Page 109 - Introduction to Business

CHAPTER 2 The Environment of Business 83

role in the world economy, since the early 1960s, the dynamic growth of European,
Japanese, and South Korean MNEs has changed the competitive nature of global
business. Increasingly, MNEs are sprouting from many developing countries of Asia
and Latin America in some niche areas of operation.
reality What form of international business is most prevalent in your business
CH ECK community?

LEARNING OBJECTIVE 10
Explain the major strategic reasons why multinational enterprises go abroad.

There are several reasons why MNEs go international, all of which are based on the
urge to earn higher profits by utilizing the MNE’s competitive advantage. Some of
the major reasons why MNEs invest abroad include
1. Acquiring essential raw materials: MNEs generally use raw materials in the
production of goods and services and quite often these raw materials are
located overseas. In order to have a reliable supply of these resources, MNEs
choose to invest abroad. For example, the oil majors (ExxonMobil, Chevron-
Texaco, Shell, BP, Total, etc.) have invested tremendous amounts of capital in
the oil-rich regions of the world such as the Middle East, Central Asia, Russia,
Southeast Asia, and Latin America. This is because much of crude oil con-
sumption is in developed countries, whereas the oil reserves are found largely
in developing countries. DeBeers (the diamond cartel) has acquired or oper-
ates most of the large diamond mines in Africa. Alcoa has heavy investment in
bauxite (aluminum ore) mines in Latin America, enabling it to produce alu-
minum ingots.
2. Maximizing production efficiency: MNEs are always looking for the least-cost
method of production, utilizing low-cost raw material inputs, employing pro-
ductive labor, obtaining capital at attractive rates, and utilizing appropriate
technology. Since a large amount of quality inexpensive labor is readily avail-
able in China, many MNEs have set up operations in that country to manufac-
ture all sorts of products like Toastmaster ovens, Sony DVD players, Sanyo TVs,
and so on. Motorola, for example, is one of the largest foreign investors in
China with some $3.4 billion invested in two plants manufacturing mobile
phones, cellular networks, and semiconductors (recently sold to Chinese
partners). Similarly, India has a large pool of talented, relatively inexpensive
software engineers; hence companies like Microsoft, Oracle, Texas Instruments,
Alcatel, and so on have set up operations in India’s technology centers like
Bangalore and Hyderabad to develop and market software.
3. Expanding market share: When the domestic market is saturated, which is
reflected in a high level of competition and low profit margins, MNEs seek to
explore overseas markets where competition may not be that fierce or the con-
sumer market is large. For example, there are quite a few foreign MNEs with
manufacturing plants in the United States. Honda has several plants in Ohio,
Toyota has production facilities in California, Hyundai is building a plant in
Alabama, Mercedes Benz has a plant in Alabama as well, and BMW has a plant
in South Carolina. The market for automobiles in the United States is large,
and foreign MNEs want to manufacture cars close to the market. Similarly,
given China’s 1.3 billion consumers with growing income levels, many MNEs
have successfully penetrated that market as well. China is now Eastman
Kodak’s second largest market after the United States, and its sales in China
are growing faster than anywhere else. With a total investment of some $1.2

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