Andreas Bachmann & Rieke Bärenfänger Global Business (2036B)
Expanding Abroad: Motivations, Means, and Mentalities; Ch. 1
Introduction
The MNE
Definition:
1) An MNE has substantial direct investment in foreign countries, not just the trading relationships of an
import-export business.
2) An MNE is engaged in the active management of these offshore assets rather than simply holding in a
passive investment portfolio.
Scope: The MNE is a very recent phenomenon, with the vast majority developing only in the post-WWII
years. What differentiates the MNE is that it creates an internal organization to carry out key cross-
border tasks and transactions internally rather than depending on trade through the external markets
Motivations:
Traditional motivations:
- Secure key supplies
- Market-seeking behaviour
- Access low-cost factors of production
Emerging motivations:
- Increasing scale economies, ballooning R&D investments, and shortening product life cycles
- Global scanning and learning capability
- Advantages of competitive positioning
Preconditions for Internationalization:
1) Motivation: Some foreign countries must offer certain location-specific advantages
2) Strategic competencies or ownership-specific advantages must be owned
3) Organizational capabilities: Necessary to achieve better returns from leveraging its strategic
strengths internally rather than through external market mechanisms such as contracts or licenses.
Process of Internationalization:
Uppsala model (foreign-market entry as a learning process):
- initial commitment of resources to the foreign market
- gaining of local market knowledge about customers, competitors, and regulatory conditions
- on basis of this knowledge evaluate current activities, and further opportunities
- subsequent resource commitments
Gradually, the company develops the necessary knowledge to become an effective competitor in
the foreign country.
Next to assimilating local market knowledge, equally important factors include:
- overall level of commitment to the foreign market
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,Andreas Bachmann & Rieke Bärenfänger Global Business (2036B)
Expanding Abroad: Motivations, Means, and Mentalities; Ch. 1
- required level of control of foreign operations
- the timing of entry.
Two factors determining the modes of operating overseas ( allows to classify approaches to foreign
market entry):
1) Level of market commitment
2) Level of control needed
The Evolving Mentality: International to Transnational
International Mentality: Managers think of company’s overseas operations as distant outposts whose
main role is to support the domestic parent company in different ways, such as contributing
incremental sales. This terminology derives directly from the international product cycle theory.
Companies with this mentality regard themselves fundamentally as domestic with some foreign
appendages
Multinational Mentality: Adopts a more flexible approach to the international operations by modifying
the products, strategies, and even management practices country by country. Companies are
responsive to the local environments; the worldwide strategy is built on the foundation of the
multiple, nationally responsive strategies of the company’s worldwide subsidiaries. Negative: Gives
rise to an inefficient manufacturing infrastructure within the company.
Global Mentality: Thinking in terms of creating products for a world market and manufacturing them on
a global scale in a few highly efficient plants, often at the corporate centre. This view sees the world,
not individual national markets, as its unit of analysis. This approach requires more central
coordination and control than the others and is typically associated with an organizational structure in
which various product or business managers have worldwide responsibility. R&D and manufacturing
activities are typically managed from the HQ.
Transnational Mentality: Aims at becoming more responsive to local needs while capturing the benefits
of global efficiency. Key activities and resources are dispersed but specialized, to achieve efficiency
and flexibility. This approach recognizes the importance of flexible and responsive country-level
operations, but also to link and coordinate them.
These motivations, means, and mentalities are the prime drivers of what is called a company’s
administrative heritage, the unique and deeply embedded structural, process, and cultural biases that
play an important part in shaping every company’s strategic and organizational capabilities.
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,Andreas Bachmann & Rieke Bärenfänger Global Business (2036B)
Expanding Abroad: Motivations, Means, and Mentalities; Ch. 1
Reading 1-1: The Tortuous Evolution of the Multinational Corporation H.V.Perlmutter
Hypotheses referring to the extent of how multinational international firms are:
H1: The degree of multinationality of an enterprise is positively related to the firm’s long-term viability.
The “multinational” category makes sense for executives if it means a quality of decision making
which leads to survival, growth and profitability in our evolving world economy.
H2: Sees the multinational as a new type of institution. This institution could make a valuable contribution
to world order and conceivable exercise a constructive impact on the nation-state.
