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, Unit One- Contemporary Global business operations
1. Define multinational corporations (MNCs).
MNC’s are business enterprises that operate in more than one country. These organisations operate
across international borders irrespective of their size or contextual orientation.
2. Analyse the stages of
MNC development.
2.1. The Pre-Export Stage
• Indicates start-up phase of a firm that aims to expand its operations overseas.
• The firm has a good management team to oversee research and development (R&D) initiatives,
which usually accompany this stage.
• Limited capital and financial difficulties may be encountered as the firm progresses through its start-
up phase owing to a lack of access to capital markets and government incentives.
• Here the firm makes enquiries about the possibility of launching its product(s) overseas, either
through a foreign agency or a domestic exporter.
• A domestic exporter could operate through the facilities provided by an export intermediary such as
a contractor or distribution agency but such an agency service could also be provided by an export
merchant, an export commission house, a resident buyer, a broker or an export manager,
• Should this initiative be successful, it could lead to profitable sales overseas and the beginning of
exports by the domestic firm.
2.2. The Immature Export Stage
• After gaining experience the firm may eventually establish its first international office abroad in a
bid to facilitate overseas sales. This office could take the form of a joint venture, an overseas export
manager or an overseas agent.
• Many firms would prefer to engage in direct exporting, which allows them to have control over the
exporting process- so far as constraints in the foreign market allow for this.
• In contrast, indirect exporting means that the exporting process is placed in the hands of a domestic
export agent, leaving the firm with little control over the process.
• Alternatively, the parent firm could decide to establish overseas branches and subsidiaries. This
presumes further growth in export sales, which calls for the establishment of sales branches abroad to
handle sales and promotional work.
• Clearly, this requires a more mature approach to exporting, involving a more permanent presence in
selected locations overseas.
2.3. The Mature Export Stage
• With the needed capital and expertise, domestic firms that have established overseas branches and
subsidiaries may be in a better position to formalise their sales initiatives overseas by appointing a
branch manager who is directly accountable to the home office, while the branch distributes the
products overseas through intermediaries operating in foreign markets.
• Depending on the resilience of the initiatives taken, such an international operation could eventually
evolve into a sales subsidiary that is legally domiciled in the foreign country, thereby forming an
autonomous sales branch.
• The home country firm may decide to assemble and, eventually, manufacture the product overseas.
This would lower costs, including transport costs, tariffs and the cost of labour. It is cheaper to
export disassembled products than whole products, often thanks to lower transport and tariff costs on
,disassembled components.
, • The result of this process would be the establishment of production abroad. This presupposes the
existence of a well-developed export programme tailored to the unique needs of the specific foreign
market.
• Incidentally, a firm may start finding it difficult to further increase sales and profits in the foreign
market it is seeking to penetrate. Frequently, this causes expansion into related businesses, provided
that the necessary support, such as technical support and the availability of capital, is at hand.
• Technical support, combined with access to capital -with the appropriate financial controls- and
necessary foreign market support could further improve the export process and regular sales in
overseas markets.
• Many believe that this marks the point at which a firm becomes an MNC, capable of operating in
international markets.
2.4. The Initial MNC stage
• Once operating as an MNC the firm may now start exporting in larger volumes to overseas
destinations.
• It can take up to 4 years for a firm to achieve initial MNC status. Often the run-up to achieving such
export volumes, overseas sales and investments is conditioned by the firm’s earlier experience in its
home country. A firm’s success domestically leads to early attempts to invest overseas.
• This often prevents the progressive globalisation of the MNCs business operations, suggesting its
status in newly established MNC.
• Now the firm is able to actively hunt for executives with rich international experience, capable of
spearheading its international its international business operations. The appointment of the one or
more suitable executives, capable of adapting the MNC’s cooperate and organisational culture could
pave the way for the establishment of additional overseas sales offices.
• Logistically this could lead to the establishment of the firm’s first overseas warehouse. Another stage
of these budding stages of development would be the establishment of overseas subsidiaries and
franchises.
• These developments are accompanied by an increased market share, both at home and abroad.
• Of significance would be the increase in the international MNCS international sales relative to its
domestic sales. However, an increase in the international sales revenue does not necessarily imply
adequate brand recognition overseas. Brand recognition remains a challenge.
2.5. The Intermediate MNC Stage
• The most chaotic and troubled phase in an evolving MNC's developments misguided efforts to
accelerate international expansion can render the young MNC vulnerable to the unpredictability of
the global business environment.
• The response to such volatility is often impulsive, and may take the form of the recruitment of more
international managers and the multiplication of international brands, market channels, foreign
capital and higher value-added products, which can test the resilience of the value chain.
• Such demands can lead to premature outsourcing and a series of miscalculated moves. In practice,
misguided efforts by a young MN C to add high-value products to its existing range can lead to
mistaken alignments with prospective partners. The MNC may also prematurely acquire related
firms in the industry or other downstream or upstream participants in similar industries.
• The above can terminate the firm’s progress towards maturity. Frequently, significant costs have to
be absorbed and large investment projects aborted, which places an increasing financial burden on
the fledgling MNC in its quest for increased profitability. Such losses hold serious implications for
both the MNC and outside investors, who stand to lose the money they have invested.
• Indeed, premature initiatives in the pursuit of rapid international expansion could even have an
impact on the viability of the firm’s present organisational structure and various of its control
mechanisms. In addition, misguided endeavours could precipitate the departure of valuable
managerial staff, which has the potential to erode the firm’s prevailing organisational culture.
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