Multinational Management

This article provides an introduction to the topic of multinational management. Multinational management employs a set of principles, theories, and models to form a systematic framework for managing organizations in a global context. This introduction will serve to demystify the term "multinational management" and to show that, while there are similarities between multinational management and its domestic counterpart, significant differences and challenges exist. As a foundational step, a working definition of two key concepts will be provided: multinational management and the multinational corporation. Likewise, we will identify the key drivers of multinational management activity and examine the location determinants of foreign direct investment (FDI) choices. Specifically, we will highlight the two principal means of FDI: mergers and acquisitions (M&A) and green-field investment. In conclusion, a close examination of the multinational strategic management process will be provided, with particular emphasis placed on environmental scanning and strategy formulation.

Keywords Foreign Direct Investment (FDI); Green-field Investment; Mergers & Acquisitions (M&A); Multinational Corporation; Multinational Enterprise; Multinational Management; Transnational Corporation; Triad

Management > Multinational Management

Overview

Globalization of the world economy has been spurred by regional trade agreements, speedier modes of intercontinental travel, and the ubiquitous nature of global telecommunications networks. While these developments represent unprecedented opportunities for growth into new and untapped markets, a concomitant downside is the growing threat from foreign competition. Therefore, a global mindset is imperative in order to achieve a sustainable competitive advantage. Organizations that fail to do so risk being overrun by existing and emergent competitive threats. To assist in this regard, it is important to know the global context in which multinational management operates and its relative influence in the global economy.

In a general sense, multinational management may be defined as integrated global management systems by multinational companies (MNCs) designed to achieve corporate objectives around the globe. Specifically, multinational management is the systematic planning, leading, organizing, and controlling of organizational resources (human, financial, technical, and informational) designed to take advantage of global opportunities in order to achieve organizational objectives. In essence, what sets multinational management apart from its domestic counterpart is the control of value-adding assets (in foreign affiliates) in countries around the globe.

Likewise, the inherent complexity of multinational management lies in the varying socio-cultural factors encountered when operating in foreign countries. For this reason, the MNC must maintain an ongoing knowledge base of the numerous environmental variables likely to impact the global firm, such as technology, laws, economic policies, cultural norms and attitudes, and societal expectations. Thus, it is incumbent that MNCs have a firm grasp of the external environment of the host country in which they intend to operate. For this reason, the process of multinational management is infinitely more complicated than operating solely in one's home country.

Multinational Management Context

Any discussion of multinational management must begin with a definition of a multinational corporation (MNC). Note that the labels multinational corporation (MNC), multinational enterprise (MNE),and transnational corporation (TNC) are often used interchangeably, depending on the context or the user of the term. For example, the United Nations' Conference on Trade and Development prefers TNC (UNCTAD, 2013), while the Organization for Economic Co-operation and Development, favors use of MNE (OECD, 2000). While there are subtle nuances of difference between the definitions of these terms, each one requires the following: 1) operational presence in at least two countries and 2) substantial managerial control over their respective foreign affiliate(s). For our purposes, we will use the acronym MNC and define it as a parent company that partially or wholly owns foreign affiliates over which they exercise substantial managerial control (Phatak, 1992).

In 2010, MNCs numbered around 103,789 parent companies with 892,114 foreign affiliates (UNCTAD, 2011). In the year 2012, MNC foreign affiliates generated approximately $6.6 trillion in value, employed roughly 72 million workers, and exported goods and services worth more than $7 trillion (UNCTAD, 2013). Furthermore, the 2012 figures show that ninety of the world's top one hundred non-financial MNCs, ranked by foreign assets, were based in the Triad (UNCTAD, 2013). The Triad consists of the European Union, Asia (primarily Japan), and North America (Ohmae, 1987).

Applications

Multinational Management & Foreign Direct Investment

The most direct means of transforming a domestic company into an MNC is through foreign direct investment, or FDI. It is important to understand that there are various means a firm may utilize to gain entry into global markets, such as joint ventures, licensing, franchising, management contracts, and turnkey operations, among others. However, by definition, it is through FDI that a domestic company directly transitions into a multinational corporation.

Let us examine FDI more closely. FDI occurs when a company acquires at least 10% ownership and substantial managerial control of a foreign firm. The acquiring firm is known as the parent company, and the acquired firm is the foreign affiliate. When a parent firm lacks the requisite control, the investment is known as foreign portfolio investment, or FPI, which is the act of buying stock and/or bonds in foreign firms without substantial managerial control (OECD, 1999).

FDI can be done via one of two methods: purchasing a foreign company's assets by cross-border mergers and acquisitions (M&A) or building new production facilities, which is known as a green-field FDI. In later sections, we will examine the motives for FDI location choices, various strategies used when making FDI investments, and the key influential factors MNCs face when choosing between green-field FDI and cross-border M&A FDI.

