Introduction
Analyzing international business in general, it can be stated that at the advent of the 21st century it became such a universal and pervasive phenomenon of modern civilization that it is practically impossible to provide an unambiguous definition of what it stands for. Attempting to reach a constructive definition, international business can be understood through its characteristics. The profit factor is general to the business sphere, and thus, the peculiarity of international business comes from the fact that international business is founded upon the opportunity of making a profit from the advantages of inter-country relations, i.e. from the fact that selling the product, providing the service, or establishing production in another country, provides a profit for the parties involved more than in the case the business was led only in their respective countries. A typical example of international business relations can be seen through direct investments in foreign countries, in which assets are actively managed as integral parts of the company. The latter is an example of multinational corporations, the role of which, in the context of international trade, has grown and reached substantial proportions, and thus, their activities in the international arena currently represent a significant meaning. Analyzing international business in general and multinational corporations in particular, this paper provides an analysis on the rationale of starting a multinational corporation in the current context, and accordingly, the formation process.
Motivation and Rationale
Although the growth of multinational corporations is specifically evident in the globalization era, it is hardly a new phenomenon. The latter can be seen through analyses of literature, which specifically trace the development of international business in general. An example can be seen through Dunning’s examination of US multinational investment in Britain, published in 1958, and which “traced the evolution of those firms back to the nineteenth century” (Jones and Khanna, 2004). Additionally, an examination of UK-based trading companies from the nineteenth century until the present day showed the expansion of multinational companies was largely initiated as an “intermediation between Britain and host economies in (mostly) developing markets” (Jones and Khanna, 2004). In that regard, being a historical phenomenon, it can be assumed that the motives for international expansion and starting a multinational corporation had largely changed through history.
The traditional motives driving business internationalization can be described through several triggers, such as the following:
- Securing key suppliers – such force is mainly related t the scarcity of raw materials, to ensure the supply of which manufacturers opened new facilities in foreign countries, e.g. Standards Oil, Alcoa, Goodyear, Anaconda Copper, and International Nickel (Bartlett and Ghoshal, 2000b).
- Market seeking behavior – this force is based on the rationale of seeking for new markets, where an intrinsic competitive advantage could not be sufficiently exploited in the domestic market, through the inability to support volume-intensive manufacturing processes, and thus, economies of scale and scope were able to provide such advantage to companies, e.g. Nestle, Bayer and Ford.
- The access to low – cost factors of production – the disadvantage of local manufacturers against imports, specifically for companies to which labor constituted major costs, acted as a motive to establish offshore sourcing locations with low-cost capital.
Although some of the factors remained unchanged over time, it can be assumed that several new factors occurred, specifically with the further development of multinational corporations. In addition to a quantitative growth, which can be apparent through the frequency of foreign participation at the top management level in companies, e.g. “[f]ourteen of the Fortune 100 companies are now run by foreign-born CEOs” (Daft, 2009), there are also other structural factors. In the past multinational corporations had relatively easy tasks, mostly related to production and distribution, while in the latest decades it can be seen that the tasks became more complex and global. The latter is specifically evident through the changing nature of multinational corporations, where the early multinational corporations were large manufacturers, while many of the newer corporations are service companies forming multinational service networks, e.g. commercial banks, investment bankers, advertisement agencies, hotel companies, etc. Accordingly, it can be stated that that the affiliation to a specific country was gradually eliminated, and although many companies are still identified by their country of origin, e.g. Intel is American, Sony is Japanese, the effectiveness of business gradually replaced patriotism.
Accordingly, it can be stated that with the emergence of new trends in international business and multinational corporations, new motivations emerged for turning the corporation multinational. Specific factors can be seen in the wave of multinational corporations coming from developing countries. In such a case, the cost factor cannot be singled out, where the motivations were largely driven by a search for markets and technological innovations (Mathews, 2006). The newcomers, specifically for the Asian region, utilized rapid internationalization, acquiring their reach in a relatively small fraction of time. Accordingly, seeking for new markets and innovations another factor for going multination is tapping on resources that “would otherwise not be available to a firm competing solely at home and seeking to sustain an international presence through exports” (Mathews, 2006).
