INTERNATIONAL BUSINESS

INTERNATIONAL BUSINESS

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Professor
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INTERNATIONAL BUSINESS

International Business
Multinational enterprises (MNEs) play more and more significant roles in regard to the
advancement of the global economy. A moderately small group of MNEs account for a majority
the worlds investment and trade. It is evident that the leading five hundred multinational
enterprises hold over ninety percent of the international foreign direct investment (FDI) stock,
while they conduct approximately fifty percent of the worlds trade. The concept of multinational
firms is among the most comprehensive form of firms in the international economy. A
multinational enterprise may be described as a firm with assets or human resources in more than
one country. Multinational enterprises own the greater share of technology in the globe, and they
obtain approximately eighty percent of all fees and royalties related to technology. Over eighty
five percent of the multinationals in the globe have their headquarters in the wealthy nations of
Western Europe, Australia, China, Canada, the U.S., and Japan, although in recent years, the has
been an increased rise in multinationals that are based in countries such as Taiwan, Spain, South
Korea, Brazil, Argentina, and Mexico (Sauvant 2005, p. 39). This paper will explore the core
motives that inform a firms decision to venture as a multinational enterprise based on Dunning's
taxonomy of foreign direct investment motives that include market seeking, efficiency seeking,
resource seeking, as well as strategic asset seeking.
Driving Factors of a Firms Foreign Direct Investment
The most referred to taxonomy of foreign direct investment motives is found in Dunnings OLI
paradigm that distinguishes four types of FDI. According to Dunning and Lundan (2008, p. 67),
this paradigm is expected to clarify why, where and how a firm develops into multinational
enterprise. The three aspects of why, where and how relate to ownership, location, and
internalization respectively. It is important to note that, in this context, the ownership advantage

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relates to the mobile asset such as patents or trademarks that the firm controls or owns. The
location advantage relates to the utilization of this asset in a foreign country, while the
internalization advantage relates to the power to control in a direct approach the utilization of
this asset in a foreign country. The four types of FDI established in the OLI taxonomy include
market seeking, efficiency seeking, resource seeking, as well as strategic asset seeking. These are
the four core motives that inform a firms decision to invest abroad, or develop into a
multinational enterprise.
Resource Seeking
The resource seeking motive for a firm to develop into a multinational enterprise entails cases
where firms are encouraged to invest out of the country with an intention to obtain specific
resources at lower costs than would be the case in the home country. The phrase resource in this
perspective denotes natural limited resources, as well as labor, and does not include managerial
and technological competencies. Managerial and technological competencies are appropriately
perceived as non marketable assets. This resource seeking motive is exemplified where for
instance Chinas remarkable economic advancement has necessitated a stable supply of natural
resources which has led to an increase in Chinese firms investments in other countries. Chinese
companies for example China Aluminum Corporation (Chalco), Minmetals, and Zijin have
invested in a broad diversity of overseas nations in order to acquire natural resources such as
metals and minerals (Makino and Neupert 2000, p. 93). In this context, it should be noted that
foreign direct investment is not driven only by regional proximity, but also by the accessibility of
requisite assets. Acquiring natural resources continues to be a major motive of Chinese
investments overseas, where the destinations for the outward foreign direct investment is in
resource-rich regions in regions such as Africa, Canada, Central Asian nations, as well as Russia,

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and Australia. According to Pazienza and Vecchione (2009, p. 15), it is evident that the
overriding motive to establish overseas subsidiaries in this perspective is to ascertain a steady
supply of resources for Chinese firms at home. As a result of the strategic significance of
securing resource supplies for the domestic economy, a majority of Chinese multinational
enterprises are owned by the State. It should be noted that the leading Chinese MNEs in the oil
and gas industry such as Sinopec, and China National Offshore Oil Corporation, China National
petroleum Corporation, have in recent years ventured into the acquisition of large oil fields
which secure a steady and long lasting production of gas and oil, as well as significant revenue.
As a result of the significance of these investments, these MNEs enjoy considerable political
support in China which has enabled them acquire billion dollar projects in regions such as Latin
America, Asia, Africa, Russia, and the Middle East.
Market Seeking
The core objective of market seeking foreign direct investment is to exploit an overseas market
which attracts a firm through the supply of services and goods to the host nation or adjacent
nations. The major problem that underpins this form of foreign direct investment motive is
exemplified in that, the intended foreign market is not automatically the market where the
foreign direct investment takes place (Sauvant 2005, p. 59). In reality, the foreign direct
investment can be either in a direct or indirect structure. In the first scenario, the firm is
interested in exploiting the market of the host nation while, in the second scenario, the nation
where the foreign direct investment is directed is utilized as a platform to facilitate expansion to
adjacent regions. This attribute is referred to as export-platform foreign direct investment. It
should be noted that market-seeking foreign direct investment is drawn by aspects such as host
countrys per capita income, market size, as well as market growth. In this context, firms explore

