Carla I. Koen. Comparative International Management
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Learning Objectives
By the end of this chapter you will be able to:
understand the factors leading to the existence of multinational corporations
(MNCs)
reflect on the stages of development and foreign market entry modes of MNCs
appreciate the influence on MNCs of pressures to adapt to local circumstances
and to integrate activities worldwide
critically assess the ‘transnational form’ as a response to these conflicting
pressures, and be able to reflect critically on the concept of the ‘transnational’
identify the mechanisms of coordination and control that are used in MNCs
explore the management of headquarters–subsidiary relationships in the MNC
distinguish between different roles of subsidiaries within the MNC, and relate
these roles to the learning capabilities of the MNC
evaluate the impact of cultural and institutional differences on the management
of MNCs
understand the country-of-origin effect as it produces itself within MNCs.
Chapter
9
Multinational
Corporations:
Structural Issues
NIELS NOORDERHAVEN
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Chapter Outline
9.1 Introduction
9.2 The Internationalization Processes of MNCs
Why do MNCs exist?
Internationalization as a learning process
Foreign market entry modes
Stages of development of MNC organization structures
Transnational management
Complex realities
9.3 Coordination and Control within MNCs
Coordination and control mechanisms
Headquarters–subsidiary relationships
9.4 Knowledge Management in the MNC
Exploitative and explorative learning in the MNC
The costs of transnational management
9.5 The MNC and Cultural and Institutional Differences
How do MNCs respond to cultural and institutional diversity?
The country-of-origin effect on MNCs
Study Questions
Further Reading
Case: Heineken
Case: Integration of the Operations of the London Branch of a German Bank
References
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9.1 Introduction
In this chapter we will concentrate on the type of organization that, arguably, deals most
intensively with international differences in management and organization: the multina-
tional corporation (MNC). While almost all firms have to deal with international diversity
issues more or less frequently, the MNC has to internalize this diversity within its organiz-
ation in the course of its daily operations. MNCs are not only important as the place where
international comparative management is practised; these organizations are also growing
in economic importance. According to the World Investment Report (WIR) (2000) inter-
national production by MNCs is growing fast, and now spans virtually all countries and
industries. The gross product of all MNCs together (about 63,000 parent firms with
690,000 affiliates) comprises one-quarter of the total gross production in the world.
Between one-third and one-half of world trade takes place between within MNCs (Kumar,
1999; WIR, 2000). Hence, the MNC is a factor of immense importance in the world
economy.
What is a multinational corporation? This question is not so easy to answer. Of
course, in order to be called ‘multinational’ a firm should engage in business activities in
more than one country. The United Nations defines multinational enterprises as ‘enter-
prises that own or control production or service facilities outside the country in which
they are based’ (United Nations, 1988: 16). The phrase ‘own or control’ is of importance.
It implies that MNCs are actively engaged in international activities. The control men-
tioned may be based on (partial) ownership, but this is no necessity: foreign expansions
may also take the form of contractual arrangements with local firms. On the other hand,
foreign investments are not always made with the purpose or effect of gaining control.
Some foreign investments are part of a portfolio of non-controlling interests, and are
made with the motive of spreading risk. In contrast, foreign direct investments (FDIs) are
made with the motive of exerting control over the activities financed. Although not all FDI
is performed by MNCs, most of it is, and we may say that FDI is an important hallmark of
the MNC.
There is no consensus whether the international business activities should be above
a minimum level (e.g. 10 per cent of turnover) or of a specific kind (e.g. production and
sales as opposed to sales only) before a firm should be called a multinational. The most
sensible approach is to assume that MNCs form no homogenous group, but that these
firms can be ranked according to their level of ‘multinationality’ or ‘transnationality’. In
the World Investment Reports, published by the United Nations, the transnationality
index for the world’s largest MNCs is published yearly. This index is the average of three
ratios:
1. foreign to total assets
2. foreign to total sales, and
3. foreign to total employment (WIR, 2000: 83).
When this criterion is applied, the most ‘transnational’ among the large MNCs are typi-
cally those from small home countries and/or producing consumer products like food and
beverages, like Nestlé (Switzerland) or ABB (Switzerland and Sweden) (WIR, 2003). This
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stands to reason, for consumer goods like foods and beverages are more sensitive to cul-
tural and institutional differences than, say, capital goods like machinery. Hence
companies active in these sectors need more of a presence in foreign countries if they
want to sell there, and for companies from smaller home countries the international
market becomes important very quickly, if they want to continue to grow.
In our discussion of MNCs in this chapter we will first, in the following section,
discuss the internationalization processes of MNCs. Subsequently, we will focus on coordi-
nation and control within the MNC. In the final section of the chapter we will focus in on
the ways in which MNCs deal with international diversity.
