Why do firms become multinational enterprises 
Why do firms become multinational enterprises?
There are multiple ways to define what is meant by the term “multinational enterprise” (MNE), most of which can be reduced to a short list of criteria summarised effectively by Franklin Root (1994). He defined an MNE as a parent company that i) engages in foreign production through its affiliates located in more than one country; ii) exercises direct control over the policies of its affiliates; and iii) implements transnational business strategies in production, marketing, finance and staffing that transcend national boundaries in order maximise profit globally.
Such well-known companies as Toyota, Intel and McDonald’s are MNEs: Toyota, originating in Japan, has factories all over the world and sells cars in over 140 countries; the American Intel has set up production in multiple developing-world states including China, Malaysia and the Philippines; while the McDonald’s international franchise (with headquarters in the US) spans 35,000 restaurants in 119 countries, serving 68 million customers daily (Wikipedia). According to CorpWatch, 51 of the 100 largest economies in the world are corporations, while the top 500 MNEs account for nearly 70 per cent of the worldwide trade.
In order to understand why firms choose to transcend national borders when growing their business, we first need to consider the three stages of evolution of a MNE, namely the export stage, the foreign production stage and the multinational stage. These stages were originally described by Raymond Vernon in his influential paper on product cycle theory. The theory envisions a company with an innovation that results in a competitive advantage in its home market. As the company establishes itself and acquires a substantial share of the home country market, it benefits from keeping production plants in the home country. This reduces costs associated with transport, potential import and allows close supervision of research, production as well as home
There are multiple ways to define what is meant by the term “multinational enterprise” (MNE), most of which can be reduced to a short list of criteria summarised effectively by Franklin Root (1994). He defined an MNE as a parent company that i) engages in foreign production through its affiliates located in more than one country; ii) exercises direct control over the policies of its affiliates; and iii) implements transnational business strategies in production, marketing, finance and staffing that transcend national boundaries in order maximise profit globally.
Such well-known companies as Toyota, Intel and McDonald’s are MNEs: Toyota, originating in Japan, has factories all over the world and sells cars in over 140 countries; the American Intel has set up production in multiple developing-world states including China, Malaysia and the Philippines; while the McDonald’s international franchise (with headquarters in the US) spans 35,000 restaurants in 119 countries, serving 68 million customers daily (Wikipedia). According to CorpWatch, 51 of the 100 largest economies in the world are corporations, while the top 500 MNEs account for nearly 70 per cent of the worldwide trade.
In order to understand why firms choose to transcend national borders when growing their business, we first need to consider the three stages of evolution of a MNE, namely the export stage, the foreign production stage and the multinational stage. These stages were originally described by Raymond Vernon in his influential paper on product cycle theory. The theory envisions a company with an innovation that results in a competitive advantage in its home market. As the company establishes itself and acquires a substantial share of the home country market, it benefits from keeping production plants in the home country. This reduces costs associated with transport, potential import and allows close supervision of research, production as well as home
Bibliography: Begg D, Ward D (2009) Economics for Business (3rd edition), McGraw-Hill Higher Education Johanson J, Vahlne JE (1977) Internationalization process of firm – model of knowledge development and increasing foreign market commitments, Journal of International Business Studies 8, pp. 23-32 Perlmutter HV (1969) The Tortuous Evolution of the Multinational Corporation, Columbia Journal of World Business, pp. 9-18 Root FR (1994) Entry Strategies for International Markets, Lexington Books Root FR (1994) International Trade and Investment, South-Western Publishing Company Vernon R (1966) International investment and international trade in the product cycle, Quaterly Journal of Economics 80, pp. 190-207