Multinational Companies: Characteristics and Internationalization Strategies

Characteristics of a Multinational Company

A company is considered multinational when it operates in two or more countries to maximize its benefits under a global perspective, rather than focusing solely on each of its national units. According to Thompson & Strickland, a multinational company is characterized by:

• The possibility of locating activities of the value chain in the most convenient location from the point of view of the firm's competitive strategy.
• The possibility of transferring its skills and strategic capabilities from its national markets to foreign ones.
• The possibility of strengthening or expanding its resource base and abilities, gaining an advantage over competitors that act only at the national level.
• The possibility of allocating risk between different competitive environments, geographically considered.

Internationalization Strategies

International Growth: Without Capital Investment

1. Exports

The simplest and most traditional way to start internationalization. Production remains in the country of origin, although sourcing and product markets may undergo some modification if required by any market. Operations are monitored, and the amount of investment is very low, besides having low penetration and overall risk.

Advantages: Eliminates the cost of establishing operations in the host country and contributes to economies of scale.

Disadvantages: High transport costs and tariff barriers.

Good alternative when...

• The company is small and has no means to manufacture abroad.
• Production outside the country is not recommended due to political risk, lack of market attractiveness, or uncertainty of expectations.

2. Contract Systems

A. Licensing (Industrial Business)

Contracts under which the foreign licensee buys the rights to manufacture the products.

Advantages: The company does not have to face the costs and risks of opening a foreign market.

Disadvantages: Does not provide strict control over manufacturing functions and marketing strategies. There is also a risk associated with the permitted use of know-how by other companies.

Good alternative when... companies lack capital or are unwilling to commit substantial financial resources in an unknown market or one with excessively high risk.

B. Franchising

An agreement through which a company sells limited rights to exploit its brand in other foreign countries.

Advantages:

• Reasonable profit without much risk or management problems.
• Quick market coverage, reaching inaccessible markets.
• Revaluation of the brand through the spread of the network.
• Information system on the market via franchisees.

Disadvantages:

• Possible emergence of future competitors.
• Risk of error in the choice of the franchisee.
• Distrust.
• Communication complexity.
• Elimination of direct control over decisions taken at the local level (no strictly hierarchical dependency relationship).

International Growth: With Capital Investment

3. Direct Investment Abroad

A. Joint Venture

Creation of an enterprise with legal personality abroad by joining one or more companies with others located in the country of destination.

Advantages:

• Can be a source of learning, benefiting from the knowledge of the local partner on the market.
• A formula for sharing risks and costs.

Disadvantages: Risk of losing control over know-how.

Good alternative when...

• The company needs global strategic coordination.
• The company is seeking to capitalize on cost advantages.

B. Wholly Owned Subsidiaries

Creating its own production units to serve local markets from their own countries. The main difference is that the combined company now has total control over operations, avoiding shared leadership and the lack of flexibility associated with it.

Advantages:

• Maintains internalization of technological skills.
• Provides strategic advantages.
• Provides rapid response to market changes.

Disadvantages:

• It is the most costly alternative.
• There are great risks related to the uncertainty of the new market.