9.2 The Internationalization Processes of MNCs
Practically all MNCs have started off as companies operating in their home country and
have, later, gradually added activities in foreign countries. Exceptions are MNCs that
acquired bi-national status at a very early stage of their development (e.g. British-Dutch
Shell), and MNCs that are the result of an international merger and have since developed
into a new entity (e.g. Swedish-Swiss ABB). Most other MNCs first developed at home, and
then started adding international activities. Before discussing the modalities of inter-
national expansion and the typical growth paths of MNCs, a preliminary question must
be answered: ‘Why do MNCs exist at all?’ At first sight, this question may seem absurd, so
much have MNCs become a fact of life. But from a theoretical point of view that MNCs
should exist is not so obvious at all. After all, the previous chapters of this book have been
emphasizing the differences between the business environments in different countries.
This means that a firm that has experience in one particular country must have a signifi-
cant disadvantage, vis-à-vis local firms, once it begins operating in another country. There
must, then, be advantages that more than offset the disadvantage of not being familiar
with the local business environment or the ‘liability of foreignness’.
Why do MNCs exist?
Various theories have been developed to explain the existence and continuing growth of
MNCs. John Dunning put the most important explanations together in what he called ‘the
eclectic paradigm’ of international investment and production (Dunning, 1993).
Dunning focuses on three sets of explanatory factors: ownership factors, location factors
and internalization factors.
Starting with the ownership factors, given the ‘liability of foreignness’ a firm must
have certain advantages over local companies if it is to compete successfully in foreign
markets. These advantages can be of various kinds. A firm may, for instance, possess spe-
cialized technology that cannot easily be bought or developed by local firms. This is true,
for instance, of chip-maker Intel. While its chip-making technology is not unique, it is
confined to a quite small group of companies, operating worldwide. Another possibility is
that a firm may have built up a valuable brand name, which allows it to compete success-
fully even without superior or hard-to-imitate technology or products. McDonald’s is an
example of a company that possesses this type of ownership advantage. The company-
specific advantage may also be that the firm has certain technological or management
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skills. Finally, a company may have privileged access to certain raw materials, like bauxite
or petroleum. This type of ownership-specific advantage is often of a political nature –
that is, it has been granted to the company by the government of the country from which
the raw materials originate. All these firm-specific advantages should be difficult and/or
costly to create or acquire (otherwise they would not constitute a sustainable advantage),
but at the same time they must be relatively easy to transfer to other locations at low cost.
The possession of company-specific advantages is no sufficient explanation for the
existence of MNCs. Why would the company that has these advantages not simply put
them to use within its home country, and then export its products to foreign markets? For
a firm to invest abroad, some location-specific factors must also exist. Location-specific
advantages, like firm-specific advantages, can be of many kinds. Historically, an import-
ant reason for firms to invest in production facilities abroad was the existence of high
import tariffs for finished goods, making it more economical to perform at least part of the
production process in the end market. This is an important explanation behind the many
local assembly plants set up by manufacturing firms before the Second World War.
Somewhat comparable is production in foreign countries to minimize transportation
costs. Beer brewer Heineken, for example, has production facilities in many countries, to
avoid the high transportation costs of a product consisting of 95 per cent water. Other
location-specific advantages may stem from production factors, in particular cheap
labour. This is an important reason for overseas investment in labour-intensive industries,
like in the apparel industry in Madagascar. Finally, some locations offer a particularly
attractive environment for specific types of activity, like the City of London for the
financial sector and Silicon Valley in the USA for information technology. These types of
location advantage are of a more dynamic nature, since they originate in a historic
process of cumulative causation, which gradually makes a particular location attractive
for particular activities, mainly because of a concentration of specialized producers and
service providers.
However, even the combination of firm-specific advantages and location-specific
advantages is insufficient to explain the FDI that makes a company into an MNC. Why
would the firm not sell or contract out its specific advantages to a local firm in the country
it wishes to enter? The local firm could in that way combine the firm-specific advantages
with the location-specific advantages, without being hindered by the liability of ‘foreign-
ness’. The explanation put forward in the eclectic paradigm is that markets for
firm-specific advantages often fail. Trading technology over a market interface is not
impossible, but can be difficult and risky, especially when the technology is very inno-
vative. The buying partner will want to have a deep insight into the technology before
deciding about the deal but, in disclosing too much, the selling firm may in fact be giving
away the very thing it wants to sell. Protection of intellectual property rights is never very
easy, and even less so in the international arena. This is why R&D-intensive firms that
expand abroad tend to internalize their international activities. In the case of advertising-
intensive firms, the motive is predominantly to avoid the damage to their reputation that
would be the result of poor-quality services offered by local representatives, which would
decrease the quality of their product or service as perceived by consumers (Hennart,
1991).
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