The Journey of MNC’s Establishing Bases in Foreign Markets.

 

“Charting New Territories”:

The Journey of MNC’s Establishing Bases in Foreign Markets

Fatima Siddiqui¹, Md. Arifur Rahman Rifat ^2, Syed Faizan Parvaiz³

 

A Multinational Corporation (MNC) is a business that is incorporated in one country but operate in multiple countries, often spanning continents. The concept of Multinational Corporations (MNCs) has a wide and evolving meaning. Traditionally, MNCs were defined mainly by their structure, focusing on how they operated across borders through distribution, production, and services, essentially extending the parent company's operations beyond its home country. However, with globalization, the lines between businesses, countries, and marketing strategies became less clear. This change is reshaping how we understand MNCs, as they adapt to a more interconnected world. MNCs have been around for a long time, even before the modern world. Ancient civilizations like the Phoenicians (today’s Lebanon) traded across different countries. Later, during the time of European empires, companies were formed to trade and control colonies. The Industrial Revolution made MNCs grow even more, as businesses wanted to sell their products in many places. In the middle of the 20th century, MNCs became very big and important, thanks to technology, less trade rules, and open economies. "Multinational corporations are not just entities that operate across borders; they are critical players in the global economy, shaping markets, influencing cultures, and driving innovation."(Rugman & Verbeke, 2001). MNCs are of various types, each with its unique characteristics and strategies:

·        Transnational Corporations: These MNCs are highly integrated and operate as a single global entity. They often have a global supply chain and a global workforce. Examples of transnational corporations include Apple, Google, and Microsoft.

·        Multinational Corporations: These MNCs are typically focused on a specific industry or sector. They have a strong global presence and often operate in multiple regions, typically more integrated and coordinated. Examples of multinational corporations include Toyota, and Coca-Cola.

·        Conglomerate Corporations: These are large corporations that operate in a wide range of unrelated industries. They are often formed through mergers and acquisitions, and their subsidiaries are typically autonomous and operate independently. Examples of conglomerate MNCs include General Electric, Tata group, and Samsung.

Each type of MNC has its own advantages and disadvantages. Conglomerate MNCs can benefit from diversification, while multinational corporations can benefit from industry-specific expertise. Transnational corporations can benefit from economies of scale and a global perspective. The choice of MNC type depends on the company's goals and their strategy.

Expanding into Foreign Markets: A Strategic Guide

               Presence in Foreign markets is an important growth tool for companies, especially in the case of a limited home market. This may happen due to lack of domestic demand, when the market is too small or the industry is too narrow. Going abroad represents an opportunity for companies to reach new customers to a much larger extent, but they also must face challenges like different political and economic scenarios, new competitors, new laws and regulations, and different quality demands. Expanding a multinational corporation into a foreign market is a strategic move requiring cautious planning and implementation. This action is frequently motivated by pursuing new markets, obtaining significant resources, acquiring advanced technologies, diversifying product offerings, or securing strategic assets. Each of these objectives influences a multinational corporation's strategy when establishing a new operation overseas. The steps include:

1. Implement Thorough Market Analysis:

Before establishing a base in a foreign nation, a MNC must perform comprehensive market research to comprehend local market dynamics, consumer preferences, and competitive landscape. This research enables the company to find accessible resources, including raw materials, workers, and infrastructure, that can facilitate operations. Moreover, it offers essential insights into consumer behaviour, which can guide product modification and marketing initiatives. When Walmart entered Mexico, it meticulously analysed local purchasing behaviour, enabling the business to customize its stores to meet regional demands.

2. Administrative and regulatory environment:

Understanding a foreign country's legal and regulatory framework is essential for successful market entry. Various nations impose distinct regulations on overseas enterprises, encompassing corporate tax frameworks, labour legislation, and intellectual property laws. Moreover, foreign direct investment (FDI) regulations may significantly restrict business operations, especially in defence, telecommunications, or finance industries. In certain instances, collaborations with local enterprises may be necessary to comply with regulatory requirements. For example, Apple needed to collaborate with local enterprises before obtaining authorization to establish its retail outlets in India. That’s why its stores in India are under the iCrest brand name.

3. Research and Development Operations:

Establishing local Research and Development (R&D) activities is essential for a multinational corporation seeking to innovate and respond to local market demands. Establishing R&D facilities in the host nation enables the corporation to create products or services that better correspond with local consumers' preferences, culture, and demand patterns. R&D facilitates the company's rapid adaptation to evolving market trends and laws, enhancing corporate agility. For example, Samsung has created numerous R&D labs in India to provide mobile technologies specifically designed for Indian consumers, strengthening its position in a competitive market.

4. Establish a Comprehensive Local Network:

Establishing an adaptable local network is essential for creating a sustainable company presence. Strategic asset-seeking multinational corporations frequently aim to establish relationships with local enterprises to acquire valuable technology, intellectual property, or distribution networks. Multinational corporations pursuing technological advancements may collaborate with community educational institutions or research organizations to foster innovation. For market-seeking multinational corporations, the collaboration with local advertising agencies, media, and distribution networks is not just beneficial, but essential for effective market penetration. Coca-Cola's extensive collaborations with local bottling firms have been fundamental to their global distribution strategy.

