Global Management 1

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Introduces global strategy: what is it? Why is it important

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Global Management 1

  1. 1. Global Management How do we manage international and global companies? <ul><li>Copyright Richard Lynch 2009. All rights reserved </li></ul><ul><li>www.global-strategy.net </li></ul>
  2. 2. How do we manage international and global companies? <ul><li>Why do we focus primarily on large companies, like Multi-National Enterprises? </li></ul><ul><li>How do we define MNEs </li></ul><ul><li>Explore the nature and extent of MNE activities </li></ul><ul><li>Relate such activities to the interests of the home and host countries of MNEs: the C-C-B paradigm. </li></ul>
  3. 3. Why do we focus primarily on large companies, like MNEs? <ul><li>Because Multinational Enterprises (MNEs)are responsible for around 50 per cent of world trade: Toyota, Disney, etc. </li></ul><ul><li>Because the world’s leading commercial banks are responsible for most of the world’s finance and cash flow: proven by the impact of the financial problems during the 2009 crisis </li></ul><ul><li>Because it is easier to understand the principles of global management with large companies </li></ul><ul><li>But small companies, especially those with a unique technological advantage, can quickly become large in a world hungry for new ideas, e.g. Facebook which only started in 2005. </li></ul>
  4. 4. MNEs: some definitions-1 <ul><li>MNE: an enterprise that engages in foreign direct investment (FDI) and owns or controls value-adding activities in more than one country. </li></ul><ul><li>Distinguish between MNEs with groups of largely independent multi-domestic subsidiaries, i.e. for local markets, and MNEs with global or regional networks. </li></ul><ul><li>Note that an MNE is not the same as an international trading firm because the MNE can transfer goods or services internally between countries before or after adding value to them from the assets it owns in a foreign country. </li></ul>
  5. 5. MNEs: some definitions-2 <ul><li>Foreign direct investment (FDI): made outside the home country but inside the investing company: control remains with the investor. </li></ul><ul><li>FDI means more than financial capital: e.g. it can also include technology, management skills, access to markets, brands, entrepreneurship </li></ul><ul><li>Distinguish FDI from foreign indirect transfer of resources: the latter covers specific assets and intermediate products, including capital and technology, that move between two independent economic agents. </li></ul>
  6. 6. MNEs: some definitions-3 <ul><li>Problems arise when moving from the control of FDI to its influence : what is the position of a Japanese Keiretsu arrangement or a German bank shareholding? </li></ul><ul><li>And what about alliances? If Samsung (Korea) agrees with Philips (Netherlands) to market some of its electronics products in Europe, to whom is the investment credited? </li></ul><ul><li>And other forms of collaboration with customers, suppliers and competitors? e.g. a sole supplier to Nissan (UK) </li></ul><ul><li>Hence a broad definition is essential to cover the plurality of economic activities of MNEs. </li></ul>
  7. 7. Significance of MNEs in the world economy <ul><li>Number of enterprises: 77,000 parents with 770,000 affiliates (2006) </li></ul><ul><li>Cross border Mergers and Acquisitions: 716 in 2005 </li></ul><ul><li>Total assets of foreign affiliates: US$ 45,546 billion (2005), growing +21% between 1996-2000 </li></ul><ul><li>Sales of foreign affiliates: US$ 22,171 billion (2005), growing +10.1% between 1996-2000 </li></ul><ul><li>Employment of foreign affiliates: 62,095 (thousands), growing +11% between 1996-2000 </li></ul><ul><li>Keypoint : In 2005, MNEs sales of foreign affiliates may account for as much as 50% of world GDP, up from 25-30% in mid-1980s. </li></ul>Source: Dunning & Lundan 2008/UNCTAD
  8. 8. World’s leading Global Non-Financial MNEs Source: UNCTAD database 131,204 85,669 France Telecom, France 114,636 98,719 Total Oil, France 233,721 122,967 Toyota Motor, Japan 192,811 129,939 Royal Dutch/Shell, Neth 195,256 134,923 Exxon Mobil, USA 193,213 154,513 British Petroleum, UK 479,603 173,690 General Motors, USA 305,341 179,856 Ford Motors, USA 258,626 247,850 Vodafone, UK 750,507 448,901 General Electric, USA Total assets in US$Mn Ranked by Foreign assets in US$Mn MultiNationalEnterprise
