THE POLYCENTRIC ORGANIZATION Economies of Scale Standardisation Possible Low cost involvement. Feasible for start-ups organization Suited for simple relationships Uniformity in divisions or small exporting

Disadvantages Local differences ignored. Elephants p cant dance syndrome y May result in local perception of an alien companys presence (Xenophobia). Management self assuredness that is overly insular. Overlooking new markets. markets

Takes market differences consideration. In keeping with local tastes preferences Less legal hassles in meeting country norms. Better match between people product.

into and host and

High cost involvement strategy. Uncontrolled diversification. Loosening of parental control and corporate identity. Duplication of functions. Infighting, cross-purpose. Lack of synergy


Favours the concept of borderless world Promotes international perspective Favours creation of networks Most favoured structure in the present context. Facilitates availability of best resources & talent. Combines benefits of both ethnocentric and polycentric cultures.

Complexity in coordination and communication communication. Large, unwieldy process of control Difficult to balance between multiproduct capabilities and scale economies. International view may blur corporate identity. Emergence of amorphous organization culture that may be difficult to integrate. Matrix structure may be difficult to manage