Why do firms become multinational enterprises

2203 Words Feb 11th, 2015 9 Pages
Why do firms become multinational enterprises?
There are multiple ways to define what is meant by the term “multinational enterprise” (MNE), most of which can be reduced to a short list of criteria summarised effectively by Franklin Root (1994). He defined an MNE as a parent company that i) engages in foreign production through its affiliates located in more than one country; ii) exercises direct control over the policies of its affiliates; and iii) implements transnational business strategies in production, marketing, finance and staffing that transcend national boundaries in order maximise profit globally.
Such well-known companies as Toyota, Intel and McDonald’s are MNEs: Toyota, originating in Japan, has factories all over the world
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One potential strategy that some MNEs choose is licensing, which involves sharing the technology innovation with a foreign firm in exchange for royalty payment (typically as a fixed percentage of sales). Licensing is considerably easier to implement at an early stage of expansion into a foreign market as it requires no significant capital expenditure (although the licensor may be required to provide some technology or training), reducing the financial risk to almost zero. As an example of this strategy, Kentucky Fried Chicken operations in the UK are done through a licensing scheme instead of direct investment, while McDonald’s runs only less than 25% of its brand restaurants directly. However, this strategy does not allow the parent firm to exercise full managerial control over the licensee and there exists a danger of industrial secret transfer, which can lead to increased competition and loss of competitive advantage limiting further growth.
An important aspect of the licensing strategy is apparent when we consider the famous Uppsala model for internalisation developed by Jan Johanson and Jan-Erik Vahlne (1977). Under this model, foreign market is an unknown realm for the expanding MNE and through establishing local operations within a new country it undergoes a process of learning – gradually acquiring knowledge about the new market, customers as well as competitors. Licensing, or in some cases operating as a
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