5. Learning of Experience and Adaptation:

Continuous learning and adaptability are essential for sustained success in an international market. Multinational corporations must remain adaptable and highly sensitive to adjustments in local market trends, legislation, and consumer preferences. For MNCs pursuing diversification, adaptability may entail investigating new product lines or business models that address changing consumer demands. Strategic asset-seeking multinational corporations may consistently advance by incorporating freshly acquired assets, such as local brands or technologies, into their worldwide operations. For example, PepsiCo's capacity to customize its product offerings to regional preferences, exemplified by the introduction of popular local flavours in many nations, has been important to its success.

6. Formulating a Market Entry Strategy:

An effectively designed market entry plan is essential for a successful launch in a foreign nation. It's interesting to note that market-seeking multinational corporations typically use entrance strategies that incorporate customizing products to align with local consumer preferences or adjusting prices to accommodate the local economy. On the other hand, resource-seeking and technology-seeking multinational corporations may prioritize joint ventures with local partners possessing access to natural resources or advanced technology. For MNCs pursuing diversification and strategic asset acquisition, partnerships or acquisitions of local enterprises with important assets like brand equity, technology, or proprietary rights are frequently the favoured approach.

 

Foreign Direct Investment (FDI): MNCs' Global Game Plan

Foreign direct investment (FDI) is a type of investment in which a company from one country acquires a lasting interest in a company in another country. MNCs transact business with large number of countries and often operate in diversified business activities. The movements of private foreign capital take place through the medium of these corporations. Thus, MNCs are an important source of foreign direct investment (FDI). In order to increase their profitability many giant firms find it necessary to go in for horizontal and vertical integration. For this purpose, they find it profitable to set up their production or distribution units outside their home country. MNCs employ various methods to invest in foreign markets. Here are some common approaches:

·        Wholly-Owned Subsidiaries: A wholly-owned subsidiary is a foreign company that is entirely controlled by a parent multinational corporation (MNC). It is a legal entity that operates independently in the host country, but it is ultimately owned and managed by the parent company. It offers several advantages to MNCs, including complete control over operations, direct access to the local market, and the potential for higher profits. However, they also involve significant investment costs, exposure to local risks, and the need to comply with foreign regulations. For example, Apple's manufacturing plants in China and Honda’s Subsidiaries around the world.

·        Joint Ventures: A joint venture is a business partnership between a foreign multinational corporation (MNC) and a local company. Joint ventures can be formed in various ways, such as by creating a new company together or by combining existing businesses. Joint ventures offer several advantages to both MNCs and local companies. For MNCs, joint ventures can provide access to local markets, expertise, and resources. They can also help MNCs to reduce their risk exposure and costs. For local companies, joint ventures can provide access to foreign capital, technology, and management expertise. However, joint ventures also have potential drawbacks. One of the main challenges is coordinating the efforts of two or more companies with different cultures, goals, and priorities. For example, the joint venture between Tata Motors and Ford Company, which formed the Tata-Ford joint venture, is a well-known example of a successful joint venture in India.

·        Acuisitions and Mergers: Acquisitions and mergers involve one company acquiring or merging with another company, either in the same or a different industry. Acquisitions typically involve one company purchasing another company outright, while mergers involve two or more companies combining to form a new entity. Acquisitions and mergers can offer several benefits to MNCs, such as immediate market entry, access to established operations, and potential synergies. By acquiring or merging with an existing company, MNCs can quickly gain a foothold in a new market without having to build operations from scratch. For example, Facebook's acquisition of WhatsApp and Microsoft's acquisition of LinkedIn in 2016.

·        Licensing and Franchising: It is a business arrangement where a company (franchisor) licenses its brand and business model to another company (franchisee) in exchange for a fee. This lets MNCs expand quickly and globally without investing much money. Franchising offers several advantages to MNCs, including rapid expansion, reduced risk, access to local knowledge, and standardized operations. However, it also has disadvantages such as loss of control, potential for brand damage, and difficulty in enforcing agreements. McDonald's is one of the most successful examples of franchising.

Conclusion

The journey of multinational corporations (MNCs) establishing bases in foreign markets is influenced by a multitude of factors. While MNCs can bring significant benefits to host countries, such as job creation, technology transfer, and increased competition, they can also pose challenges, including job losses, tax avoidance, and cultural homogenization. The relationship between MNCs and host countries is often characterized by a delicate balance of interests. MNCs seek to maximize profits and minimize risks, while host countries aim to attract foreign investment and promote economic development. By investing in local infrastructure, training workers, and supporting community development initiatives, MNCs can contribute to the overall well-being of the population. Additionally, MNCs can bring new ideas, technologies, and business practices to host countries, which can help to promote innovation and economic growth. To maximize the benefits and mitigate the risks associated with MNCs, governments and businesses must work together to address the potential negative consequences of globalization. This includes implementing policies that promote responsible corporate behaviour. By demonstrating a commitment to ethical business practices, MNCs can build trust and goodwill with stakeholders around the world. In Short, the future of the world economy depends on the ability of MNCs to operate responsibly and contribute to the well-being of all stakeholders. By working together, governments, businesses, and civil society can create a more sustainable and equitable global economy that benefits everyone.