Liberalizing Trade Between Developed and Developing Countries for Multinational Corporations - Term Paper Example

Multinational corporations, before entering a foreign market have to take into account various factors and considerations. Global competition, entry strategies, strategic timing and positioning, the government rules and policies, the local culture, investments, and the target market are some of the issues that confront the MNC. Due to advancement in information technology and communications, distances have diminished between nations and reach is easier. The host country benefits immensely with foreign direct investments. Due to globalization, situation has altered to keep pace with the changes. Nevertheless, challenges remain which can be overcome to a large extent with the support of the local government machinery. Table of Contents 1. Introduction 3 2. The Rise of MNC 5 3. Issues 3.1 Entry Strategies 7 3.2 Global Competition 8 3.3 Strategic Time and positioning – first mover advantage 9 3.4 Government Machinery 11 3.5 Isolationism 13 3.6 Culture infiltration 14 3.7 Target Marketing 16 4. Discussion 17 5. Conclusion 19 References 20 INTRODUCTION Liberal trade policies, incentives, growing foreign direct investment (FDI), advancement in information technology and communication have all stimulated the process of globalization (Lee & Tai, 2006). Multinational corporation (MNC) is the most powerful institution today. A multinational corporation can be defined as a corporation that engages in international production and that bases its management decisions on regional or global alternatives (Savitsky & Burky, 2004, p4). MNCs recognize the newly emerging markets in the developing countries and the transition economies as oppurtunities for expansion across borders and foreign markets. To enhance shareholder wealth and to improve cash flows, multinational corporations have to enact strategies. According to Savitsky & Burky, MNCs expand across barriers in two ways – trade and Foreign Direct Investment (FDI). The role of multinationals is enhanced because they provide the funds, jobs and the technical expertise to the host country. Multinationals, before venturing into a foreign market have to take into consideration various factors like the macro environment, which include government regulations and policies and demographics. Other complexities and uncertainties include the consumer behavior. Apart from these, three major issues require careful planning before venturing into another region, which include the right marketing mix, sourcing, of the product and investment decisions (Qdi). Huge investments are required to enter an overseas market before the utilization of investment comes. While new technologies and liberalizations have helped big multinationals to increase their efficiency and reach, these very forces pose a challenge from the smaller firms. The smaller firms are a threat to the big corporations as they too capture the market and are in the race for the same products and services. This report highlights the issues that multinational corporations have to address in liberalizing trade between developed and developing nations. The Rise of MNC World Foreign Direct Investment (FDI) inflows have risen in the last two decades, specially in the last decade when it went up by 4 times of the amount in the previous decade. It peaked to $1,392 billion in 2000 but then fell sharply by around 50 per cent to $651 billion in 2002 (Bitzenis, 2005). The increase of FDI upto 2000 was largely due to liberalized trade policies, removal of barriers, growth in the telecom industry, mergers and acquisitions, cross-border transactions and globalization. The decrease was due to slowdown in world economy but this slow down accelerated the world restructuring process. Because of economic slowdown, lower demand, and intense competitive pressures in developed countries, the multinational corporations were forced to look at cheaper locations (Bitzenis). As a result, growth was higher in developing countries than the developed countries. As liberalization increased, firms begun to operate across national borders, thus become multinationals. Multinational corporation started aggressively spreading in Latin America and Asia and with the drop of the Iron Curtain, it also expanded its reach to Eastern Europe and the former Soviet Union (Savitsky & Burky). To have economies of scale and for comparative advantage, companies started to expand overseas. In addition, consumer tastes are similar in different countries. Pressure from the shareholders and the workers urge companies to expand. (Savitsky & Burky). The multinational corporate wave continues to grow in its effort for a coherent global economy previously separated by culture, geography, or nationality. Entry Strategies Multinationals can enter new markets in a number of ways. Each strategy has its own risks, advantages and disadvantages. While exports is the simplest form of entering an international market, other strategies that companies can consider are licensing, joint ventures and off-shore operations. Joint ventures have to be applied in countries where foreign ownership is restricted. In the service sector brand extension strategy is frequently followed by companies (Aaker & Keller, 1990 cited by Pina et al., 2006). This helps to keep the marketing costs low while the chances of success are high. The frequent use of a monolithic branding strategy helps build goodwill behind the widely employed corporate brand (Free, 1996 cited by Pina et al.,). Global Competition Multinational corporations have grown in dimensions but there is a strong resistance to the term ‘corporate globalization’. While multinationals bring with them cutting-edge technology and huge amount of funds, there is stiff resistance from domestic competitors (Savitsky & Burky). Global competition has important