There are numerous multinational enterprises (MNEs), which dominate the global market and operate in different regions, but proliferation of MNEs has existed for more than 200 years now. Initially, multinational enterprises represented a segment of direct foreign investments in various states as they did not form joint investments with local firms. However, with the introduction of globalization coupled market liberalization, MNEs have had an opportunity to expand their market niche and enhance efficiency and productivity; a move that has propelled them to become key players in the business arena. Although MNEs dominant global markets, they have experienced several global financial crisis including the 2007/2008 that reduced direct foreign investments margins by $0.5 trillion (Soleymani, 2010, p.115).
Despite this drawback, multinational enterprises have championed for economic growth globally. They have shaped the global economy through job creation, the enactment of favorable trade policies and regulations and enhanced integration of markets through globalization. Although MNEs are highly appreciated, they have been criticized in equal measures by developing nations for implementing policies and decisions, which lead to unhealthy competition. Most MNEs are more competitive than local firms because they have strong brand names, use advance technology in their operations and enjoy economies of scale thus creating unhealthy competition in the local market (Kiely, 2005, p.900). Amidst these criticisms, MNEs continue to invest abroad and this raises the question- what motives MNEs to invest in foreign nations. The paper explores various strategic motives, which influence MNEs to invest in foreign nations.
Strategic motives for Multinational Enterprises to invest abroad
John Dunning (1977) asserts that MNEs are motivated by four main motives to invest in foreign nations. These motives are: marketing seeking, resource seeking, and efficiency seeking and strategic asset seeking (Moffet, 2005, p. 530).
Investors understand that foreign nations may have better markets than their domestic nations and they take advantage of this situation to explore such markets. In most cases, managers of MNEs may establish that their products and services can compete favorably in foreign markets and increase their revenue margin. For instance, in 2001- the Huwei Technologies decided to expand its market space by distributing its products in Asian and Africa markets. Additionally, investors may be motivated to seek market overseas when there is over production and saturation of certain goods and services in their home country (Buckley & Ghauri, 2004, p. 90). In such a scenario, it is important to invest abroad to avoid unhealthy competition and low returns.
Multinational enterprises require inputs inform of raw materials to produce, process and manufacture their products. Most of the inputs are natural resources, but they may not be available in one’s country; a move that motivates the investors to seek particular resources (labor, capital and land) in a foreign nation (Sayek, 2007.p. 121). Additionally, MNEs invest in foreign countries because the resources are easily available and affordable; as aspect that reduces the operation cost of the company and increases revenue margin. For instance, Samsung located its production facility in Mexico, instead of America because of cheap labor in Mexico. Therefore, availability and cost of resources motivate owners of MNEs to invest in foreign nations.
Multinational enterprises may decide to invest in foreign nations to take advantage of economic changes in the region. For instance, the introduction of favorable trade policies and regulations in a region may compel MNEs to restructure their investment plan. This move renders their investments more competitive in the global markets. Additionally, owners of MNEs may invest in foreign nations to enjoy economies of scale caused by variance in consumer taste, preference and supply potential. An example of efficiency seeking multinational enterprise is SINOPEC Limited-a state-owned Chinese Multinational oil and gas Company that renders oil and gas services in different countries.
Strategic asset seeking
Enterprises need to establish strategic assets to enable them compete effectively in trade affairs and enhance their competitive advantage in global markets. As a result, most MNEs invest in foreign nations to establish strategic assets in terms of distribution networks, supply chain and technology. In order to realize this goal, MNEs are required to form alliance with other foreign and local companies- which have specialized in given area of production (Cohen, 2001, p. 221). For instance, in 2006-SAIC-a leading Chinese Car manufacturer formed alliance with Korean SsangYong Company to enhance its distribution and marketing strategies in the European market.
