Strategies of multinational companies
A multinational/ transnational company, according to Peter Dicken, is “… a firm which has the power to co-ordinate and control operations in more than one country, even if it does not own them”. (Peter Dicken, Global Shift) Most of these companies are essentially capitalist organisations. As such they behave on the basic principles and rules of capitalism; the quest for profit. With academics such as, acclaimed economist and Nobel Prize winner, Milton Friedman and Adam Smith philosophising in their favour, why would they act in any other way.
Although, profit, as Friedman argues, is the only responsibility that a company has, there are other driving factors for an enterprise wanting to multinationalise; growth, increase market share, or sheer dominance. Acknowledging that there are other factors, one can deem that it is the notion of competition that has spurred on these, now multinational, companies. It is these corporations that have spawned this sound-bite of “Globalization”.
While globalization is thought of by many as having the potential to make societies richer through trade and to bring knowledge and information to people around the world, there are many others who perceive globalization as contributing to the exploitation of the poor by the rich, and as a threat to traditional cultures as the process of modernization changes societies. If we argue that globalisation and multinational/transnational companies co exist interdependently, then one has to question how it is they spread.
These organisations have three main methods of entering a host nation or creating Foreign Direct Investment (FDI); 1. merger or acquisition 2. expanding 3. Greenfield operations Each of these methods, present a different level of influence exerted by the company’s origin. For example, by merging, the multinational can lose autonomy and may have to accept a new corporate governance and culture. With expansion, we see that the level of autonomy and influence remain at an adequately high level. This is because there is less decentralisation of power.
The corporate management/headquarters take on a different role than that of the regional headquarters. Instructions with relevance to investment, expansion and main line strategy, i. e. shape and the direction of the enterprise, still lie with the flagship. The regional HQ is decentralised, but to no autonomous level. Their role is to seek intelligence, look for entrepreneurial openings and manage the differences in culture. We can see, primarily, that the means of entrance into the foreign market can affect the way in which the company’s origins influence its strategy.
Furthering the concept of culture, it is argued “the notion of culture is clearly inadequate to capture these national differences as it neglects important institutional factors, leading many to prefer the term ‘national business systems'” (Tutorial Week 5, page 9). It is the distinctiveness of these ‘national business systems’ that pot the multinationals so deep within their roots. An example of this would be Ericsson. The enterprise “has over three quarters of its voting shares held by Swedish financial institutions.
This concentration of key activities in the home base means that the centre has a disproportionate influence on strategy formulation. Hence, international strategies continue to reflect significant ‘country of origin effect’. ” (Tutorial Week 5, page 9). The origin of the multinational, without doubt, does influence its strategies and presence in the host country. As to the extent of this influence, we shall examine this in further detail. To enhance our understanding of this, we will look at various theories put forward by leading academics in this field.
Yao Su Hu It is advocated by Yao-Su Hu, in his publication ‘Global or Stateless Organisations are National Firms with International Operations’, that there is no such thing as a transnational/multinational company. There are only “global firms with international operations” (Yao-Su Hu, Global or Stateless Organisations are National Firms with International Operations’). This myth of the multinational corporation is slowly fading. This is not to say, however, that he argues that the origin is of no influence.
He distinguishes between the two. His argument is based on four prominent assertions; 1. geographical spread and scope 2. ownership and control 3. the people and the legal nationality 4. taxation Looking at each, we can see why Hu adopts a paternalistic view with reference to a multinational’s strategy. All the above features are developed in the homeland. It is the flagship of the business; its epicentre. We will focus on two of the four validations, ownership and control and the people and the legal nationality.
Ownership and control is, predominantly, enforced and rested in the – “national hands” (Yao-Su Hu, Global or Stateless Organisations are National Firms with International Operations’) of the flagship/parent enterprise. A direct result of this is a deeply embedded set of values, cultures and practices which are woven through all the subsidiaries. Big global organisations, such as Ford, have no foreign higher tier management. Those that do, however, make sure that those employed have a similar style which tows the line of the national parent company.
This is an approach which allows a balance to be drawn between the multinational and its shareholders. This is because most of the shares are held by those in the host nation. One should also question how ownership and control affects ‘Binational’ companies. Based on the fact that AAB have two parent organisations, it is argued to be amongst the most international, owned equally by Asea AB in Sweden and BBC Brown Boveri in Switzerland. Nestli?? limits its non-Swiss voting rights to only three percent.
Ownership and control is enforced by the parent company. Companies such as IBM, tend to own all their subsidiaries. Thus, all profits are accrued to the home nation and local influence is severely limited. 2. Another factor that links the multinational’s strategy with the country of origin is that “companies can only be formed under national law, and they acquire the nationality, citizenship, or domicile of the country under whose law they are incorporated” (Yao-Su Hu, Global or Stateless Organisations are National Firms with International Operations’).
This suggests, therefore, that the parent and subsidiary company belong to their individual nations, respectively. International law requires legal nationality to obtain diplomatic protection of the respective State, establishing “a real and effective link between the corporation and the State” (Yao-Su Hu, Global or Stateless Organisations are National Firms with International Operations’). This strong legal link is harmonised with that of taxation.
Only locally generated earnings of foreign-based multinational are taxed while, as earnings accrue to the parent company of home-based multinationals, their entire worldwide revenue is taxed. The strong affiliation of multinational with their country of origin stems from the argument that they have a legal and fiscal nationality. * Stephen Hymer A main form of strategy is finding and obtaining a competitive advantage. There are three main levels at which advantages can be identified down the ‘value chain’.
The ‘downstream level’, considers the relationship between the firm and its customers where ability to win price wars, superiority of products, reputation and supplier service provision are examples of advantages possessed by the firm. 2. The ‘intermediate’ level focuses on the increased levels of a firm, including its skills, attributes, assets and internal and external relationships. 3. The ‘upstream’ level reflects on dynamic advantages such as being a learning organisation, innovation and the ability to take a long-term view.
Therefore, industries involving rapid technological progress will have multinationals with dynamic advantages whereas; stable business environments will focus on downstream advantages. (Yao-Su Hu, The International Transferability of the Firm’s Advantages). Further to this, enterprises that succeed at a local level, often feel they can use the same strategy at a global level. Unfortunately, this is not the case, as seen from the example below; HSBC (Hong Kong Shanghai Banking Corporation).
HSBC is very much a leading bank in Asia. Although it came up against severe losses when trying to expand west, HSBC managed to acquire Midland Bank. Only 31 percent of its assets are based in Hong Kong, yet, 45 percent of its pre-tax profits originate in Hong Kong, too. This illustrates that HSBC’s operations are still more successful in Hong Kong. It does lean weight to the level to which strategy is based from the origin. (Yao-Su Hu, The International Transferability of the Firm’s Advantages).