Given the understanding that domestic firms become MNCs by way of FDI, a useful context can be gleaned in knowing the flow of FDI activity. Global inflows of FDI grew substantially between 2003 and 2007, but they began to decrease around the same time as the global financial crisis of 2008. FDI flows increased again between 2009 and 2011 before dropping once more, from $1.652 trillion in 2011 to $1.351 trillion in 2012. Also in 2012, for the first time ever, FDI flow to developing countries was greater than the flow to developed countries. The value of cross-border M&As also decreased between 2011 and 2012, from $555 billion to $308 billion, and the value of green-field FDI projects worldwide decreased from $914 billion to $612 billion (UNCTAD, 2013).

An example of FDI via acquisition is US-based Ford Motor Company's purchase of UK-based sport utility vehicle maker Land Rover. On the other hand, a green-field example is Korean-based Hyundai Motor's decision to build an engine-manufacturing plant in Montgomery, Alabama (CNBC, 2007).

FDI Location Determinants

MNCs engage in FDI investment for various reasons, including low-cost labor, lower transportation costs, favorable tax treatment, favorable business environments, and dwindling home market opportunities. Based on the results of UNCTAD's global survey of MNCs, published in 2006, there are four main underlying motives for FDI location decisions (UNCTAD, 2006, pp. 158-163):

Market-Seeking: to gain access to new regional and global markets. Market-seeking FDI is by far the most common motive, especially for developing-country MNCs in the process of internationalizing operations. A large percentage of survey responses (51%) chose market-seeking as their primary motive for FDI location decisions. Corresponding percentages for the other motivational factors are listed below.

Efficiency-Seeking: to achieve lower costs for resources (e.g., labor, transportation, minerals, etc.). Twenty-two percent (22%) of survey responses indicate efficiency-seeking as their primary motive.

Asset-Seeking: to obtain technological, managerial, and physical infrastructure, a motive chosen by 14% of respondents.

Resource-Seeking: to acquire land, lower lease rates, raw materials, low-cost unskilled labor, skilled labor and management expertise, and so on. Of all of the motives, resource-seeking is the least favored, with only 13% of responses choosing it as a motive.

FDI Preferences: Green-Field FDI or M&As?

When choosing between green-field investment and cross-border M&A activity for FDI investments, what are the determining factors known to impact the MNC's choice? In response to this question, Brouthers and Brouthers (2000) offer a guide for green-field FDI preference over M&A activity. Note, however, that the survey queried only Japanese MNCs with foreign affiliates in the European Union. Yet their conclusions offer a useful framework for green-field investments and cross-border M&A decisions. Here are their findings:

• The smaller the relative size of the investment, the more likely a firm is to prefer green-field FDI. However, if the size of the potential investment is large, an acquisition is the preferred mode of FDI. Acquisition is preferred because it provides experienced managerial personnel, along with existing financial resources and, hence, a reduction of inherent risks.
• The greater a firm's technological intensity, the more green-field diversification is preferred. This preference is due to the decreased likelihood of proprietary technology being disseminated against the firm's wishes. It also eliminates the need to impose proprietary technology and methods on an acquired firm.
• Firms with higher levels of multinational experience prefer green-field investment. The rationale is that well-established MNCs will have firmly developed organizational cultures and management practices, with the ability to readily transfer these cultures and practices abroad.
• In high-growth markets, MNCs prefer green-field investment. The reasoning is that slow- or low-growth markets (as opposed to high-growth markets) have little need for capacity expansion in that particular market. Hence, it is more advantageous to acquire a struggling competitor in order to obtain needed capacity. On the other hand, a high-growth market is likely to offer little to no excess capacity, so any capacity must be self-generated by way of a green-field investment.
• Less-diversified firms prefer green-field investment. Diversified firms, which presumably have become diversified by acquiring other firms, tend to possess greater expertise in effectively integrating and managing merged or acquired firms. However, a less-diversified firm is unlikely to have similar expertise in cross-border M&A activity, prompting the need to seek growth by way of green-field investment.
• Firms entering markets with cultures that avoid high uncertainty prefer green-field investment. In high-uncertainty-avoidance cultures, individuals are more resistant to change. Uncertainty avoidance is defined as the degree to which a society tolerates ambiguity (Hofstede 1991). By their very nature, cross-border mergers and acquisitions impose a high degree of change (layoffs, work policy changes, structural changes, etc.) on the acquired foreign affiliate. Thus, in high-uncertainty-avoidance cultures, green-field investment would be more preferable, as the manufacturing facility is being built as a start-up.
• Firms entering markets with related products prefer green-field modes. The premise here is that green-field investments with related products tend to achieve greater synergy. Likewise, firms tend to prefer green-field investment for the ability to more closely control the integration of these various synergies across their related product lines. An acquisition may bring with it competing product lines, making it difficult to achieve synergy across these lines. Again, to avoid this dilemma, green-field investment is the preferred choice.

