Introduction
According to (2005), entrepreneurs and managers face a range of costs and challenges when they expand internationally particularly due to liability of foreignness (p. 15). However, especially in the case of banana growers in the US, integration is necessary to resolve concerns regarding quality (1970). Cross-border connection is crucial. In the US, banks that are under the Edge Act in 1970s are induced to support US exports by providing the platform for ease of borrowing and to lure foreign deposits to support the former (1974 p. 50). Under this circumstances and historical account, the interest of studying multinational corporations (MNCs) and the cause of their existence are stimulated. How MNCs weigh benefits and costs of an international engagement?
In our analysis of MNCs, six theories will be used that can relate MNCs international growth to specific motivations. Industrial organization (IO) approach assumes that there is an opportunity to create monopolistic dominance through multinational investments (1970); international product life cycle (IPLC) on minimization in costs of factors of production (1966, 1979); behavioral (BEH) on avoiding high-levels of retaliation from market leaders and competitors (1973 & 1976); internationalization (INT) on minimization of transaction costs (1981 & 1985: also 1937) and the ability to choose between hierarchy or market strategies (1986); resource-based (RB) on creating competitive advantages (1991 1959 & 1993); and network theory (NT) on the incentive to prevent tedious and costly understanding of firm behavior and performance (1992; 2000).
The Case of News Corporation
In a case study entitled, “News Corporation (NC): Entering the US Pay Television Industry” (cited in 2004), cross-border diversification of NC is eminent (see attach 1 and 2). Through its history, this international media company had exemplified acquisition strategies to be able to grow. But the case does not explicitly provided rationale behind its multinational investments. In a chronological thinking, NC bought newspapers in London, Britain and US to gain initial entry to the industry (pp. C101-C102). In a hasty analysis, RB theory seemingly drove NC because it has the financial as well as business resources to create synergy with then financially-troubled but established and known local firms. NC money complemented local embeddedness giving rise to investment outflow outside the home country of Australia (p. C101). On the second thought, what really infused investment motivation was explained by NT. If the drive is merely resource / competency-based, NC would have created synergies with other Australian firms which may prove to be more culturally feasible and manageable. Homogeneity in assets can also give way for economies of scale to apply that will make cross-border operations less costly.
Comparatively, the home and host prospective partners have converging cost advantages with reference to RB view. However, NT suggests that no strategic networks would ensue in multinational investments rather the incentive of NC to acquire embeddedness in the host country. Without emphasis on NT, NC cannot have rights (specifically, competitive rights) to operate in host markets. This is because host firms have already developed social (to customers), professional (to forward and backward suppliers) and economic (to employees, managers and government) ties through time. This excludes their knowledge on how to handle deviations/ conflicts arising on the course of such relationships. Even if a foreign firm will enter the market internally strong, its external environment may not allow it to apply its strengths without their operations/ strategies becoming acceptable to host stakeholders. Since NC was then held only newspaper business as well as its host targets (pp. C101-C102), the inability to imply that the content of their paper is adjusted from Australian point of view suggests dissolution of the future in the host market.
Such argues that RB cannot support NC rationale on such host firm acquisitions. This argument is intensified by the fact that even some are loosing in business, NC saw such as a business rather financial opportunity to resolve NT issues. It may not need financial, organizational, physical or technological resources instead minimum level of reputation-based resources from brand name of the host firms. On that respect, the matching process of NC and host firm resources is less significant. Instead, initial entry and operational stability in the early years of host operations are necessary that makes NT the determinant of NC strategy. The question in the minds of NC’s managers is “how to get into the game?” not on “how to win the game?” If any, RB is dealt in the later stages of host operations in which resource matching and discovery of competitive advantage (like synergy or market power) are done for long- rather short- and immediate-term existence.
In addition, with regards to the main issues of NC multinational investments to US pay television industry, IO confirms that the firm wanted to acquire Digital TV to serve as the platform for possible monopolistic dominance. Digital TV and Echo Star are under duopoly competition in the direct broadcasting satellite (DBS) systems in the US since 1981 (C104). When NC would be able to combine its completely vertically integrated satellite (C102) and other related business, its industry presence alongside Digital TV can easily defeat the competitiveness of Echo Star. Through its history, Digital TV continuously outperforms Echo Star through acquisition of small and loosing industry players (C105) implying that NC integration could ultimately lead to bold leadership in the duopoly market structure.
