Rise and Growth of Multinational Companies - Essay Example

RISE AND GROWTH OF MULTINATIONAL COMPANIES . By     Location Rise and Growth of Multinational Companies Globalisation is a process that has seen the world become a global village. Globalisation is the process that has led to a total reorganisation of international trade as well as integration of financial markets. Firms can now trade in any country of their choice as long as they comply with the laws and regulations of the host country (Organisation For Economic Co-Operation And Development 2007). Asia is one of the continents that have benefited immensely from the globalisation process. Many multinational firms from the Asia Pacific region have been able to conquer world markets, supplying a variety of goods and services across the world. The question in the minds of many analysts is how these firms have managed to dominate the world market for long. Statistics show an increase in the number of multinational firms in the international market from developing countries, evident through an increase in FDI from developing nations as illustrated in the graph. Accessed from: http://www.economist.com/node/10496684 From the graph, by the year 2006, developing nations accounted for 14% of the total world’s FDI. Countries like China and Japan depend on exports as the major source of income to boost the country’s GDP. The rise of the multinationals from Asia has attracted world attention to the policies and practices leading to the rise of the firms. The multinational firms enjoy firm specific advantages and country specific advantages that enable them to operate in the international market efficiently. The technological advancement in the country will determine the products to be produced, but the cutting edge is the cost of technology in different countries, so that the two countries are able to produce using the same technology but at different costs (Dolfsma, Duysters & Costa 2009). The firm with lower cost gets an advantage over the competitors. Korea is one Asian country that has benefited from the country advantage in the production of electronics. Proper utilization of available technology in production of electronics in Korea has seen the rise of multinational producers such as sumsung (Kim 2006). Sumsung originates from South Korea, but currently has branches in more than 60 countries. The change in production cycle has aided the process of international trade with production process separated into various distinct stages. Each stage of production is undertaken at different locations where costs are lowest. The division of production process coupled with good transport system is behind the success of multinationals. The lean production system allows the department to control the production process and not individuals while automating the systems to save on costs of production (Andreosso-O’Callaghan et al 2007). Asian countries adopted the automation of processes from their European counterparts. The value of currency of a country over other currencies also determines the direction of trade in the country. Changes in value of Asian currency over other currencies such as the dollar, discourage exports since traders earn less. Thus, firms opted to foreign direct investment in other markets as a means to cut costs while increasing market share. The motor vehicle is one such industry from Japan exporting parts to other countries and doing vehicle assembly in the branch (Black and Morrison 2010). Liberalization of economies in Asia is a major contributor to success of multinational firms. Liberalization of trade allows people to trade with some degree of freedom for both imports and exports. The Asian Pacific countries had strict trading regulations that prohibited foreign direct investment both in and out of the country. The removal of the ban on foreign direct investment in Japan in the year 1971 saw the beginning of a new era in international trade. Trade in japan has never been the same again as companies went out to find more investment destinations. The shift of concern from firms from material benefit to value addition has aided in the rise of multinationals. Toyota is an example of a firm that has grown to be the world largest firm supplying automobiles globally through the long term orientation technique (Mishronik and Basu 2014). The corporate culture in Asia pacific region is contributing immensely to the growth of multinationals (Mishronik and Basu, 2014). Unlike the western culture of individualism, the Asians have a culture of collectivism. The corporate culture has seen these people work together for the success of the firm. Honda brand is one major example of a of Japanese motorbike that has grown from a small garage to a multinational firm all due to the collectivism culture. The first owner of the firm started in a small garage in japan repairing and tuning them to compete in races. Through financing from a friend, the firm was able to start manufacturing and supplying piston rings to manufacturers of cars including Toyota. Eventually the owner learnt through visiting manufacturers to produce good quality parts required by major manufacturers. Though the brand was sold to Toyota, it had already developed into a recognized brand (Cleeve 2007). National culture is also helping the Asian pacific international firms trade better in the international market. Coupled with colonial influence of the English language, the Indians were able to learn English and communicate well internationally (Sauvant & Pradhan 2010). Firms from India were able to put up businesses in other firms since they could communicate well using the English language, thus reducing the cost of doing business with the outside world. The entrepreneurial culture of the Indians further aided the development of firms in the country. Most firms were traditionally owned by families and passed down from one generation to the other along the family line. Children were taught how to run businesses with their parents in preparation for inheriting. Through having family businesses, decision making is easier, thus increasing the rate of growth of multinational companies from India. The challenges of globalization prompted firms to go global. Trade liberalization brought a major challenge to Indian firms as they would now face competition from foreign firms, thus the need to move fast in the market. Tata Motors is a family business from India that is competing well in the international market. When faced with the threat of being overtaken by firms from other countries, Ratan Tata turned his attention to foreign markets in the 1990s (The Economist 2008). The owner had little to consult about and was soon in the international market selling automobiles from Tata Motors. Given the freedom of choice from family owned businesses, Tata diversified production to IT and pharmaceuticals just when the demand for these products were at boom in mid 1990s. Thus the fast pace of decision making and a high independence by family owned businesses is aiding in the growth of multinational firms from India. One major strategy utilized by the Asian pacific firms in the international market is the cost leadership strategy (Larcon 2009). Being mostly developing nations, Asian Pacific nations have lower cost of labour compared to western countries. Developing nations have relatively low cost of production compared to their developed counterparts. The countries are also endowed with plenty of natural resources that can be utilized in production. Through cost leadership strategy, the countries are able to produce goods at costs and export them to other countries at lower prices than other developed nations. The cost advantage over other nations give these products a higher demand in the world