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new markets since it provides an opportunity to remain competitive and advance within the
industry, in addition to attaining scope and scale economies. According to Zemplinerova (2012,
p. 87), market-seeking foreign direct investment is predominantly the most widespread form of
strategy for firms in their internationalization process. A number of contemporary studies
demonstrate that, the escalation of market-seeking motives drive Chinese MNEs mainly towards
emerging and large markets. In this context, market-seeking motivations are the rational outcome
of Chinas export-oriented strategy in recent years, where firms pursue their export channels with
an intention to develop market shares, as well as circumvent trade barriers. Other tradesupporting motives for foreign direct investments entail distribution networks, facilitating
exports of local products, and developing exports that emanate from the home country to
emerging and rapidly developing markets. Since market-seeking policies are usually interrelated
positively with significant markets, involvement of Chinese multinational enterprises in large,
overseas markets is mainly explicated by market seeking motivations.
Famous instance, Chinese firms investing overseas for market-seeking reasons comprise of
Chinese manufacturers of consumer electronics and home-appliances for example Huawei
Technologies, Haier, and TCL that have in recent years endeavored to enter the increasingly
prosperous developed economies for instance the U.S. In this context, Chinese firms in their
pursuance of the market seeking motive have acquired a number of foreign firms for instance,
the TCL Group was successful in purchasing the German Schneider AG, while Shanghai Haixing
Groups acquired Glenoit Textile, and Wangxiang Groups acquired Universal Automotive
Industries Inc (Morck, Yeung, and Zhao 2007, p. 105).

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Efficiency Seeking
The efficiency seeking motive in foreign direct investment revolves around rationalizing the
configuration of established market seeking or resource based investments in an approach that
the firm may take advantage of the geographically detached activities. These gains derived from
the economies of scope and scale and the diversification of risk. The rationale of efficiency
seeking is to exploit special factor endowments, policies, economic systems, as well as market
structures in concentrating production in a narrow amount of locations (Sweet 2010, p. 398). The
benefits of efficiency seeking are the products of dynamic and static synergies in cross border
mergers and acquisitions. Static synergies entail the alignment of management resources,
revenue development through employing marketing, as well as distribution networks of merged
firms, procurement synergies, the economies of scale in production, resulting in reductions of
overheads and averting of duplication of R&D, production or related processes. Dynamic
synergies entail the harmonizing of corresponding competencies, as well as resources in
enhancing the innovatory capacities of a firm with long-term positive outcomes on sales, profits,
as well as market shares (Pazienza and Vecchione 2009, p. 25). The pursuance of static synergies
is increasingly imperative in industries that are typified by escalating competitive pressure,
plummeting prices, in addition to excess capacity, for instance in the automobile industry. On the
other hand, dynamic synergies can be fundamental in industries that experience rapid
technological changes and are innovation driven for instance pharmaceuticals and information
technology. Efficiency seeking motives are evident in Gildan Activewear venture in the
Caribbean. This is a Canadian firm that specializes in apparel has established branches in the
Caribbean Basin with an intention to enhance its competition in the North American market
Zemplinerova (2012, p. 65).

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Strategic Asset Seeking

The rationale of a strategic asset seeking strategy in foreign direct investment is that a firm learns
from other firms, as well as host nations. These assets may assume multiple forms that range
from innovation capacity, organizational capacity, market penetration capacity through accessing
existing distribution channels, as well as understanding the host nations consumer preferences
and tastes. While the conventionally considered motive of foreign investment by MNEs has been
the utilization of an existent ownership advantage, contemporary reasons have included the
strengthening of an existent advantage of the MNE, or the development of new capacities, as
well as advantages. It seems rational to imply that the motive for the MNEs pursuance of
strategic asset seeking may be anchored in the processes that facilitate them in becoming
increasingly entrenched in the local setting (Morck, Yeung, and Zhao 2007, p. 125). This is
informed by the premise that being locally embedded enhances the likelihood of facilitating the
inflow of requisite knowhow and technology that the MNEs are targeting. Consequently, through
adhering to the host nations practices and norms MNEs are perceived as insiders instead of
outsiders, and consequently are likely to benefit from less intricate accessibility to local
knowledge, as well as other local strategic assets. This is in agreement with the contemporary
development of alliances in the industrialized nations.
The surfacing of strategic asset-seeking initiatives implemented by firms based in emerging
economies is a recent occurrence. The amount and volume of overseas acquisitions that are
executed by MNEs from emerging economies is rapidly escalating. This is evident in the
profound transformations that have been seen in the technological strategies of pharmaceutical
firms from India. Based on the re-surfacing of product patent systems on an international scale,
in addition to stern quality standards in export markets, Indian firms have embarked on serious

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improvement of their technological capacities (Sweet 2010, p. 422). The universal trend in
reasonably large pharmaceutical firms from India is to enhance their R&D strength, where a
number of these firms pursuing the ambition of advancing new molecules. It is evident that a
number of Indian pharmaceutical MNEs are currently endeavoring to advance past the process
development-based innovation strategy towards enlarging the product basket. Since these firms
lag behind their global competitors in regard to the volume of product basket, as well as the
operation scale, inorganic corridor towards product development capacities may be as critical as
R&D. The attainment of foreign strategic assets and in-house R&D are usually complementary,
mainly when firms hold fragile product development capacities. Consequently, it is not
impractical to consider that the current acquisitions by pharmaceutical firms from India are
attributable to their strategic competency enhancement objective (Zemplinerova 2012, p. 65).
Conclusion
Multinational enterprises hold several economic advantages over exclusively domestic firms. It
is essential that the requisite and sufficient circumstances that would sustain these advantages in
the long term be understood as the initial step in making the decision to venture abroad.
However, economic fundamentals alone are not adequate in successfully managing a
multinational enterprise. Managers require deciding the extent to which foreign operations
require being coordinated across national boundaries. The principal managerial dilemma that
faces multinational enterprise managers is balancing between domestic responsiveness and
international integration. Establishing and implementing the appropriate policy structure
configuration in regard to responsiveness, as well as international integration is conceivably the
most imperative undertaking for multinational enterprise managers.

Bibliography

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