As a general rule, MNCs from developing nations prefer green-field FDI, whereas MNCs from developed nations show a greater preference for cross-border M&A activity (UNCTAD, 2006).

Multinational Strategic Management

In the preceding discussion on location determinants of FDI and factors influencing choice of FDI mode, the common link is that these decisions all take place under the umbrella of multinational strategic management. Strategic management is the process of developing long-range plans to achieve organizational goals. While each stage is equally important in the strategic-management process, we will focus special attention on environmental scanning and strategy formulation.

Assuming a firm already has an established mission statement, the process of multinational strategic management begins with an environmental scan.

Environmental Scanning

At this stage, MNCs scan their internal environment (i.e., organizational resources and capabilities) for strengths and weaknesses, while scanning the external environment for global opportunities and threats. This is known as SWOT analysis, where SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. SWOT analysis tells the firm whether it has distinctive competencies that give it a strategic competitive advantage (Deresky, 2006). In plain language, SWOT tells the organization what it does well. In sum, the knowledge gleaned from an internal environmental scan is necessary in order for a firm to develop a sustainable competitive advantage. Competitive advantage will be discussed in more detail later in the topic.

In addition to the internal scan, a firm must also scan its external environment. As stated earlier, multinational management is distinguished from its domestic counterpart based on a myriad of external environmental factors. Wheelen and Hunger (2006) identify four key global external variables facing MNCs.

Political-legal forces consist of forms of government, laws, and legal systems that exist in the host country. Some typical examples impacting the management of MNCs include laws regarding labor content, environmental protection, intellectual property, profit repatriation, and taxation.

Socio-cultural forces are spoken language, norms, behaviors and attitudes toward foreign companies and foreigners, literacy of the workforce, religious beliefs, demographics, and cross-cultural transferability of work practices, to name a few. Hofstede (1991) provides a useful framework for understanding cross-cultural interaction when managing in a foreign context.

Economic forces consist of GDP, FDI, interest rates, inflation, currency exchange rates, monetary and fiscal policies, prevailing wage levels, etc.

Technological forces include changing technology, telecommunications infrastructure, workforce skill levels, transportation networks, levels of innovation, etc.

Strategy Formulation

Corporate-Level Strategy

Corporate-level growth strategies establish the overall direction of the firm. There are five corporate growth strategies, any of which may be used to satisfy the aforementioned motives for FDI (i.e., market-seeking, resource-seeking, efficiency-seeking, and asset-seeking) (Wheelen and Hunger, 2006). With any one of these five growth strategies, the MNC may grow by external means (M&A), or the firm may opt for internal growth measures (green-field start-ups). For example:

• Backward vertical integration is the purchase of a provider of inputs to the MNC's production process. One example is General Motors (GM) acquiring a seatbelt manufacturer in Malaysia. On the other hand, GM could build a plant in Mexico and make the seatbelts themselves, which would constitute green-field investment.
• Horizontal integration arises when a firm expands in the same industry. Germany-based Daimler's acquisition of US-based Chrysler is an example of horizontal integration in the automotive industry. It is important to remember that horizontal integration may utilize green-field development as well.
• Forward vertical integration occurs when an MNC becomes a distributor of its own products. If a UK-based record company acquires (M&A) or starts (green-field FDI) a record store in the United States, this is an example of forward vertical integration.
• Concentric diversification is the acquisition or start-up of a firm in a related industry. For example, if a Chinese-based manufacturer of snow skis acquires a Singapore-based company that makes ski apparel, this is concentric diversification.
• Conglomerate diversification is the acquisition or start-up of a firm in an unrelated industry. For example, if US-based brewery Anheuser-Busch acquires Hyundai Motors of South Korea, this is conglomerate diversification.

Business-Level Strategy

Whatever growth strategies an MNC chooses, the firm must then decide how it is going to compete in its various business lines and services. This is known as business-level strategy (Wheelen and Hunger, 2006). A key component of business-level strategy is establishing competitive advantage. Rael Lipson of Gold Field's Exploration Inc. aptly states the following about competitive advantage: "The key to a competitive advantage is to discover new opportunities before they become widely known, to recognize them where others do not, to see those that may not have existed before and to act before your competitors do" (Comergence, 2004).

