A Critical Analysis Of Mnes Strategic Motives Of Using Fdi Global Operations And Contrast The Range Of Methods Available Based On Case Study.

1.0 Introduction In this essay, it present a critical analysis of multinational companies (MNEs) strategic motives of using foreign direct investment (FDI) global operations and contrast the range of different methods available on different situations such as: Joint ventures, licensing, direct exporting, FDI, mergers and acquisitions (M&A). While, these substitutes are broadly introduced for comparative analysis, the focus of this essay is internationalization thought FDI based on the Tesco case study. Tesco PLC is a British multinational enterprise which its main business is grocery and general merchandise retailer. Tesco is one of the market leading companies in the UK grocery area (market share 28.4%), and has operated its business in 12 countries include Asia and Europe. (Finch, 2010) .Initial Tesco was a UK grocery retailer, since 1990s Tesco has diversification operate such as: Tesco Superstores, Tesco Metro etc. (Hawkes, 2013)In 2015, Tesco has over 500,000 employees and the revenue was 62.28 billion GBP. In order to analyses the Tesco’s strategy in regard of FDI. First of all, the international trade theories will give a broad overview and it will cover the internationalization process. Then look at the multiple market entry modes such as: Joint ventures, direct exporting, and M&A. thirdly, the motivation and different advantages when the enterprise make decided will be consider. Finally, the conclusion of the essay will be provided. 2.0 Foreign direct investment The word foreign direct investment is used to refer to an investment from one country to another by companies (Piana, 2005). Buckley (1992) describes direct foreign investment as an investment in business from an investor who originates from another country. Foreign direct can be done by an individual investor or an organization/company. This essay will focus on the foreign direct investment done by a company. The company or organization that engages in foreign direct investment is now as Multinational Corporation (MNC) or Multinational Enterprise (MNE) (Buckley, Foreign Direct Investment by Small and Medium Sized Enterprises:The Theoretical Background, 1992) . There are three type of foreign direct investment that a multinational corporation can engage in. These are Vertical FDI, horizontal FDI and Conglomerate. Vertical Foreign direct investment occurs when a company invests abroad in activities different but related the one in their home country. For instance, Toyota Company has acquired distributorship deal in India. Vertical FDI is normally done to take the firms closer to the market (Buckley, Foreign Direct Investment by Small and Medium Sized Enterprises:The Theoretical Background, 1992). Horizontal foreign direct investment occurs when companies invest abroad in the same activities as those carried it carry out in Home country. On the other hand Conglomerate FDI occurs when a company investment abroad are total different and unrelated to those in the home country. 3.0 Motives for foreign direct investment by Multinational Corporation There are several theories that try to explain why firm engage in foreign direct investment. Some of them include the Eclectic Paradigm to FDI Eclectic Paradigm to FDI This theory was developed by Dunning (1997) and borrowed heavenly from traditional theories of FDI. In this theory, Dunning (1997) argues multinational corporation engagement in foreign direct investment is determined by three factors I.e. ownership advantage, location advantage and internalization Factors. Dunning (1997) asserted that a firms decided to engage in foreign direct investment if three condition are met. These conditions are; I. The firms will have ownership advantages in the international market vis-a-vis other firms II. There are some location advantages in using firms’ ownership in foreign locale. III. It is beneficial to internationalize the above advantages rather that transfer them to foreign firms. Eclectic paradigm to FDI theory has supported by a numbers of empirical studies including those conducted by Rugman (2010) and Zhu (2008). In this study, it was found out that Dunning (1997) argument and construct as contained in his theory were true. Firm engage in foreign direct investment dues to their ownership advantage. On the other hand, the locales of their Foreign direct investment is determine by the location advantages. Location advantage offered by different countries is one of the motives that entice firms to engage in direct foreign investment. If a region or country has a location advantage, it becomes strategic location for firm who aims to grab that opportunity. For instance, when compared to USA, India has a number of location advantages that has been enticing Firm to the region. The labor in the location is cheaper and there is also a big market for products and services due to high population. The location advantage offered by India has been attracting Multinational Corporation from UK, USA and all over the world. For instance Nestle a leading Us-based corporation chosen to locate some of their production facilities in India due to location advantage offered. Market seeking motivations According to the vast majority of resources reviewed in this essay, seeking a new market for an organization’s products or services is one of the factors that motivation Multinational organization to engage in direct foreign investment (Pettinger 2012, Giese et al 2000). According to Giese et al (2000) seeking new market is one of the traditional factor that motivate firm to internationalize it operation. Giese (2000) argues that internationalization that is driven by the need to expand the market usually occurs at two stages. In the first stage of Internalization, Multinational Corporation manufactures or produces goods in their home country and export them for sale through their subsidiary. Generally, the foreign subsidiaries are involved basically with sale and service. In the second stage of internalization, Multinational Corporation shift from exporting their products and servicing their product in through subsidiary to direct production in foreign country in plants they own. In other word, in the second stage, firms chose to invest in production facilities in foreign market with the aims of producing goods and services locally. These strategies also help reduces the cost of transportation exportation that are incurred when