Again, it is easy to think that RB approach can have its significance as the acquisition due to considerable synergies of the two companies’ assets. However, the end result for a combined firm goes out from a typical competitive advantage rather features of monopolistic dominance. There is likely market power, costs savings and lesser affiliation fees from the US law benefit of “One license, two stations and one market” (C 106). Citing IO as explanation of NC motivation is supported by the fact that NC’s President aimed his company to be the worlds biggest media firm (C101). As NC, before the intended acquisition, has already established newspaper, book publishing, radio, film and cable in the US which provided an impression that Digital TV is the bridge to achieve the aim.
BEH approach has also have augmented reasoning why NC prefers to expand internationally. The firm preferred to face minimal competition that de-focuses its multinational investments from a broad line of media products and broad geographical markets. In the case of Digital TV, NC may enter US market using its own satellite facilities and expertise in Australian, Asian and European subsidiaries. However, the reasoning of BEH suggested that it should acquire or merge with Digital TV to avoid intense competition that can result to significant losses in US infrastructure investments. In the contrary, BEH assumption that in the end of the investment, the firm would pursue follow-the-leader strategies does not hold. Rather, there is a likely possibility that its merger with Digital TV will result to Echo Star going out of business. Hence, a more suitable monopoly motivation and thus IO approach.
NT also has some validity. Technological innovation is embedded in the US pay television industry which can undermine other foreign technologies to the detriment of NC competitiveness. Backward and forward suppliers are embedded within the American culture which can be problematic to NC managers and employees. Legal environment can also be hostile to foreign investors as the benefits are embedded to local cable providers. Lastly, the branding of the duopoly players also has bearing in customer’s preference of service provider. On the other hand, these motivations are all inserted in IO model with more significant roles in the success of NC. NT is merely complement to OI model wherein the latter provides the level of importance for each embedded features of the US duopoly industry. With simply NT as reference model, Echo Star (the duopoly underdog) would have been the target.
The Case of Perdue Farms
Established in 1920, the US-based firm is known for geographical expansion as theme of success (2001 C416). However, multinational investments came later in 1990s to Asian and European countries including Russia (C422). The initial market entry in China by selling chicken feet can be explained by IPLC approach. Since US do not approve chicken feet for human consumption, the increasing harvest on poultry and subsequently the production wastes from the feet was resolved by market expansion. The maturity stage of poultry products suggested that if the company would not able to find a market, it would not efficiently sells its products due to too much waste. Chinese people treat the “paws” as delicacy (C422) making it viable to sell chicken feet there. IPLC assumes that best factor endowments are not equally or universally distributed providing the bearing for the firm to export the restricted product parts outside the home country.
On the contrary, IPLC is blemished on its rationale of Perdue’s strategy. First, the search for the best factor endowments may not be the firm’s motivation because the Chinese poultry market is not particular in branding. It is contradictory in the US operations. With this respect, RB is automatically discarded as the firm actually lost competitive advantage from its trademark, processes, technology and biological know-how (C423). Poultry industry is seen as commodity industry in China. Going back on IPLC, Chinese ports and delivery trucks are designed inefficiently that makes the products short-lived leading to limited Chinese geographical distribution. Although the products in US operations are in mature stage, supporting productive factors are lacking in the host country except for the “paw” market.
Due to this, INT approach can have its foothold as key features of the theory are relevant. Opportunism and profit maximization are present in Perdue’s move because even though chicken feet are prohibited in the US, the company “dumped” them into other countries. To maximize their gains, the firm “blinded” itself to the fact that Chinese consumers can develop adverse health effects upon consumption. Corporate managers are learned and informed about this fact. However, as it created impersonal relationships (through exportation) in which face-to-face communication and long-term link with Chinese stakeholders are prevented, self-interest and opportunism is supported to meet its profit maximizing goal. Chinese market is an inefficient system to know the adverse effects of such consumption which ultimately provided hierarchical organization of Perdue a perfect substitute to minimize transaction costs. INT best described firm-market strengths/ weaknesses and their consequences that distinguished its contribution from factor-based IPLC.