According to Wheelen and Hunger (2006), the resource-based view of competitive advantage maintains that sustained competitive advantage results from firm-specific resources such as plants, equipment, employee skills and knowledge, technology, and reputation. However, a firm must not only possess various firm-specific resources to have a competitive advantage; it must also have capability. Capability is the MNC's ability to exploit firm-specific resources to its competitive advantage. For example, a firm may be highly proficient at developing new technologies, yet lack expertise in bringing that technology (in the form of value-adding products and services) to the global marketplace. In this instance, capability is lacking. The last part of the competitive advantage equation is sustainability. In other words, does the competitive advantage have staying power? The sustainability of a competitive advantage is based on whether it is 1) inimitable, i.e., not easily duplicated by others and 2) durable, so as to resist obsolescence. According to Porter (1985), firms use a set of generic strategies for gaining competitive advantage. A firm may pursue a low-cost advantage by producing or distributing products or services more efficiently, or it may choose differentiation (e.g., providing superior service, unique features, etc.) as a means of distinguishing products and services from those of competitors.

Strategy Implementation

This is the execution stage of the strategic plan, the process by which strategies are put into action through programs and procedures. Without proper execution of the above-mentioned strategies, the entire plan falls apart. For example, suppose an MNC has decided to employ one of the above corporate growth strategies in order to exploit new markets and generate growth in overseas markets. However, while the parent firm may be excellent at making strategic choices, (e.g., green-field vs. M&A, conglomerate vs. concentric diversification, etc.), they may have a dismal record of integrating and coordinating parent-company management practices into foreign operations.

Evaluation & Control

This final step involves obtaining feedback to assess current performance and verify whether organizational goals are being met. When performance gaps are identified, corrective measures are implemented to eliminate those gaps. Common performance measures are ROI (return on investment), EPS (earnings per share), and ROE (return on equity).

Conclusion

Obviously, multinational management involves a bevy of choices to be made, and we have only scratched the surface. Sound decision making in multinational management requires access to meaningful and real-time business intelligence. An MNC must constantly assess its competitive position in light of opportunities and threats in the global market, as well as strengths and weaknesses of the firm. Also, while there are a number of ways to gain access to foreign markets, becoming an MNC begins with the choice of FDI. In order to answer this question, MNCs must assess their motives for going global. Next, the question becomes where to locate the firm's chosen mode of FDI, which in turn is affected by the motive for FDI. Therefore, in order to develop and sustain competitive advantage, a well-orchestrated strategic-management process is necessary. This process obviously requires sound strategy formulation and is useless without proper follow-through in the strategy implementation and evaluation/control stages.

Ultimately, multinational strategic management is only as effective as the employees (human resources) tasked with implementing them. In this vein, out of pure necessity, managers must possess a global mindset and entertain a long-range planning perspective, coupled with proper nation-specific training to manage effectively outside their own borders. Multinational management demands it.

Terms & Concepts

Foreign Affiliate: The offspring of a parent company, acquired by a merger/acquisition or green-field investment.

Foreign Direct Investment (FDI): A transaction whereby a company acquires at least 10% ownership and substantial managerial control of a foreign firm.

Green-Field Investment: An FDI investment in which a company builds, owns, and operates production facilities in a foreign country.

Mergers & Acquisitions (M&As): An FDI transaction in which one firm purchases another. In the case of mergers, the firm purchased is completely absorbed by the parent company. With acquisitions, the acquired firm continues to operate as a stand-alone subsidiary.

Multinational Corporation: A parent company that partially or wholly owns foreign affiliates, over which they exercise substantial managerial control.

Multinational Management: The systematic planning, leading, organizing, and controlling of organizational resources—human, financial, technical, and informational—to take advantage of global opportunities in order to achieve organizational objectives.

OECD: Organization for Economic Co-operation and Development.

Strategic Management: The process of developing long-range plans in light of organizational strengths and weaknesses and external opportunities and threats.

Triad: A geographic area consisting of the European Union, Asia (primarily Japan), and North America.

Uncertainty Avoidance: A given society's degree of tolerance for uncertainty or ambiguity.

UNCTAD: United Nations Conference on Trade and Development.

Bibliography

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Suggested Reading

Aguilera, R. V., & Dencker, J. D. (2004). The role of human resource management in cross-border mergers and acquisitions. International Journal of Human Resource Management, 15, 1355-1370. Retrieved March 22, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=15980340&site=ehost-live

Bartlett, C., & Ghoshal, S. (2003). What is a global manager? Harvard Business Review, 81, 101-108. Retrieved March 22, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10256911&site=ehost-live

Edwards, P., Sánchez-Mangas, R., Tregaskis, O., Levesque, C., McDonnell, A., & Quintanilla, J. (2013). Human resource management practices in the multinational company: A test of system, societal, and dominance effects. Industrial & Labor Relations Review, 66, 588–617. Retrieved November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88923800&site=ehost-live

Kumar, V., & Subramaniam, V. (1997, Spring). A contingency framework for the mode of entry decision. Journal of World Business,32, 53-72. Retrieved March 22, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9711196538&site=ehost-live

Rugman, A., & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35, 3-18. Retrieved March 22, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12339309&site=ehost-live