Chapter 7:

Multinational Formation
Keith Head
Sauder School of
Business
 The “take-away” for this
chapter
• Chapter 7 asks “Where should we do the
things we do?”
– At home: the country where top mgmt is
based.
– Abroad: offshore, overseas, in a foreign
country
• The answer: “It all depends on the 4
elements of MN strategy: trade costs,
factor advantages, PLEoS, market
sizes.”
Nestle
IBM worldwide
LG Electronics (part of LG Group,
formerly Goldstar Electronics)
 Levels of Multinational
Strategy
• Who is the we in “Where should we do it”?
– An individual business unit business strategy
– A collection of business units under the same
ownership corporate strategy
– A collection of business units linked through a
mix of equity ties and long term contractual
arrangements  network strategy
 Multinational (single) “Business” Strategy

Home Country Foreign Country

Home Centralization
(Exporting)
H-form

Replication
R-form

Foreign Centralization
(Importing)
F-form
 Examples of Centralization
• Home Centralization:
– Boeing commercial aircraft assembly in U.S.
(mainly Seattle)
– Airbus commercial aircraft assembly in EU
(mainly Toulouse)
• Foreign Centralization:
– Mattel’s Barbie dolls (2 factories in
Dongguan, China +1 in Malaysia +1 in Indon.)
– Matsushita’s TVs (Malaysia)
 Boeing’s Everett Factory:
the largest building in the world
(472 million cubic feet of space )
 Boeing’s Everett Factory:
sole location of 747 assembly
Boeing’s 747
 Nestle, the Replicator
254,000 Employees in 508 Factories in 85 Countries
(2002 Management Report)

Area Sales Factories Employees

Americas 40% 32% 41%

Europe 40% 41% 34%

(Switz.) (1.6%) (1.8%) (2.6%)
Asia, Africa 20% 27% 25%
& Oceania
Critical Foreign Market Size to Justify
Overseas “Replication”
Critical Distance to Justify Overseas
“Replication”
 At Home, Abroad, or Both?
The Answer Depends (in part) on
Where Demand Is
 Home Centralization benefits
from
• Strong PLEoS
• Low trade costs to export to foreign
country
• Large home market
• Home country has factor advantages
Foreign Centralization benefits
from
• Strong PLEoS
• Low trade costs to import from foreign
country
• Large foreign market
• Foreign country has factor advantages
 Replication Form benefits
from
• Weak PLEoS
• Both markets are large
• High trade costs impede exports &
imports
• Unimportant factor advantages: costs of
production similar across countries.
 Multi-product Multinationals
• Corporate multinational strategy considers
best form for firms operating in more than
one business (product).
• Relationships between products:
– Unrelated
– Vertical (intermediate inputs vs final outputs)
– Horizontal (complements vs substitutes)
– Joint products
 Multinational Forms: Vertically
Related Products
• Upstream (U) creates inputs
• Downstream (D) uses U inputs to create outputs
• Examples:
– Teaching: U is PPT preparation, D is
presentation to students
– Movies: U is writing & casting, D is filming &
editing (or U is movie production and D is
movie exhibition)
– Steel: U is blast furnace, D is steel furnace &
rolling mill
Bao Steel’s integrated works
 ExxonMobil
• Upstream: exploration in 37 countries and
“production” in 26 countries
• Downstream: refining and “marketing”
– Owns 45 refineries, located in 25 countries
– Operates 37,000 retail sites in 100+ countries
• “presence in about 200 countries”
ExxonMobil’s “Upstream” Sites
ExxonMobil’s “Downstream” Sites
Multinational Forms for 2 vertically
related products
 Vertical Specialization good if
• Strong PLEoS
• Low trade costs to export U to foreign
country
• Low trade costs to import D from
foreign country
• Home country has factor adv. for U
• Foreign country has factor adv. for D
 Branching Form
• Examples:
– Coca Cola’s concentrate (U) and bottling (D)
– Subaru’s engines (U) and car assembly (D)
• Benefits from
– Low trade costs on U, high on D
– Low PLEoS on D, high on U
– Home factor adv. in U, weak factor advs. in D
 Multisourcing form
• Defn: procuring same input from multiple
source countries
• Examples:
– Refinery in one country, sourcing crude oil
from multiple drilling sites (in different
countries)
– Nike’s “network” strategy in shoe mnfg.
• Benefits from
– Low trade costs (for U & D)
– Diseconomies of scale for U
– Uncertain (unpredictable) factor adv. for U.
Forms for 2 horizontally related
products, served by upstream
 Key trends in world economy
• Falling trade costs
– More efficient transportation (containers,
EDI, use of air transport)
– Lower tariffs, WTO oversight of disguised
protection
– Technology-powered improvements in long
distance communication
• Rising economies of scale?
 Implications for Multinationals
• Less Replication
• More Vertical Specialization
• Firms face very different industry
conditions
– Contrast Nestle, Boeing, Mattel
– Will continue to pursue divergent strategies