Outline significant theories explaining the existence of multinational enterprises, and critically evaluate their ability to explain the complex patterns of interaction in the contemporary global economy.
Table of Contents
Theories to Explain the Macroeconomic Approaches of MNEs in Global Economies. 4
The Foreign Direct Investment or FDI Theory of International Capital Flows. 4
Theories to Explain the Microeconomic Approaches of MNEs in Global Economies. 5
Internationalisation Theory or Transaction Cost Theory. 6
Several relevant theories have been proposed by different renowned theorists to discuss and explain the existence of multinational corporations. Multinational enterprises are such enterprises, which control income or revenue generation assets in one or more than one country. Multinational enterprises or MNEs are also known as international establishments or global corporations or transnational enterprises. Some theorists have explained the tactics and modes of operations of different organisations in different countries by their developed theorists. The methods and activities of business operations of several multinational enterprises have changed in the contemporary era. Some multinational enterprises consider microeconomic approaches to operate in foreign countries. On the other hand, some multinational enterprises also think the macroeconomic methods to work in the international markets. Different scholars or theorists have proposed various theories for the macroeconomic approaches as well as microeconomic approaches, which are adopted by various multinational organisations to operate in different countries. There are two major objectives for the development of these theories. First of all, the theorists try to illuminate the existence of the organisations in this global economy. Second of all, the theorists also try to pinpoint the intricate patterns of the interaction of the organisations in the present-day global economies.
The major objective of this assignment is to explain and analyse the theories, which are developed for the explanation and evaluation of the macroeconomic as well as microeconomic approaches adopted by different enterprises in global market places depending upon the economic orientation or structure of different countries. Therefore, two types of theories have been implied in this assignment.
Different multinational firms consider different kinds of investment approaches along with differentiated business operation approaches in the international markets. The reasons behind the consideration of different types of strategies are the different economic structures, growth rate, political scenarios, and the social environments of various countries. As per Luo and Tung (2018), the major objective of the consideration of the theories to explain the macroeconomic approaches is to view the activities of multinational firms from the point of view of trade and international economic-related activities. On the other hand, the major objective of the consideration of the theories to explain the microeconomic approaches is to view the activities of the multinational firms from the point of view of firm-level and industrial level activities. Both types of theories are being evaluated below.
Location theory can be applied to the organisations if they extend their business networks beyond the national boundaries. Location theory can be divided into two segments, such as supply oriented theory and demand-oriented theory. The supply-oriented location theory explains that the manufacturing activities of an organisation take place in such units where the factor manufacturing costs are low. On the other hand, the demand-oriented location theory generally explains that the location of an enterprise is governed by the location of the competitors and operating market. A combination of these two locational theories brings four important locational factors in the explanation activities, such as cheap labour, transportation cost, untapped and protected markets, and raw materials. According to Knight and Liesch (2016), these four factors collaboratively help the researchers to pinpoint the emergence of multinational enterprises. This location theory of international investment also successfully explains the geographical distribution activities of multinational enterprises in the global market.
According to the principles of this theory, the majority of the multinational enterprises always try to enter into the weak currency areas from the stable currency hosting nations. Aliber has proposed that the majority of the multinational firms generally try to enter in such financial markets, which can help the firms of host economies to gain adequate financial advantages. According to Coe (2018), this particular theory can be applied for all those enterprises, whose borrowings and properties are based in the selected markets.
Till the 1960s, foreign direct investment activities by the MNEs were regarded as international capital flow activities. FDI or foreign direct investment theory is also recognised as the theory of international capital flows. This theory suggests that financial resources or capital generally move in different nations in relation to their different interest rates. The interest rates differ basis on the risk and capital premium typically, and factor benefaction ratios of the staff. After the 1960s, the concept of FDI changed as a result of criticism and further suggestions on the international capital flow theory. According to Verbeke and Kano (2015), FDI theory explains the transfer of skills, labours, technological resources, organisational skills, and different management skills.
