It is the aim of any company to expand its commercial activities across its national borders despite the many risks associated with the same. The main risk may be changes in political systems, which mainly occur when the party in power loses the elections. For example, in 1977 in India when the opposition party won the elections, there were some changes in policies, and this action negatively affected the Coca-Cola company operations in the country. Other risks include the loss of assets due to fighting or nationalizations and financial factors that may affect wages, commodity prices, exchange rates and interest rates.
There may also be risks associated with resources such as inadequate technology and lack of skilled labor. All these risks do not qualify to prevent firms from entering into international markets. Multinational companies have to adjust their marketing strategies such as how they sell and distribute, for them to effectively cope with new market demands and associated challenges. Most firms offset these risks by obtaining insurance from a corporation like `the U.S government’s Overseas Private Investment Corporation (OPIC).
The main Strategic Motives of Companies that choose to Invest Abroad
- Looking for Higher Profits
Maximizing profits is the most strategic motive for multinational companies’ overseas investment. First, new opportunities to generate profits may not be ready available in the domestic market due to market saturation. Second, there may be no competition in foreign markets or competition in these markets may be less intense as compared to domestic markets. Multinational companies can utilize these competitive advantages to increase their profit margins.
- Searching for New Markets
Firms may choose to invest abroad to search for new buyers for their commodities. Their products may be unique or so new to other nations, and these firms may desire to gain from this competitive advantage. It is a common phenomenon for customers to have a desire to buy or try new products. In addition, producers may invest goods abroad particularly high technology goods hoping to get higher returns than addition investments at home especially when they experience saturated sales in their home markets (Sutherland, 1998). These companies may also seek markets abroad to follow customers or suppliers that have built foreign production facilities there, or to minimize the costs associated with serving a market from a distance. Opening new markets abroad is also a way of avoiding some trade barriers and restrictions, which in turn reduces costs.
- Seeking Resources
Multinational companies have higher chances of accessing financial resources such as joint ventures. This action can help them learn business practices, technology, and culture of other people and create contacts with distributors, creditors, and potential customers. In addition, a company from a developed country can much benefit from the availability of unexplored raw materials and other natural resources in developing countries such as minerals, aquatic resources, oil, and forestry. Moreover, a multinational company can take full advantage of rich labor resources available at low-costs in developing nations. This action can greatly reduce the costs of production and increase profits.
- Efficiency Seeking
Multinational companies can take advantage of differences in the costs and availability of traditional factor endowments in various countries. They may also be interested in taking the advantage of the economies of scale through large-scale production, higher sales volumes and lower-price offerings (Eckel, 2003).
- Strategic Asset Seeking
A firm may choose to invest abroad seeking to build strategic assets such as new technology and distribution network. This action is mainly common in the developed countries where there are abundant capital-and technology-intensive industries. It usually involves the establishment of partnerships between new companies in the region with other existing foreign firms specializing in certain aspects of production. All these firms may seek to apply management experience and advanced technology in their production, which may lead to greater competitive advantage in the international market, and improve production quality and efficiency.
Examples of Multinational Enterprises and their Motives for Investing Abroad
- Coca-Cola Company
The Coca-Cola Company has been operating for about 128 since 1886. The company has become one of the world market leaders in the beverage industry, and it offers over 400 different beverages brands in more than 200 countries in the world. These beverages include soft drinks, energy drinks, water, coffee, tea, sports drinks, and juice drinks. Its activities are organized into various geographic Strategic Business Units, which include Latin America, Asia, Europe, North America, and Eurasia and Middle East.
Although seeking for markets, resources, and more profits are some of the reasons that made Coca-Cola Company choose to invest abroad, the main reason is that it wanted to protect its formula for its production. It wanted to maintain the secret of its formulae by investing in bottling plants in all corners of the world rather than licensing in a local firm. Licensing in local firms may make it so easy for other local firms to leak the formula and come up with similar products. The formula comes in the form of intangible assets such as brand names, and managerial, marketing, and technological knowhow.