market than other products, especially among the lower class people who make up the majority of the world population. A good example is china, which produces goods at lower costs due to the internal conditions of the country. Another Chinese system of internationalization that has given it an upper hand in the international market is the search for a compliment (Liu 2012). Most western countries explore international markets in search of broader markets to sell their products. Unlike these firms, the Chinese firms are on a mission to complement their resources and skills. Being a developing nation faced with the many challenges of a developing nation, China does not have all the resources it requires to develop. The Chinese are out seeking technology, brand knowledge and experienced managers in international markets. The search for compliments has seen asian firms expand operations to areas in the world where they can access resources at lower costs. Change in management styles by asian firms has led to growth of multinationals from Asia. Poor management system in the home country is affecting the Asian multinational companies in their operations both locally and abroad. Weak human resource management practice is affecting firms from the Asian countries hindering them from exploiting their full potential in the market (Howard 2010). Centralized labour allocation is one such practice where employees were allocated different working stations without any consideration in china. A shift from the inefficient human resource management practice in the western practice has led to the growth of MNC from Asia (Shen and Edwards 2006). Most Chinese MNC are learning international management styles from their rivals to aid them in the process of joining the global market. The method of entry into the international market is a defining factor to the success of the multinationals. Provision of the basic service before production will increase chances of success in the international market. A research showed that firms that invest in related services succeed more than firms that invest in totally unrelated products and services. The Japanese have a culture of making an earlier investment in the international market offering services before actually entering the market (Gorzen and Sakimo 2007; Rhaehl & Bird 2005). Provision of pre-services create an enabling environment for the success of the business. Access to international financial instruments has aided the growth of multinationals in the world (Dunning 2008). If a firm wishes to put up a branch in a new market in a foreign country, the firm will provide majority financing that s over 50% of the capital requirement and source the balance from the international financial market. By providing majority capital, the firm retains ownership of the branch to the mother country. Asia has also learnt much from the European union leading to regional intergration resulting in better trading in the region. Peace is the desire of the whole world. Maintaining peace in the region is a hard task for countries considering each country has a different form of government and different ideologies held by each country. The European Union is one to be emulated by Asian countries for success in international business. Through the regional block in Europe, members of the European Union enjoy economic autonomy and peace that makes the region conducive for trade (Kim 2009). Globalisation comes with many challenges to all nations, including insecurity. Regionalisation allows for regional agendas to be given the top priority and addressed, including social, political and economic issues. The case of Korea and China are the best example of the importance of regional integration in Asia. Korea is aligning its policies with those of its major trade partner China for purposes of regional integration to aid in the trade between the two countries (Nicolas 2007; Kim 2006). The alignment of the two countries has seen increased trade between the nations and benefits to firms in both countries. The Asian practice of market research and creation of bilateral agreements before investing is aiding in the success of multinationals. The multinationals are not always assured of success in their mission in the global market. Most multinational firms target developing nations as they target new market when the need to expand rises (Liang 2007). The developing countries are a preference for new markets due to the high population, low technology and unsatisfied market demand, thus giving rise to a market niche for multinationals to fill. Creation of bilateral agreements by Asian governments is a step towards helping multinational firms succeed in the given market. A better understanding of the global market is necessary for managers in the multinational firms to enable them fit in the global market (Sauvant and Maschek 2010). A comparison between the economies of the east and the west show the great difference that has led to the growth of multinationals. Japan is one country that has risen from economic crisis to an economic giant (Witt 2008). Just when the country was going through economic distress and was about to adapt to the American capitalist system, a second thought to reform the existing systems changed everything (Vogel 2007). A slight change in the current system was all Japan needed to rise again. Among the changes made include: labour market requirements where firms could now layoff and hire staff as required, pension reform from seniority based remuneration to performance based, the company holding where the ban on company holding was lifted, and banks were allowed to make loan decisions and price loans as per their risks among other reforms (Yamazaki and Kayes 2007). The reforms marked the turnaround for Japan’s economy. Though America looked down on the economy during this financial crisis, Japan proceeded to greater economic heights and is now a world recognized economy. Reforms in the education sector saw the growth of research and development leading to major technological advancement all due to the innovative Japanese (Tan & Mohoney 2007). Further, China is among the most productive developing economies that has attracted international investments leading to increased inward FDI. The fast pace of technological advancement and creativity of the Chinese population is increasing the competitive advantage of firms operating in China. Chinese closeness to Japan than other European markets is a reason for the growth of MNC from Japan. A comparison of firms from Japan and Europe shows a better performance of the Japanese firm in china than the European firm (Jaussaud & Schaper 2007; Urata 2006). The good performance is attributed to the lesser physical distance between China and Japan, enabling the Japanese to better manage the subsidiary firm. Training of employees and regular follow up of the performance of the branch is necessary to ensure a successful business. Adoption of the lean production system is another major reform leading to increased output by firms. Trading with other developing countries has aided in the process of economic development (Belderbos & Heijtjes 2005). Developing nations investing in developed countries in most cases lead to failure in the business. Investing in other developing nations not only provide an opportunity for growth in the new market but also creates a good working relationship with other developing nations. Integration of developing nations will lead to economic growth of these nations due to the exchange of development projects through giving priority to trade partners. China is one Asian country that has adopted the method of investing in other developing nations to gain more economic growth. 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