This theoretical approach is also known as oligopolistic or monopolistic power theory, or market power theory, or industrial organisation theory, or structural market imperfection theory. This particular theory explains that the organisations used to cross the national borders and enter into the international markets to gain monopolistic or oligopolistic advantages. Generally, the majority of the multinational enterprises avoid typically the possibility of entering into a perfect competition market to maximise revenue generation as well as profitability.
Hymer proposes this product life cycle theory and the principles of this theory explain that the multinational enterprises generally consider different kinds of productive activities to develop effective product strategy to enjoy the oligopolistic or monopolistic advantages in the international market. The multinational enterprises generally consider three important stages of product characteristics, such as new product, maturing product, and standardised products. Firstly, some multinational enterprises enter typically into foreign markets by introducing new products depending upon the results of the market research. In this stage, the demands of the target audiences are measured through feedback and data gathering activities. Secondly, the performance of new products can be gauged through data collection and feedback activities. Successful feedback results generally indicate that the products are maturing gradually in the international markets. Last of all, the quality, demand, supply, quantity, pricing, features, and performances of the maturing products decide whether the products can become standardised products or not. According to Buckley and Ghauri (2015), again, the data collection and feedback process can be considered to determine whether the products are standardised products or not. In case of problems found in the new product as well as the maturing product stage, the management professionals of the multinational enterprises generally develop product differentiation strategies to ensure the level of standardisation. The product cycle theory explains the characteristics of the products of multinational enterprises in different stages of products typically.
Internationalisation theory is also known as transaction theory. It states that multinational enterprises generally enter into foreign markets to ensure oligopolistic or monopolistic advantages. The organisations practically create an internal market in the international markets due to market imperfections in distinguished knowledge and transitional products. It is also notable that the professionals of different multinational organisations have to go through different types of transaction activities to gain an oligopolistic or monopolistic power in international markets. These help in reducing the degree of perfect competition-related threats. Overall, the creation of an internal market in the foreign markets depends upon the effective cost management of different transaction activities. According to Strange and Humphrey (2019), it is acceptable that internationalisation theory generally explains the transaction cost controlling and market advantage management activities of the multinational enterprises in the foreign markets.
OLI Theory stands for ownership, locational, and internationalisation theory. This OLI framework of the OLI model is nothing but the further development of internationalisation theory or transaction theory, which was published in the year 1979 by John Dunning. This OLI framework is made of three essential aspects, such as ownership advantages, location advantages, and internationalisation advantages.
As a view of Narula and Pineli (2017), specific ownership advantages are considered as those competitive advantages of the firms, which are enhanced through the engagement in foreign direct investment. Higher competitive advantages generally help in improving the engagement of the firms in international productions.
In the locational advantages, the firms consider several locational attractions like alternative geographic regions or countries, for enhancing value-adding activities of the multinational enterprises. Immobility of the firms regarding the utilisation of created or natural resources can be ensured through the collaboration of the locational benefits and competitive advantages. This can help in exploiting their overall advantages by getting engaged with the FDI activities.
In terms of receiving the internationalisation advantages, the organisations have to organise the development and exploitation of the organisational core competencies. The organisations can prefer more engagement in the foreign direct investment activities if the organisations feel that the globalisation of the cross-border intermediate market is beneficial for them. Hence, it has been identified that the OLI framework generally evaluates the competitive advantages of the organisations in foreign direct investment activities in the international business.
Location theory is still useful in this contemporary world as it is an integral part of regional science, spatial economics, and economic geography. These things are essential for the multinational organisations to consider in international business as this approach helps in addressing the question regarding what types of economic activities are important for multinational firms, why these economic activities are essential for multinational firms, and where these activities would be valuable. According to Palley (2015), the multinational organisations choose preferred business locations to do business, gain competitive advantages, and maximise profits. Therefore, consideration of the locational theory is essential for contemporary multinational firms.
The Aliber Theory of foreign direct investment is also relevant and useful for contemporary organisations. This theory suggests that the changes in the economic growth rate of a nation generally lead to a change in exchange rates. It probably has a substantial impact on sourcing, marketing decisions, financing, and international practices of the firms. As a view of Rochon and Rossi (2016), it is identified in the contemporary business operation activities that the multinational enterprises quite often face some problems regarding exchange rate related issues in the international market, which lead to challenges in the business operation decision-making processes. Hence, it can be stated that the Aliber Theory is highly essential for the economists as well as business researchers to apply and analyse international business operation activities of multinational organisations.