  9. 9. Why do MNEs expand internationally-1? <ul><li>Resource seekers : invest abroad to acquire specific assets at a lower real cost than home markets. </li></ul><ul><ul><li>Three main types </li></ul></ul><ul><ul><ul><li>physical resources, e.g. RTZ in minerals </li></ul></ul></ul><ul><ul><ul><li>cheap and well motivated labour, e.g. Sony in China </li></ul></ul></ul><ul><ul><ul><li>buy technology or marketing expertise, e.g. Volkswagen in Brazil </li></ul></ul></ul><ul><li>Market seekers : invest in a particular country or region to supply goods or services to markets in these or adjacent regions </li></ul><ul><ul><li>Motives </li></ul></ul><ul><ul><ul><li>protect or exploit markets </li></ul></ul></ul><ul><ul><ul><li>Adapt to local tastes </li></ul></ul></ul><ul><ul><ul><li>Avoid excessive transport costs from home country </li></ul></ul></ul><ul><ul><ul><li>Part of global production or marketing strategy </li></ul></ul></ul><ul><ul><ul><li>Host governments encourage investment </li></ul></ul></ul>
  10. 10. Why do MNEs expand internationally-2? <ul><li>Efficiency seekers : rationalise the resource base or market-seeking opportunity in order to gain from common governance and efficiencies </li></ul><ul><ul><li>Benefits usually economies of scale or scope </li></ul></ul><ul><ul><li>Often experienced MNEs </li></ul></ul><ul><ul><li>Cross-border markets must be well developed and open </li></ul></ul><ul><li>Strategic asset seekers : acquire assets of foreign corporations in order to promote long-term strategic objectives, such as competitiveness. </li></ul><ul><ul><li>Less to import specific cost or marketing advantages </li></ul></ul><ul><ul><li>More to strengthen own competitive portfolio or weaken competition </li></ul></ul><ul><li>There may be other reasons for expansion, e.g.escape home country restrictions, support exports or imports, passive investments. </li></ul>
  11. 11. Why do MNEs expand internationally-3? <ul><li>Smaller companies? can these reasons for the expansion of large MNEs also be applied to smaller companies? </li></ul><ul><li>Answer : Yes but the reasons for smaller companies have not been researched as thoroughly as those for the large companies. </li></ul><ul><li>Research base for large companies: Dunning, J. and Lundan , S.M. (2008) Multinational Enterprises and the Global Economy , Edward Elgar </li></ul><ul><li>Importantly, the reasons for international and global company expansion are mutually linked with that behind country activity. The two – company and country – bargain with each other for benefits and co-operation </li></ul><ul><li>Hence: the Company-Country-Bargaining Paradigm which we explore next. </li></ul>
  12. 12. Global Resource-Based Strategy: the C-C-B Paradigm World environment Company strategy not aligned to one country See Lynch Ch 19
  13. 13. Elements of the C-C-B Paradigm-1 <ul><li>World environment : the institutions, structures and relationships that make up the world community. </li></ul><ul><ul><li>Institutions: World Bank, World Trade Organisation, etc. </li></ul></ul><ul><ul><li>Structures: World system of tariffs and trade, defence, communications, etc. </li></ul></ul><ul><ul><li>Relationships: country and company relationships within broader economic and political structures, cultures and history. </li></ul></ul><ul><li>Company : each company will have sustainable competitive advantages based on its resources and market position: </li></ul><ul><ul><li>Brands and reputation, knowledge and skills, innovative ability, architecture of relationships. </li></ul></ul><ul><ul><li>those that arise as a result of being a subsidiary of a parent </li></ul></ul><ul><ul><li>those specific to the MNE’s existing international activities: better access and knowledge, ability to exploit cheaper sources of labour, differences in capital structure, etc. </li></ul></ul>
  14. 14. Elements of the C-C-B Paradigm-2 <ul><li>Country : each country will have some advantages based on its resources and its location </li></ul><ul><ul><li>special skills, education, infrastructure of roads and telecomms </li></ul></ul><ul><ul><li>economic and government policies on inflation, etc. </li></ul></ul><ul><ul><li>natural wealth of country, e.g. oil, agriculture, climate </li></ul></ul><ul><ul><li>membership of trade block(s) </li></ul></ul><ul><ul><li>cultural and historic links </li></ul></ul><ul><li>Bargaining : companies and countries undertake to discuss with each other the possibilities of doing business through this process: </li></ul><ul><ul><li>Tariffs, taxes and investment incentives </li></ul></ul><ul><ul><li>Local competition, barriers to trade, market size and growth </li></ul></ul><ul><ul><li>Government support directly and indirectly </li></ul></ul><ul><ul><li>Relationship with other members of trade block. </li></ul></ul>Note : C-C-B Paradigm heavily adapted from the late Prof John Dunning’s earlier O-L-I paradigm to focus on international and global strategy issues .

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