CHP 2

Slide 2.
Chapter 2
The Multinational enterprise (MNE)
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 2.2

• Objectives
• The nature of multinational enterprises
• Strategic management and multinational
enterprises
• A framework for global strategies: the FSA/CSA
matrix.
• It’s regional, not flat.
Slide 2.3
Objectives
• Describe the characteristics of MNEs.
• Explain the internationalization process.
• Explain why firms become MNEs.
• Discuss the strategic philosophy of these firms.
• Introduce a country/firm framework for examining
a firm’s competitiveness.
Slide 2.4

• A company headquartered in one country but with
operations in one or more other countries.
• MNEs often downplay the fact that they are
foreign-held.
Slide 2.5
The nature of MNEs
Slide 2.6
Table 2.1 The world’s largest 500 multinational enterprises, 2007

Source: Authors’ calculations and adapted from Fortune, The Global 500, July 23, 2007
Slide 2.7
The world’s largest 500 multinational enterprises, 2011

Fortune 2011
Slide 2.8
The world’s largest 50 multinational enterprises, 2011

Fortune 2011
Slide 2.9
Click to see what these MNEs are…
Slide 2.10
Characteristics of MNES
• Affiliates must be responsive to a number of
important environmental forces, including
competitors, customers, suppliers, financial
institutions, and government.
• Draw on a common pool of resources, including
assets, patents, trademarks, information, and
human resources.
• Affiliates and business partners are linked
together by a common strategic vision.
Slide 2.11
Figure 2.1 The multinational enterprise and its environment
Slide 2.12
The internationalization process

• Internationalization: The process by which a
company enters a foreign market.
• Not all international business is done by MNEs.
Indeed, setting up a wholly-owned subsidiary is
usually the last stage of doing business abroad.
• Why do businesses wait to set up wholly-owned
subsidiaries?
– Foreign markets are risky.
Slide 2.13
A typical internationalization process

• Initially, the firm might license patents, trademarks or
technology to a foreign company in exchange for a fee or
royalty.
• The firm sees a potential for extra sales by exporting and
uses a local agent or distributor to enter a foreign market.
• The firm may use exporting as a “vent” for its surplus
production and might have no long-term commitment to
the international market.
• As exports become more important, the MNE will set up
an office for its sales representative or a sales subsidiary.
• The firm might set up local packaging and/or assembly
operations.
• Finally, the firm will set up a wholly-owned subsidiary
(FDI).
Slide 2.14
Figure 2.2 Entry into foreign markets: the internationalization process
Slide 2.15
License
Export
•via Agent / Dealers
•via Own Sales Reps
Local Packaging & Assembly
FDI
• Mergers & JVs
• Acquisitions
• Greenfield (Totally New)
No n-
o f or s
h S NE
t M uc ing M
No factur
a n u
M
Figure 2.2 Entry into foreign markets: the internationalization process
Slide 2.16
End of Part 1 of 2
Slide 2.17
Recall
• What are the major IB activities?
• What is the internationalization process?
Slide 2.18
Why do firms become MNEs?

• to diversify themselves against the risks and
uncertainties of the domestic business cycle;
• to tap the growing world market for goods and
services;
• in response to foreign competition;
• to reduce costs;
• to overcome barriers to entry into foreign markets;
• to take advantage of technological expertise by
manufacturing goods directly.
Slide 2.19
Why do firms become MNEs?

• A few examples:
– “Pakistan starts onion exports to India”
– “Canada food imports”
– “Chinese Geely buys Volvo from Ford for $1.8b”
– “Tata Motors buys Jaguar, Land Rover”
Slide 2.20
The strategic philosophy of MNEs

• MNEs make decisions based on what is best for
the overall company, even if this means
transferring jobs to other countries and cutting
back the local workforce.
• Some considerations for location choice?
Slide 2.21
Table 2.2 The international expansion of four MNEs

Source: United Nations, World Investment Report 2001 (Geneva: United Nations Conference on Trade and Development, 2001)
Slide 2.22
Strategic management and MNEs

• The strategic management process involves four
major functions: strategy formulation, strategy
implementation, evaluation, and the control of
operations.
Slide 2.23
Figure 2.3 The strategic management process in action
Slide 2.24
Basic mission
• The following questions must be answered to
determine the firm’s basic mission:
– What is the firm’s business?
– What is the reason for its existence?
For example,
• Royal Dutch/Shell; BP Amoco and Texaco are in the
energy business, not (only) the oil business.
• AT&T, Sprint and MCI are in the communications
business, not (only) the cable-telephone business.
Slide 2.25
Analysis of the external and

internal environment
• The goal of external environmental analysis is to
identify opportunities and threats that will need to
be addressed.
• The purpose of an internal environmental analysis
is to evaluate the company’s financial and
personnel strengths and weaknesses.
Slide 2.26
Formulation of objectives
and overall plan
• Internal and external analyses will help identify
long-term (2–5 years) and short-term (< 2 years)
goals.
Slide 2.27
The implementation process