Also, INT put importance to Chinese market conditions of environmental uncertainty, asset specificity exchange relations and frequency of transactions which. The host government is under communism rule and anytime there could be policy that can derail all Perdue’s exports from international conflicts or protection of local producers. It hedges this downside through naming Chinese exportation as small part of its business. This makes the uncertainty less risky for the entire operations especially the major production in the US. In this volatile environment, profits will continue to pour as there is currently high frequency of transactions while US poultry harvest has numerous production excess of chicken feet. The Chinese market wants it and demands it creating asset specificity as the bond that build up trade relations. These conditions are perfectly suitable for Perdue and tell significant rationale on this multinational investment.
INT can also explain Perdue’s de-motivated stance in pouring large amount of capital in Russia. The country’s economy is crumbling coupled by rampant corruption. Exportation is seen as the hedging mechanism to prevent excessive risks arising from this unacceptable environmental uncertainty. Even if conditions of asset specificity and frequency of transactions are present, the firm chose hierarchical-orientation and stability. Using IPLC, efficient factors of production would be an unlikely hedging mechanism to surpass possible not only financial but more importantly business losses. It cannot explain why Perdue engaged in indirect multinational investments through exportation. Rather, INT explains the benefits of such strategy as it is flexible and profitable (although in relatively minimal amounts).
The comparative advantage of Chinese market compared to Russia is also eminent when Perdue decided to create joint partnership with a Shanghai-based company (C423). This ultimately suggested the higher motivation of Perdue to engage in Chinese investments. INT offers justification. The Chinese market has higher “opportunistic” features than Russian market in which the firm can gain more profit. Hence, the engagement can satisfy more self-vested interest with minimal environmental risks. The alliance can be explained by NT in reference to Perdue’s admonition that it did not attempt to go alone in the Chinese operations as the cultural differences is too risky for them (C423). Without such alliance, Russian and Chinese markets may experience convergence on their market risk and uncertainty levels.
The Case of Nike
Since its inception in 1963, Nike is already outsourcing production to sub-contractors in Asia (2001 C367). The strategy is proved to be efficient particularly in labor costs in which the home country in US cannot provide. The most common contractors are found in South East Asia operated by Taiwanese and South Korean firms (C368). The manner how Nike located its production facilities can be analyzed using IPLC approach. Since athletic shoes have short product life spans (C367), what the home operations can efficiently provide is its design and research expertise. On the other hand, host operations can augment the inappropriateness of investing in highly mechanized machines. They serve as the house and pooling mechanism for laborers. As a result, Nike did not only have product life cycle compatibility but also cost efficiencies.
The IPLC model is followed by Nike operations. In the introductory phase, the home market designs and approves the market feasibility of the products (C367). As demand grows and matures in both actual and forecasted figures, the mass production of the models is delegated to the host operations (C367). The two operations are distinguished by the stages in the product life cycle in which they play both significant roles. In addition, the assumption of IPLC holds in which knowledge as well as best factor endowments are not equally and universally distributed. The home operations are the best source of innovation and design trend while the host operations on labor and standardization practices. The host operations even provided other endowments like access to raw materials and lower tariffs. Due to this features, RB approach can contribute in the analysis as Nike had created competitive advantages and efficiencies in the value chain not strictly due to product life cycle but more on comparative advantages of Asian natural resources and economic policies.
IPLC also explains the reason behind Nike’s move to retain 100% stake in subsidiaries in hockey equipment, dress and casual shoes and licensed team products (C367). Compared to production of shoes, these specific business areas are catered to specific markets that may have high bargaining power due to future contracts attached to Nike as well as complexity/ machine-based manufacturing involved. These factors make the short product life cycle of shoe design into shorter, personalized and dynamic trends and needs customers may using these products may demand. The production of hockey equipments and licensed team products are intended for specific markets while dress and casual shoes are easily replaced by fashion changes in developed countries. The home operations can effectively handle these areas as sub-contracting to Asian shoe makers would result to sub-standard quality, expensive employee training or inefficient machine acquisition to complement the manpower of host operations.