implications for economic policy. Due to their scope and size, MNC can stifle competition. It can also lead the economy towards oligopoly or monopoly. Concentration of market share in one hand distorts the allocation of resources, raises prices, and decreases output (Savitsky & Burky). The government policy of the host country at times allows monopoly to prevail. Strategic Time and positioning – first mover advantage DHL, the global market leader of the international express and logistics industry, specializing in providing innovative and customized solutions from a single source, was the first to enter the Chinese market in 1980 (Business Wire, 2006). As an MNC, it decided to enter into a joint venture and became the first express company active in China. DHLs strategy all through has been long-term commitment in China. DHL recognized the boom in Chinas express and logistics market and their strategy assures further expansion and investment in China. Brands are one of the greatest assets of a multinational firm and China being a transition economy, DHL had a made a strategic move to penetrate the market at the right time. As per Gao et al., (2006), brands that enter the market earlier have larger market shares, which is the competitive edge that DHL gained by early entry. Since it got barrier free environment, it could expand easily. Thus, DHL had the right strategy to first study the market on its own before going in for joint venture with SINOTRANS. Joint ventures may perhaps be time-consuming and initially difficult, but yields optimum results both for the MNC and the local company offering partnership (Gross, 1995). Sinotrans had unrivalled local knowledge in the China foreign trade transport market while DHL was the leader in global air express industry. Setting up joint ventures in China has several advantages as seen by Gross (1995). Joint ventures help the MNC gain access to the domestic market while still maintaining control over its activities. Under joint ventures, foreign investors gain from the reasonably well educated low cost labor available in emerging economies. The host country government extends support in all matters like foreign exchange and tax exemption, which is one of the reasons DHL, launched its investment plans. General Motors (GM) too wanted to act aggressively and start a joint venture in Japan, but they did not succeed. Hence, they changed their strategy and brought R&D functions into China at the request of the government. When other automobile companies were reluctant to drain technology and quality control, and confined themselves to assembly of finished cars, GM took the bold initiative to tie up with the government for R&D functions. GM’s PATAC, a joint venture R&D centre is an independent automotive research development company (Hara & Nakanishi, 2004). Today GM has local production, has established an R&D function, as well as developed its own sales channels to create a local sales function. Hence, the move by GM can be said to be strategic to have taken an initiative when others were hesitant against government policies in China. Government Machinery Reconciling with the local government is an important factor for any MNC to enter a market. In response to liberalization and reforms in the emerging economy in China, Motorola of US had clearly defined investment and insiderization policies (Hara & Nakanishi). It established joint committee with the government Electronics Department. It set targets for local content, carried out philanthropic activities including construction of elementary schools. It concentrated on high-end users in mobile phones sector to handle local competition. It could capture the sophisticated, wealthy, and young users due to its innovative design. On the other hand, a major pharmaceutical MNC of US found the government machinery in Korea inefficient and opaque in their dealings (Lee & Hobday, 2003). Despite economic development and deregulation, there is unequal treatment of foreign companies in the domestic market. Corruption, labor-management conflict, taxation, and red tape are major hurdles, which prevent MNC from making aggressive investments in Korea. Unfamiliarity with local economic, cultural, and political rules, regulations, and business norms result in higher investments from MNC although not on initial investments. MNC wanting to enter the Korean market also face communication barriers and know of English is extremely poor in Korea. Multinationals have to face anti-corporate and anti-establishment sentiments triggered by the civil societies in the host country (Savitsky & Burky). There is a general assumption that liberalization trade benefits big business houses at the cost of the consumers. They do not take into consideration the boost that it gives to the development of the local economy. The power of MNCs is kept in check by the national governments, as Vodafone had to face regulatory control in US. One pharmaceutical MNC, Schering-Plough lobbied US Senators and made political donations in order to win renewal of its patent on the popular allergy drug Claritin. Situations like these, aggravates the anti-corporatists who argue that in the interest of democracy and the greater social good, certain terms cannot be agreed upon. Greater transparency and anti-corruption measures would benefit both the host country and the multinational company. Isolationism Hipsher (2006) cites instances where countries and individuals favor laws and regulations to protect local businesses from international competition but such measure are counter productive. In order to protect locals from the negative influences of foreign companies, international trade, and intercultural interactions, efforts by the Taliban in Afghanistan and the Khmer Rouge in Cambodia ended with disastrous results. Isolationist policies are short-sighted, prevent long-term progress and should