The labor cost also plays an important role as an emergent motivation for multinational corporations’ internationalization. Although this factor can be related to the traditional motivations, it nevertheless, changed its form from the cheap unskilled workforce into global outsourcing of talents, an example of which can be seen in the example of India as an offshore site for IT services (Gereffi, 2005). The latter is an example of the shift from manufacturing to the service sector (Daft, 2009).
Other factors supporting internationalization are the economies of scale and scope. In the first case, the rationale was guided by finding markets for the increased volume of production in which the lowest possible cost per unit was achieved (Daft, 2009). Accordingly, such economies allow obtaining volumes discounts, which in cases are the distinguishing factor for the survival of the company, e.g. Ford Motors. Economies of scope, on the other hand, can be seen in providing a variety of products and regions that will provide a competitive advantage for the company. The advantages sought in such cases are mainly represented through increased marketing power and synergy, and the development of broad knowledge, allowing the corporation to provide specialized products and services (Daft, 2009).
The Process of Internationalisation
The process of becoming international can e differentiated based on several approaches and theories. The product-cycle theory, developed by Professor Raymond Vernon, divides internationalization into three stages. The starting point for these stages, in that regard, is typically the company’s created innovation. The first stage, accordingly, is building the production facilities in the home country, where customers are located. During this stage, the product becomes standardized and creates a demand in other countries through exports. The second stage implies meeting the demand in foreign countries, and preventing the opportunities for competitors, the company sets up new facilities in foreign countries. In the third stage, when the product is highly standardized, many competitors enter the market, and thus, the company will seek an advantage through moving the production to developed countries and lower the costs. Accordingly, meeting the demand for the product in developed and developing countries, the latter become net exporters of the product (Daft, 2009).
The variation of these stages can be seen in implementing different approaches to enforce the processes which are perceived to occur naturally. For example, during the stages where demand is created abroad, the company might initiate actions as a recognition shock, where the perceptions of the products abroad should introduce from scratch, rather than rely on their recognition in their countries of origin. The latter can be seen through the example of Samsung, which had “had a lot of work to do to change overseas consumers’ expectations” (Bartlett and Ghoshal, 2000a). Another step that can be taken during the second phase of the internationalization process can be seen through investing ahead of demand. The latter although risky can be seen to create a push from homelands toward internationalization.
Other intermediary steps in internalization can be seen through the exploration of market conditions before moving production to foreign countries. A case study of a Japanese-owned electronics firm, presenting its supervisory systems in three of its plants located in different countries, i.e. Japan, Mexico and Britain, presented striking differences in job content and scope of responsibilities. It was shown in the study that “the quantity and quality of labor were central to providing a pool of adequately skilled personnel who were able to fulfill broader supervisory roles” (Lowe et al., 2000). Accordingly, it can be stated that during the stages of internationalization the company, i.e. joint production, increasing the volume or offshoring the business, the export of the business model is not always working. Accordingly, the source of innovation is no longer limited to the center of the company, where emerging markets might contribute to the decentralization of product development.
Conclusion
It can be concluded that the process of internationalization has changed drastically during the last decades, where internationalization turned from being an option to being a strategic imperative. In that regard, although the search for profit remained the main factor, the new emerging motivations imply the necessity for companies to gain global competitive advantages. In that regard, the internationalization of business turned from being merely an expansion of the production into a survival factor. Accordingly, it can be stated that the process of internationalization has changed as well. The stages based on the product-cycle model, although have many common elements, revised to accommodate the current trend s toward rapid internationalization, in which many factors should be considered such as the quality of the labor, the product development cycle, and the changes to the business model. In that regard, emerging markets are no longer just recipients, but also active contributors to the products’ development philosophies of multinational corporations.
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