FDI theory is also crucial for the economists and business research professionals to analyse the international capital flow or mobility activities of the multinational organisations in the global markets. This is identified that the majority of the multinational organisations always try to mobilise the private funds in different international markets in the pursuit of the healthy return on the invested capital. The example of several contemporary multinational firms can be taken here like Vodafone, Walmart, and Tesco Plc. Etc. The capital flow or mobility of these firms in international markets can be analysed and discussed through the foreign direct investment theory.
The Hymer-Kindleberger theory is highly realistic for multinational organisations. Indeed, multinational organisations generally expand their business network to gain oligopolistic or monopolistic advantages. It is quite real in this present era as the majority of the oil and gas organisations expand their network in different international markets to gain monopolistic as well as oligopolistic market advantages. Hence, this theory evaluates the complex interactions of multinational organisations in foreign markets. The Transaction cost theory is an upgraded version of the Hymer-Kindleberger theory. According to Voinescu and Moisoiu, (2015), this particular theory suggests that organisations generally go through some essential transaction approaches to reduce the degree of perfect competition in international markets. The example of several leading hypermarket chains can be considered as such organisations generally follow the transaction cost theory to gain monopolistic and oligopolistic advantages.
Product-cycle theory is the most realistic, highly practised, and most common theory to analyse and evaluate the product development and product management strategies of the multinational organisations in the international market. Different products go through different life-cycle stages. Hence, it can be stated that the consideration of this particular theory helps the organisations to withdraw the low performing products in the decline stage of the life cycle and re-introduce the products to maintain the business and growth efficiency in the international market. The OLI theory proposed by John Dunning is highly important as this particular theory suggest that the company do international businesses to enhance either locational advantages or internationalisation advantages, or ownership advantages. This is sure that the organisations generally expand their business networks in the international market to gain competitive benefits and the competitive advantages can be categorised into these three major types.
All the mentioned theories are being evaluated above to determine their abilities in explaining the complex interaction patterns of the multinational enterprises in international markets. Among the above methods, the concept and bases of Hymer-Kindleberger Theory, FDI Theory of International Capital Flow, and Transaction-Cost Theory have been changed. Before or during the 1970s, FDI Theory suggested that financial resources or capital generally move in different nations in relation to their different interest rates. The interest rates differentiate basis on the risk and capital premium typically, and factor benefaction ratios of the staff. Now, FDI theory explains the transfer of skills, labours, technological resources, organisational skills, and different management skills after the 1970s. As per Wojtkiewicz, (2015), the principles of the Hymer-Kindleberger Theory and Transaction-Cost theory suggested that the organisations generally expand their business networks in the monopolistic or oligopolistic market. However, now it is identified that several multinational companies are also expanding their business networks in perfect competitive global markets. The degree of globalisation has increased after the 1970s. Therefore, the business orientations of the multinational firms have changed. The global industry has become more saturated and more competitive after the 1970s.
The significant gap of FDI theory is that the theory did not explain the transfer of skills, labours, technological resources, organisational skills, and different management skills as these aspects are also mobilised besides of the financial resources. However, some theorists are working hard to integrate some additional inputs in this theory to explain the complex international activities of the multinational firms. The major gap of Hymer-Kindleberger Theory is that the theory did not explain that the multinational organisations also can expand their reach in the perfectly competitive international market. However, the emergence of Transaction-Cost theory suggested that the organisations can extend their network in the perfectly competitive market by reducing the degree of competition through different transaction activities. There is also a significant drawback in the OLI framework. This OLI framework is an international FDI theory. This theory has evaluated that the organisations focus on ownership, locational, and internationalisation advantages in business in FDI. However, in this contemporary era, the organisations are also focusing on maintaining governance and sustainability-related advantages in doing business in international markets. The organisations are entering ion those global markets in this contemporary era in which the firms can use sustainable resources in the business to improve governance and ethics.
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