not be encouraged or implemented. Multinationals often have to face such resistance. Culture infiltration Another MNC, Nestle of Switzerland, faced a unique problem and used its brand image to infiltrate into China. Nestle was unable to introduce coffee culture in China, so they adopted a diversification strategy (Hara & Nakanishi). They bought Chinese brands offering products like water, seasonings, and milk. They have not yet succeeded in China but they perceive China as a lucrative market for food business. Even in developed countries, culture plays an important role. Vodafone is the worlds biggest wireless operator and one of worlds largest company by market capitalization. Vodafone was an aggressive exporter and had clearly defined plans and the strategy. To avoid the hassles of licensing, which would necessitate permit to launch its services in US, Vodafone strategically started by acquisition and then went into joint venture. The major advantage in joint ventures is sharing of risks and the ability to combine local knowledge with a foreign partner with know-how in technology or process (Qdi). although Vodafone has earned a global brand image it has not been successful in USA. It lacks visibility and influence in North America. It was not able to acquire local telecommunication companies because of security laws and other regulatory barriers. It is listed in the London and New York Stock exchanges, but it is unable to attract mutual fund managers and institutional investors from North America. Through acquisition of AirTouch it expected to gain access to a wireless market in the US with low penetration levels and thought it would have huge potential for growth. Vodafone has a control-oriented strategy worldwide but in US it has a minority stake (Strategic, 2004). Even in Japan they have been unsuccessful because their handsets did not match the local culture. They learnt the hard way that to survive in the market they would have to tailor-make the handsets and not use the global model. An MNC in the service industry has to keep up with the regional culture and requirements to be successful. Target Marketing Due to advancement in information technology and communications, people in transition economies and remote villages are aware of western products and culture. They desire to possess and because of MNC and higher jobs, they are can afford it. As such, the multinational corporations and foreign companies should target the market so that they know what to say and where to say it (Lee & Tai). They should have a comprehensive knowledge of who they are targeting as perceptions and thoughts vary between cultures. They must have good understanding of the communications channels that influence individual purchasing decision. Discussions The impact of geography and culture is greatly reduced due to globalization. McDonald pursues the ‘multi-local’ strategy. Improvements in transport and telecommunications sector have reduced the impact of distance allowing firms to enter foreign markets. At the same time, new technologies and deregulation of capital markets allow small firms to compete with multinational corporations. As competition increases, the interest of share holders and the customers become important in corporate decision-making. This new form of corporate governance has to be accepted otherwise they run the risk of losing finance and customers to competitors (Savitsky & Burky). Governments must support this transition to a more accountable, transparent, and efficient form of corporate governance within their economies. Savitsky & Burky assert that economies of all shapes and sizes – including China, Germany, France and the Asian Tigers – are confronting this challenge. The clash of traditional business practices is most acute in Japan, resulting in opening up of the economy to mergers and acquisitions, including those by foreign investors. Recent studies indicate that it is now the microeconomic factors like management of the firm which determine success rather than the macroeconomic reasons (Savitsky & Burky). This is because of the increasing role of international trade, improved managerial techniques, and supply chain management. When multinationals adopt the strategy of mergers and acquisitions in developing countries, they face resistance. Acquisition of existing facilities is accompanied by payroll cuts. While M&A helps salvage the exiting facilities which otherwise would not have survived liberalization or other competitive pressures, local resistance is stiff. Conclusion Thus, it can be concluded due to liberalization, multinationals have to address several issues in both developed and developing countries. These depend upon various factors. Marketing strategies would have to be changed depending on the product, the demographics, the geographical location, and its status in the world market. Opportunities and risks are equal in entering a foreign market and both have to be weighed cautiously before venturing into a partnership. Competition in a growing economy is healthy but strategies have to be formulated accordingly. With intense globalization, policymakers cannot afford to pin the economy’s hopes on a few chosen firms as in Japan. Foreign firms should be allowed to produce goods and services that they can produce more efficiently. Multinational corporations can raise efficiency, facilitate integration with overseas market, and bring new technologies and management methods but the vast potential has to be recognized by the policy makers. All nations can gain from MNCs as they have huge funds and cutting-edge technology to offer to the developing nations. The host country governments need to implement sound macroeconomic policies, and ensure effective health, and education system. MNCs have to be prepared for stiff competition from smaller firms. 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