products are produced in home country and exported to foreign market. Although the argument by Giese might be true, not all the firm that usually goes through the two stage of internationalization. There are other chose to invest in production facilitates in a foreign country even without having necessary operated in the market. Tesco is one of the companies that invest direct inn production facilitates in foreign market in pursuit of new market. Resource/ asset seeking motivations Resources are important resources in any given organization. Seeking resources is therefore one of the factors that had driven multinational corporation to invest in foreign direct investment. According to Dunning et al (2008), firms are motivate to engage in direct foreign investment in order to acquire assets or resources that otherwise are unavailable in the home country. This is particularly the case with companies dealing with mineral resources. Such kind of companies usual invests direct in country where the mineral resources are in abundance in order to extract and export them in other markets for sale. Similar argument is put forward by Giese (2000) who assert that organization usually engage in direct foreign investment with the aims of acquiring resources that would give them competitive. Wladimir (2008) points out that the resources that motivate Firm to engage in direct foreign investment may include cheap labor, mineral resources, talents, technology among others. Efficiency-seeking motives Some multinational corporation usually engages in foreign direct investment with the aims of seeking efficiency as offered by the prevailing condition. As Pointed out by Wladimir (2008) the sole aims of every business is to maximizes profits and such firms will allows be attract to and pursues any opportunity for improving efficiency. This is one of the motivations that have driven most of the multinational into the international market. Cheap labor, favorable taxation system, cheap laws material, cheap electricity among other are some of the factors that motivate a firms to engage in direct foreign investment (Dunning 2008). For instance, India is one of the countries known to have very cheap labor in the world. This cheap labor has been one of the reasons why Multinational Corporation has been investing heavily in India (Giese 2000). In case of Tesco, marketing seeking has been the key driver that has been motivating it internationalization. The company has engaged in direct investment activities in offshore country with the aims of the tapping in to new market that are viable. For instances, in 2013, Tesco decided to close down it USA operation as the market was not profitable. This definitely tell that the biggest aims of Tesco in it internalization strategies is to seek new but profitable markets. 3.0 Methods’ used by Multinational Corporation to engage in foreign direct investment When an enterprise decides to internationalize, choice of the appropriate market entry method is very crucial strategic decision. (Datta, Herrmann, & Rasheed, 2002). There are several types of entry modes/method to choose from. These include exporting, Joint ventures and franchise, acquisition and green field venture. Similarly, each mode both has their own advantage and disadvantage that means the firm should serious consideration for their decision. 3.2.1 Exporting According to David and Richard (2007), exporting involved sale goods or savvies to other countries and there are two types of exporting: direct exporting and indirect exporting. Buckey (1992) states that direct exporting is a basic mode for a company and it has characterized by benefit and weakness. On the plus side, direct exporting can reduce the invest risk for the host country and it may help the firm entry faster. Some country has its specific comparative advantage for example: Indian and China are dominated positions of clothing industry, Japan is proved be adept at electronic products (Datta, Herrmann, & Rasheed, 2002).Firms such as Samsung used the direct exporting advantage process the computer chip market. Finally, the exchange rate can be another important factor when a company plans to exporting. Because the exchange rate is a potential advantages take place in currency market which influence both sell firms and competitor. On the minus side, firstly direct exporting may not suitable when the production costs in the exportation country are lower than firm’s home country. (Mudambi & Mudambi, 2002)For example, some European clothing companies have transferred some manufacturing to Indian or China due to the low-labor costs. Moreover, there are some entry barriers such as: tax fees, transportation fees, corporate governance. The trade barriers may be hard to overcome. Finally, the company may lose control marketing and the local agencies may not work well, so they need to set a subsidiary to management process. Indirect exporting means the firm exporting goods or services through many types of intermediary (Buckley, Foreign Direct Investment by Small and Medium Sized Enterprises:The Theoretical Background, 1992) .According to Jolanda (2010) the intermediaries play a “middleman” role in the international trade, and they help the firm to identify customers, financing and distribution infrastructure providers. Oppositely, it will increase the firm cost. At the same time, the intermediary often works for many firms which lead poor basic qualities or responsibility. 3.0.2 Joint Ventures A Joint venture is a trade agreement in which take place when two or more firms invested capital together. Each of them own part of shareholding and they share profit, pay, risk and control power (Kogut, 1998).First of all, When an enterprise decide use joint ventures to entry a new market, it should assess the local environment include: political systems, culture etc. Then, enterprises could share risk, cost, and get more local resources when they enter a new market. Finally, many government wish to protect local economic development and job opportunity, they may encourage joint ventures. A foreign company could benefit from the government support. However, according to Jolanda (2010) and Lassserre (2007), there are several reasons that may cause joint venture to fail. according to Lasserre (2007, p145), most companies have seen joint venture failures for five reasons: 1) have different goal with partner 2) lack of strategic vision 3)poor integration and co-operation with partner 4)haste in negotiation. Thus, when companies want to use joint venture to entry a new market, they should consider to choice a suitable partner to ensure the market process. 