• Once goals have been established, the plan is
then broken into major parts and each affiliate
and department is assigned goals and
responsibilities.
Slide 2.28
Evaluation and control of operations

• Progress is periodically evaluated and changes
are made in the plan to accommodate changing
circumstances and new information.
Slide 2.29
Framework for global strategies:

the FSA/CSA matrix
Slide 2.30
Building blocks in
our international business
• There are two basic building blocks in an
international business course.
– Firm-specific advantages (FSAs): a unique
capability proprietary to the organization
 It may be built upon product- or process technology,
marketing- or distributional skills.
– Country-specific advantages (CSAs): country
factors
 Natural resource endowments (minerals, energy
and forests), the labour force and associated
cultural factors, etc.
Slide 2.31
Developed
Markets
Developing
Markets
Firm-specific Advantages (FSAs) of the Largest MNEs
Slide 2.32
Figure 2.4 The basic components of international business
Slide 2.33
Figure 2.5 The FSA-CSA matrix
Slide 2.34
The competitive advantage matrix

• Quadrant 1: resource-based and/or mature,
globally-oriented firms producing a commodity-
type product  cost leadership (Improving FSA
can make them move to quadrant 3.)
• Quadrant 2: inefficient, floundering firms  no
alternative but to exit or to restructure
• Quadrant 3: follow any of the generic strategies
 both cost leadership & differentiation
• Quadrant 4: differentiated firms with strong FSAs
in marketing and customization 
differentiation (the CSA is not relevant)
Slide 2.35
Dunning’s “eclectic” theory of MNEs:

OLI framework
Slide 2.36
Dunning’s “eclectic” theory of MNEs:

OLI framework
• Ownership factors (O): FSAs
• Location factors (L): CSAs
• Internalization factors (I): FSAs
• O and I, in practice, are integrated features of

FSA management within the MNE that cannot be
decoupled in strategic decision making.
Slide 2.37
Victor Chen’s Hypothesis

(to be presented at Harvard, Oct, 2011)
CSA FSA/O-Adv FDI
Relative L-Adv
Adapted from Chen (2011), “Home sub-national institutional effects on OFDI: Exploring direct and indirect effects”,
paper accepted for presentation at 5 th CGG Conference, Harvard University, Oct 3-4, 2011.
Slide 2.38
It’s regional, not flat

• The world is flat by Thomas
Friedman, the New York Times
journalist.
–Today, a large proportion of
international business
takes place through offshoring
leading to globalization.
• The world is not flat!

–There remain strong barriers
as a business attempts to
cross the boundaries of triad
regions.
–The liability of inter-regional
foreignness.

CHP 2

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Slide 2.

The Multinational enterprise (MNE)

The Multinational enterprise (MNE)

The Multinational enterprise (MNE)

The nature of MNEs

Table 2.1 The world’s largest 500 multinational enterprises, 2007

The world’s largest 500 multinational enterprises, 2011

The world’s largest 50 multinational enterprises, 2011

Click to see what these MNEs are…

Figure 2.1 The multinational enterprise and its environment

The internationalization process

A typical internationalization process

Figure 2.2 Entry into foreign markets: the internationalization process

Local Packaging & Assembly

Figure 2.2 Entry into foreign markets: the internationalization process

Why do firms become MNEs?

Why do firms become MNEs?

The strategic philosophy of MNEs

• Some considerations for location choice?

Table 2.2 The international expansion of four MNEs

Strategic management and MNEs

Figure 2.3 The strategic management process in action

Analysis of the external and

The implementation process

Evaluation and control of operations

Framework for global strategies:

Firm-specific Advantages (FSAs) of the Largest MNEs

Figure 2.4 The basic components of international business

Figure 2.5 The FSA-CSA matrix

The competitive advantage matrix

Dunning’s “eclectic” theory of MNEs:

Dunning’s “eclectic” theory of MNEs:

• O and I, in practice, are integrated features of

Victor Chen’s Hypothesis

CSA FSA/O-Adv FDI

It’s regional, not flat

• The world is not flat!

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