Multinational Enterprises

Multinational Enterprises

Introduction:

According to Campbell (1994) Multinational enterprises have realised the cost benefits and also the and efficiency advantage of investing in abroad, foreign direct investment has grown rapidly over the recent past, according to UNCTAD (2004) between the year 1990 and 2002 foreign direct investment grew from 950 million dollars to 4 billion dollars, this growth has been as a result of the increased number and diversity of service MNE. Service MNE will establish linkages with suppliers, competitors and other local firms in order to gain competitive advantage.

The research report presented compares two cases where there are linkages between the multinational companies and a case where the firm does not establish linkages in its venture. According to the respondent venture into Taiwan and Korea were two different scenarios, in Korea the multinational enterprise did not find a joint venture partner and therefore it decided to undertake investment on its own, this is because firms in the economy wanted to take control of the venture and therefore the situation of lose win situation.

In the Taiwan market the multinational company established a joint venture with a local firm and things were less complicated, this is because the multinational company learnt fast and also the growth was very fast and this shows the importance of establishing linkages with the local firms. According to the report a firm will gain by knowing the pattern and benefits of forming linkages, it is also evident that local firms will also benefit from the establishment of linkages, linkages will also aid in upgrading of local firms and also development of the local economy, Miles (1993) states that the unique nature of the services provided by these MNE in host economies and therefore it is hard to come up with a generalised theory on the service industry.

Multinational Enterprises

This paper discusses the findings of this report which portrays the importance of linkages, changes that occur in these linkages and the importance of forming linkages with host country linkages. Multinational firm will form linkages with competitors, suppliers and firms in other sectors.

Do Linkages exist in the Service Sector?

Foreign direct investment has grown in the recent past and their growth is also contributed to the existence of linkages, from the interview with the president B and Q Korea linkages exist in that some multinational countries will get into joint ventures with the host country local firms, therefore linkages do exist but the type of linkages formed with local firms will differ from country to country.

Joint ventures are advantageous in that they aid the multinational company to establish quickly and also learn quickly about the foreign market other linkages that exist include with firms that are in other sectors which help the firm to run smoothly.

For example a multinational enterprise will subcontract other firms in other sectors such as in the transport sector, according to the respondent they subcontracted DHL in Korea to undertake transportation of goods to consumers in the host country.

The MNE will also create linkages with suppliers who act as providers of best prices and best quality of goods, the advantage of these suppliers’ linkages is that they act as a source of knowledge, skills and technological information which aids the firm to improve its business undertakings.

Multinational Enterprises

When joint ventures fail in these host countries firms will opt to do it on its own but in this case the venture is usually very difficult, the venture is usually very slow and very expensive in this case but with time the firm will establish linkages with other firms, for example when the firm starts its business venture it will first import almost all its products but with time it will find local suppliers and therefore their level of imports will decline, according to the respondent however this is vice versa in Korea where they first imported 10% and later this rose to 17%, however this is attributed to the fact that most of the goods that are consumed in Korea are usually imported from china. This example shows that as the firm will over time adopt linkages and adopts strategies that are in line with the host country’s market

How do linkages in the service sector change with host country firms over time?

Linkages will change over time as the firm adapts to the new market characteristics, example from the case reported by the respondent where the amount of imports increased from 10% to 17% shows that there is a change in the linkages established by the firm. The changes occur due to improvements in business strategy.

Another type of change is where the firm will acquire the local firm which previous were in joint venture, this type of linkage shows that the firms merge and as a result the firm is sold off. As a firm invest in another country the linkages move from simple to more complex linkages, the firm will its self establish linkages with suppliers, transporters and chain retailers in order to benefit and also in order to gain information regarding what is required by the consumers.

Changes will occur as the firm establishes less expensive suppliers, for example the investment in Korea first did not import much and therefore had to buy from local firms, after the supply chain that involved importing goods from china was established then the volume of imports

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increased.

Changes will also occur from complex to simple linkages whereby firms will stop importing products and start to purchase locally as linkages are established among local suppliers, this as a result will lead to change in the linkages the firm establishes from complex to simple supplier linkages.

What is the impact of forming service sector linkages on host country suppliers?

There are various impacts that the firm experiences as a result of forming linkages with other firms, from the Korea Taiwan scenario reported by the respondent there are various advantages associated with linkages.

The Korea investment:

The multinational company did not find a suitable partner to venture with and therefore it started to establish linkages, at first this venture was very expensive and very slow and for this reason establishing linkages will lead to a reduction in the cost of investments and also the firm would grow very fast. Korea market was very complicated and complex because the firm used the information that was provided by the research company about the market, the research company only provides numbers and does not provide the emotional context of consumers in the market.