On the other hand, IO has some symptoms in the strategy of Nike particularly in the aspect of labor. The firm directly employed 20,000 while around 500,000 are indirect employees in 565 contract factories in 46 countries around the world (C367). In 1990, Indonesian employees are paid at around / day compared to US / hour (C367). Despite the huge difference, such dollar amount is viewed competitive compensation in the country. Further, an operation of one factory in Vietnam accounted 9,465 factory workers within a pool of 10,000 total employees. The entry-level wages averaged at a mere .50/ day which is one of the lowest of Nike international factories (C369). However, such amount is considered above industry by the locals that resulted for Nike to enjoy the 18-24 bracket of new employees comprised mostly of women (C368).
With this, monopolistic advantage on labor is eminent. Although several campaigns against Nike labor practices are enormously criticized by their home country stakeholders, the high wage benefits in the eyes of local people is maintaining their production efficiency in the host countries. However, Nike has yet to dominate the shoe industry in host countries to create monopoly over them due to the intervention of global shoemakers as well as embeddedness of local shoe products. More importantly, efficiency in factor of production (labor) and other local factor endowments serve as motivation why Nike continues to produce its shoes in the host countries. IPLC resolves these issues while preventing to imply that Nike is a monopoly in the host country.
Conclusion
The decision to embark in multinational investments is proved to be satisfied by major motivational theories. Our discussion shows that some of them are partial explanatory models and there is a need for critical thinking, theoretical knowledge and case evidence to be able to come up with a more consistent model that best describes corporate motivation. As observed, both RB and NT theory play considerable roles in influencing multinational companies’ decision to geographically expand operations. This can be the reason behind long-run profit-maximizing goal of the firm as well as adaptive requirements of host countries. Generally, these two decision factors are at the fore in determining strengths and opportunities as well as the weaknesses and threats of a cross border investment. It is also confirmed that the cross-border movement of foreign direct investments (FDIs) is not a self-evident strategy in viewing the existence of multinational corporations (MNCs) (1996 p. 6). In the case of Perdue, they are exporting but international growth under specific motivations still hold. In the contrary, the decision to become a true MNC (in which wealth-creating assets is owned and operating internationally) makes motivational theories more complex to an organization as in the case of NC and Nike. This is so as costs and challenges intensify as the primary responsibility is to integrate the parent company’s activities within the region (2003).
Appendix
Attach 1: Regional Business Portfolio of News Corporation
Business
Region
Film
Australia/ United States
Movie Studios
Australia
Satellite Pay Television
Australia/ Asia/ Europe
Sport
Australia
Newspapers
Australia/ United States/ Europe
Magazines
Australia/ United States/ Europe
Television
United States/ Asia
Cable Programming
United States/ Asia/ Europe
Book publishing
United States
Radio
United States
Attach 2: Some Diversification History of News Corporation
Year
Acquired Firm
Status Before Acquisition
Location
% Stake
1968
News of the World
-
London
49
1969
The Sun
Under financial crisis
Great Britain
100
1974
Texas Newspapers and San Antonio Express
-
United States
100
1976
The Star and New York Post
-
United States
100
1981
The Times and Sunday Times
-
United States
100
1985
Twentieth Century Fox
Severe looses
United States
50
1990s
Star TV
-
Asia
100
1990s
Sky Perfect TV
-
Japan
100
1990s
Sky Multi-Country
-
Latin America
30
1990s
Foxtel
-
Australia
25
1990s
Stream Spa
-
Europe
50
1990s
Premiere World
-
Germany
24
On-going
Telepiu
-
Italy
-
On-going
DirectTV
-
US/ North American Scope
-
Note in attach 2: The italicized firms-names are in the newspaper industry, the regular case-names are in the pay television industry and the bold is in the satellite pay television.
Bibliography
Credit:ivythesis.typepad.com
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