- no single criterion of multinationality such as ownership or the number of nationals overseas is
sufficient;
- external and quantifiable measures such as % of investment overseas or the distribution of equity
by nationality are useful but not enough
Instead, most relevant seems to be: The executive’s primary attitudes toward building a multinational
enterprise:
1. Ethnocentric (Home-Country) Attitudes:
a. Belief in the superiority of the home company over subsidiaries
b. Performance criteria for men and products are “home-made”
c. “what works at home must also work in the other country”
d. Executives in both HQ and affiliates express the national identity of the firm by associating
the company with the nationality of the HQ
e. Men of the home nationality are recruited and trained for key positions everywhere in the
world
2. Polycentric (Host-Country) Attitudes:
a. local people know what is best for them, the part of the firm which is located in the host
country should be as “local in identity” as possible
b. a polycentric firm is a loosely connected group with quasi-independent subsidiaries as centers
c. many executives mistakenly equate polycentrism with multinationalism
d. no local manager can seriously aspire to a senior position at HQs
e. one consequence (and perhaps cause) of polycentrism is a virulent ethnocentrism among the
country managers
3. Geocentrism (World-Oriented):
a. Ultimate goal of geocentrism: A worldwide approach in both HQs and subsidiaries
b. Requires a collaborative effort between subsidiary and HQs to establish universal standards
and permissible local variations, to make key allocational decisions on new products, new
plants, and new laboratories
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,Andreas Bachmann & Rieke Bärenfänger Global Business (2036B)
Expanding Abroad: Motivations, Means, and Mentalities; Ch. 1
c. Within legal & political limits, best men able to solve the company’s problems are sought for
anywhere in the world
d. Subsidiaries contribute benefits such as
i. An increasing supply of hard currency
ii. New skills
iii. A knowledge of advanced technology
e. Geocentrism requires a reward system for subsidiary managers which motivates them to work
for worldwide objectives, not just to defend country objectives
The EPG Profile
Executives can draw their firm’s profile in ethnocentric (E), polycentric (P), and geocentric (G)
dimensions. They are called EPG Profiles.
- The degree of ethnocentrism, polycentrism, and geocentrism by product, function and geography
can be established: R&D often turns out to be more geocentric; financial managers are likely to
see their decisions as ethnocentric; marketing function is more polycentric
- The EPG profile is a more precise way to describe the degree of multinationality companies have
reached
Forces Toward and Against Geocentrism
1) External positive factors:
a. Growing world markets
b. Increase in availability of managerial and technological know-how in different countries
c. Global competition and international customers’ advances in telecommunications
d. Regional political and economic communities
2) Internal positive factors:
a. Top managements’ increasing desire to use human and material resources optimally
b. Evidence of waste and duplication in polycentric thinking
c. Top managements’ own commitment to building a geocentric firm as evidenced in
policies, practices and procedures
3) External obstacles:
a. Rising political and economic nationalism
b. Suspicions of political leaders of the aims and increasing power of multinational firms
4) Internal obstacles:
a. Management’s inexperience in overseas markets, mutual distrust between home-country
people and foreign executives
b. Resistance to participation by foreigners in the power structure at HQs
c. Linguistic and other communication difficulties of a cultural nature
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, Andreas Bachmann & Rieke Bärenfänger Global Business (2036B)
Expanding Abroad: Motivations, Means, and Mentalities; Ch. 1
Any given firm is seen as moving toward geocentrism at a rate determined by its capacities to build on
the positive internal factors over which it has control and to change the negative internal factors which are
controllable
Costs, Risks, Payoffs
Attitude Costs Risks Payoffs
Ethnocentrism Ineffective planning; fewer Political and social Simpler organization; more
innovations repercussions; less flexible control over appointments
response to local changes to senior posts in
subsidiaries
Polycentrism Waste due to duplication; Excessive regard for local Intense exploitation of
inefficient use of home- traditions & growth at the local markets, more local
country experience expense of global growth initiative for new products
Geocentrism Communication & travel Too wide distribution of More powerful total
expenses; educational power, personnel problems company; better quality of
costs; international HQs and those of re-entry of products and service;
bureaucracy international executives worldwide utilization of
best resources, more profit
There appears to be evidence of a need for evolutionary movement form ethnocentrism to
polycentrism to geocentrism.
- Two mistakes on the way:
1) Tokenism: appointing one or two non-nationals to senior posts (even on occasion to HQs). The
foreigner is often counteracted by the number of nationals around him, and his influence is small.
Tokenism does have some positive effects, but it does not mean that geocentrism has arrived
2) Window dressing: Attempt to demonstrate influence by appointing a number of incompetent
“foreigners” to key positions
- Do not underestimate the human stresses which a geocentric career creates (human costs of
international mobility to executives and their families)
Reading 1-2: Distance Still Matters: The Hard Reality of Global Expansion P.Ghemawat (2001)
- many companies overestimate the attractiveness of foreign markets, partly due to the analytic
tools they rely on. Most prominent example:
- Country portfolio analysis (CPA): Technique to decide where a company should compete. By
focusing on national GDP, levels of consumer wealth, and people’s propensity to consumer, CPA
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