The firm did not realise that the consumers were brand conscious and that in every sector there were only 4 to 5 brand of the product that the consumers preferred, the quality of products was also very important in the Korea market in that they tried to provide a product that was cheap

Multinational Enterprises

but consumers did not buy it.

If the firm had established proper linkages in the market such as mergers and acquisition it would have gained more information about the market, this venture was expensive in that they had to undertake TV campaigns in order to inform consumers about the brand, this would have been much easier and cheap if the firm established linkages with its competitors by skipping the bit of understanding its consumers.

The cost of this venture was very high, also very high competition from other rivals such as LG and Hanse and that this investment would have been cheaper if the firm understood the emotional and cultural differences which exist in these countries.

According to the respondent for every venture the first step is to understand the market, this involves understanding the needs of the consumers whether prices, quality and brand, after this is done the next step is to find suppliers whereby a firm is required to find 300 to 400 suppliers and choose the best, after this is done the next step is the advertising campaign which involves tv campaigns and other forms of advertising.

Taiwan investment:

The Taiwan venture is very different from the Korean venture, this venture according to the respondent was characterised by establishing a venture partner and this helped the company to understand it consumers much faster and better, the firm experienced rapid growth and finally it acquired the other company, this was a win win situation whereby both firms gained from the venture, in 1996 they established one retail store and today due to the rapid growth the firm has over 20 retail stores. This shows the extend of advantage gained by forming linkages.

Multinational Enterprises

In this investment strategy the firm had an advantage that there was a ready supply chain and therefore the venture was much easier and cheap.

From the above two examples therefore establishing linkages with suppliers with suppliers are very important, this is because they are a source of information regarding skills, technology and knowledge regarding the market, these suppliers will also be a source of cheap and quality goods that aid in establishing demand in the host country, a multinational firm always establishes these linkages with other firms in the host country.

The suppliers in the host country will also aid the firm to minimise costs of production whereby the firm will check for the less expensive supplier and this aids in increasing the profits obtained and also aid in growth of the firm.

The other advantage is that the firm is able to communicate with the supply firms about quality of goods produced and the desired prices, in our case study the Korea scenario shows that the firm experienced a different consumer preference in the market and the consumers wanted quality branded products and not cheap and poor quality products, despite the expensive of creating brands the firm finally succeeded in its business undertaking.

Local firms and the local government will also benefit from the establishment of linkages, linkages will also aid in upgrading of local firms and also development of the local economy, therefore the local firms will benefits from the improvement in their technology and the local government will gain through the process.

Multinational Enterprises

Critics on Methodology:

The methodology used to collect this data is not random, this means that the results of these study may be biased, snowball sampling method is not randomly selected because it involves asking an interviewer to recommend someone else for the study, therefore the best method of sampling that could be preferred is a random sample to avoid bias in the study. Further on the sample only 29 interviews were considered and given the extent at which the multinational enterprises have grown the study could have considered a bigger sample to avoid bias in the study.

The Taiwan and Korea investment strategy in the report by the respondents clearly shows the different linkages that firms will establish abroad to gain competitive advantage, however considering only two countries to analyse the differences will provide biased information because this report does not consider other developing countries and the effect of linkages in these countries, for this reason this study is a breakthrough into understanding linkages but it cannot be used to generalise the issue of linkages because every country has its own differing market as portrayed buy the Korea, Taiwan and UK market.

Conclusion:

The research report shows the importance of establishing linkages and the possible changes that occur in these linkages. The two cases of venture into Taiwan and Korea are different and show the significance of linkages and how firms establish linkages, In Taiwan the multinational company established a joint venture with a large local firm and the venture was less expensive and fast.

Joint ventures are one sign of linkages formed by firms in host countries, there are numerous advantages associated with such linkages in that the MNE learns quickly about the foreign market and also there is fast growth. Other linkages exists where the firm will subcontract other firms to perform other services for the purpose of smooth running of the company, the other

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form of linkage is formed where a firm establishes linkages with its suppliers, in this case the form of linkage formed by the firm is through establishing china suppliers and also local suppliers of its goods.

The other purpose why MNE will create linkages with suppliers is because they will be in a position to communicate about the quality and prices that are desired in the market. Firms in most cases will opt to establish partners but if this fails they will tend to establish these linkages on their own although this method is slow and expensive.

The other advantage of forming linkages with suppliers is in order to gain competitive advantage, suppliers being a source of information regarding the current trends in the market will help the MNE utilise available business opportunities abroad. The local firms and also the local economy will also gain from the formation of these linkages.