Apart from these four main motives, there are other motives, which influence MNEs to invest in foreign countries. They include:
Labor is an important factor of production. However, the labor market is imperfect in nature and renders labor services to be underpriced or overpriced (Cheni & Chen, 2004, p. 329). Most nations have imposed policies, which restrict movements of workers across borders; a move that renders labor services to be underpriced in such states. In such situations, MNEs may decide to invest in foreign nations to take advantage of cheap labor. IBM, Microsoft and Dell Companies are examples of MNEs, which are motivated by cheap labor in most developing countries.
Governments regulate international trade by imposing quotas, tariffs, trade barriers and enact trade regulations, which strict free movement of certain goods and services across nations. In so doing, governments protect local firms, increase revenue collection and prevent unhealthy competition. In certain instance, governments have discretion to ban the importation and exportation of particular goods and services. For instance, following the introduction of new trade regulations in Europe 2005, Honda Company was unable to compete effectively in the market. In such an event, most MNEs tend to relocate their facilities to foreign nations to deal with such trade barriers.
Most MNEs may invest in foreign nations because they own intangible assets such as technology, managerial skills, strong brand names, trade secrets and propriety rights, which need to be protected and cannot be given to other firms. In such a scenario, MNEs with intangible assets find it profitable to form alliance with foreign companies where they derive their returns through internalizing transaction deals (Floyd & Summan, 2008, p. 662). The Coca Cola Company is one of MNEs, which is motivated to invest in foreign nations as it owns intangible assets.
Three Companies and their motives
The Coca Cola is a renowned American based multinational enterprise that deals with manufacturing, retailing, distribution and marketing of coke brands and other soft beverages. The company has more than 2,000 outlets in 200 countries, including India. The company also has established bottling firms in many countries, but it has taken this initiative to protect its intangible assets. In 1990, the company was motivated by its intangible assets to establish bottling firm in India, but it abandoned the project because it was pressured by the Indian government to disclose the Coke formula. Instead of the company establishing its own bottling firm, it was motivated by the motive of strategic asset seeking to form alliance with Indian based companies, which deal in manufacturing, distribution and marketing of bottles; a move that enabled the company increase its profit margin. Using various strategic motives, the company has transformed a leading company in the beverage industry globally. As a result, the company recorded an increase of 8% in sales volume and collected 48.2 billion as revenue in 2013 (Elmore, 2013, p.720).
Samsung is a Korean multinational enterprise that manufactures and distributes Samsung electronics and other accessories. The company requires extensive human labor and it has been motivated by imperfection in the labor market to establish its facilities in foreign nation. In the recent past, the company has established its facilities in countries, which offer cheap labor such as Mexico, China, Japan, Indonesia, Malaysia and India. As a result of this strategic motive, the company has recorded $8.3 trillion as profit in 2013 (BBC News, 2013, p.1). This translates to about 26% increase in revenue collection compared to the previous year (2012). Additionally, in 2012 the company was motivated by the motive of strategic asset seeking to acquire Smart Things company- a software developing company, and expand its market niche in the global market.
Honda Motor Company is a multinational enterprise that deals in manufacturing of different car models. In 2005, the company decided to invest in America because U.S had fair trade regulations. However, the company failed to expand its market niche, when the European Union introduced new trade regulations. This move reduced the company’s revenue by 27.8 per cent (Eun & Resnick, 2007, p.89). In this case, it is evident that strategic motives can be effective or ineffective in enhancing MNEs performance and productivity in the global economy.
Multination enterprises have existed for many years and dominant in global markets. MNEs are motivated by varied motives such as market seeking, efficiency seeking, intangible asset seeking, resource seeking, and product life cycle, imperfection in labor market and trade barriers. The Coca Cola Company was motivated by intangible assets motive to invest in most foreign nations. Samsung Company was motivated by imperfection in labor market to expand its operations in developing nations with cheap labor. Honda Motor Company was motivated by favorable trade regulations to invest in America, but it failed as European Union introduced new trade barrier.
BBC News, 2013, Samsung Electronics profit jumps 26%. BBC News. Retrieved October 29, 2014, from http://www.bbc.com/news/business-24665480
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