Honda has many companies all over the world and is among the largest and best automobile manufacturers in the world. There are many reasons that Honda Company chose to invest abroad. Taking china as an example, China is a huge market for many multinational companies, and Honda is one the most successful companies in the Chinese markets (Honda-International, 2009). Honda is much attracted to china due to its cheap labor and low –cost manufacturing. For years, the country is known for its cost leadership and manufacturing efficiencies.
Another reason that made Honda invest abroad is to circumvent trade barriers. A good example is Honda’s investment in Ohio. The fact that vehicles produced in Ohio were not subject to U.S trade restrictions helped Honda circumvent the imposed tariffs and quotas by establishing its activities in the United States.
McDonald’s are the largest fast-food restaurant chain in the world. They serve about 70 million customers daily in more than 120 countries in the world. Although they are headquartered in the US, they have set up other regional headquarters in countries such as Singapore, Great Britain, India, and Canada. The company sells soft drinks, hamburgers, French fries, desserts, cheeseburgers, and chicken (Evans, 2004). The McDonald’s have a strategic plan called Plan to win. The focus is not to be the biggest fast-food restaurant series, but to continue being the best fast food restaurant series. The main strategic motive that made the company choose to invest in almost all parts of the world is searching for markets, and they aim at building better brands intelligibility. Their current focus is to make their image predictable globally. Other reasons are the common ones such as to increase their profits, search for readily available labor forces and resources, and seeking efficiency.
How successful have these Strategies been?
- Coca-Cola Company
A statement from the Coca-Cola Company website states that the company is facing some competition from other well established-companies in the industry. The main competitors are Pepsico, Nestle, and Dr.Pepper. Despite this competition, the company has reported remarkable increase in the number of its customers and its reputation is high. Its gross profits have increased over time, and it is still rated the best and biggest beverages provider in the world.
The main thing that makes Coca-Cola Company so successful in its multinational activities is through following its three principles. These principles include ‘think local act local’, ‘Country-by-Country Bases’ and the act of integrating with the local environment. The company creates value through engaging its retailers in every level of its value chain, which are the operations from raw materials to finished goods. The Coca-Cola Company’s gross profits for the year 2009 to 2013 were 20.02B, 22.41B, 28.6B, 29.15B, and 28.36B respectively. All these values are in USD millions (KO Annual Income Statement, 2014)
Honda has many competitors in the world. The main ones are Japan-based Toyota and Nissan Motor Co Ltd (Nissan). Despite this competition, the company reputation, profits, the number of customers and its scale increases day by day. In addition, its sales have increased remarkably, and its dealers’ networks continue to strengthen each day. The sales grew from 2.5 to 3.7 million, and the company has become the 7th best automobile manufacture in the world (Honda-International, 2009).
- McDonald’s Corporation
No matter how successful or big a company is, it must face some competition. McDonald’s competitors include Burger King, Wendy's, KFC, and Hardees. However, due to its smart multinational strategies, its reputation and brand value, the company has dominated in its main headquarter and abroad. The company’s value, the number of its customers and profit increase every day. The current statistics shows that its gross income for year 2009 to 2013 were 8.79B, 9.64B, 10.69B, 10.82B, and 10.9B respectively (McDonald’s Corp, 2014).
Multinational firms require focus and dedication to be successful in these strategies.
Eckel, C. (2003). Fragmentation, efficiency seeking FDI and employment, Review of International Economics, 11(2), 317–331.
Evans, S. (2004). "McDonald's: The journey to health". BBC News. Retrieved May 2, 2011
Honda-International Business-Honda in China (2009). Retrieved 5 November 2014 from
KO Annual Income Statement (2014) Coca-Cola Co. Annual income statement. Retrieved 6 November 2014 from www.marketwatch.com/investing/stock/ko/financials
McDonald's Corp (2014). MarketWatch. Retrieved 6 November 1014 from www.marketwatch.com/investing/stock/mcd/financial
Rugman, A.M. and S. Collinson (2006), International Business, 4th ed. Amsterdam: Elsevier
Sutherland, A. (1998). Managing the international Economy in an Age of Globalization. Retrieved 4 November 2014 from www.globalization101.org/uploads/File/Investment/invall