3.0.3 Green field Venture Another international market entry mode used by Multinational Corporation is the Greenfield venture. This is a market entry strategy whereby a multinational corporation established a new wholly-owned corporation in a foreign country (Ireland & Hoskisson, 2008). When compared to other market entry mode, green venture strategies have several advantages. To start with, unlike other strategies where a company inherits risks and liability, Green venture, give a multinational corporation the opportunity to start a fresh without any liability hindrance. In additional, by established a wholly new subsidiary, the business is seen as local and insider who can be useful in attracting clients and reducing hostility that local may have toward foreign company. However, unlike other market entry mode where Multinational corporation ride on already established business, reputation, client base and established facilities, green venture is limited by the facts that, a company has to start from the bottom (Ireland & Hoskisson, 2008). 3.0.4 Acquisition This is a market entry mode which involves acquiring existing business. Acquisition can happen through acquisition of majority of equity holding and complete buyout of an existing business (Ireland & Hoskisson, 2008). When compared to other marketing entry mode, Acquisition has several advantages. These include fast entry to market, riding on already established business, well known business and already established business facilities. In other words, acquisition give them a multinational the advantages to enter a new international market without the needs of going through the process of establishing new business. The strategies however put Multinational Corporation at increased risk and liability of former business. 4.0 Tesco internationalization As seen in the discussion above, there are various method/strategies that Multinational firms use to engage in foreign direct investment. The appropriateness of each method depends with each multinational corporation evaluation. Tesco has been using different marketing entry method in different region. For Instance, in India, The Company decided to engage in direct foreign investment through joint venture. The company entered into joint venture agreement with Trent limited to form a new company known as trend hypermarket which will be responsible for running the Star bazaar retails business in the entire of India. There are several advantages that the Tesco Company is likely to get by using this strategy in India. As pointed out by (Bloch, 2016) joint venture allows a multinational corporation to gain access to expertise without the needs of hiring staffs. This is particularly the case with Tesco. By entering into Joint venture with Trend limited, the company has been able to access the expertise of staffs previously employed by trend limited to run the star bazaar retail business. Equally, joint venture allows a multinational to share the risk of high-leveraging yet uncertain business. In relation to Tesco, entering using joint venture strategies to enter the India market give it the chance to pursue the business opportunity offer by the high population in India but at the sometime cautioning the company from the volatility of Indian economy. However, using joint venture to purse the foreign direct investment has some limitation for Multinational Corporation. To start with, the success of the joint venture depends on how well the two or more companies forming the joint venture will agree on various tactic decisions. Any misunderstanding may lead to failure of the joint venture. The success of Tesco investment in India wills therefore dependent the ways the company will relate with trend limited especially o matter to do with strategic and tactical decision. Apart from joint venture, Tesco has also been pursuing other strategies of foreign direct investment. For instance in France, Tesco pursued it foreign direct investment interest through the acquisition strategies. The company bought 85 percent equity holding in Catteau supermarkets which operated under cedico Brand. There are several benefits a multinational corporation gets from this strategy. To begin with, this is the fastest mode of entry into an international market, a company does need to build new facilities, stock them etc they just buy stock in business already in business. Another advantage of this market entry method is that, a company is buying already established business which has created reputation and customer base for itself. Therefore the multinational corporation does not have to spend much to establishing name, reputation and customer base. This was some of the benefit enjoy when it acquired 85 percent in Catteau supermarket. Through this acquisition, Tesco was able to leverage on the 72 superstores, 7 hypermarkets, and 24 small stores that were under Catteau supermarket. However, acquisition strategies have it own disadvantage. First of all acquiring an existing business is more costly that starting one from scratch. Secondly, there might be issues of integrating the acquired business with the multinational corporation home office. And finally, acquiring and existing business mean that the multinational corporation doe not only acquired it assets but also liabilities and risks. This can be costly especially when the risk matures. For instance, after acquiring Catteau supermarket, the risk of competition become so real for Tesco, forcing it to call it a day after investing so much in the business. Conclusion This essay has assessed the motives for multinational enterprise to engage in foreign direct investment. From the assessment, several motives has been revealed which include marketing-seeking, efficiency seeking, taking advantages of location advantages, explore ownership advantage and seeking resources. An assessment of Tesco corporation revealed that it strategic motives has been to seek new market for it services and products. The essay has revealed that there are several marketing entry mode used by multinational corporation. These include joint venture, acquisition, green venture and exporting. An assessment of Tesco Corporation revealed that the companies have been different mode to entering different market. It was however, revealed that all these strategies has their advantages and disadvantages and such multinational should evaluate carefully the method it intend to use.