"A multinational enterprise (MNE) is an enterprise which owns or controls value-adding activities in two or more countries. (Dunning 1989, p. 5)" MNEs are believed to be the most important part of the globalized economies (Navaretti et al. 2004, p. 1). This essay will discuss about the various reasons why the national firms have a propensity to become multinational enterprises and what they exactly do to become a global player. Different people have different opinion and feelings about MNEs. Some of them welcome the foreign wealth, new and scarce technologies, skills and knowledge while others unwelcome it because of the threat it possesses for the national or domestic firms. Not only huge corporations but also small and medium sized companies can transform into MNE by investing abroad or by having one or more subsidiary companies in foreign countries (Navaretti et al. 2004, p. 2). This essay in the first place will discuss about the various theories and hypothesis put forward by different authors (Grubaugh 1987, p. 149) explaining the possible determinants for the firms to become multinational and finally it will talk about the assortment of opinions indicated by range of theories on how a firm can internationalize and endows with different emphasis on the concern of which markets to enter and to select the right mode of entry (Whitelock 2002, p. 345). This essay will conclude that MNEs are constructive, adds value for everyone and increases employment opportunities. It heightens the economic state of the country it is doing business in and also that of its origin country and provides with long standing returns (Navaretti et al. 2004, p. 48).

Macdougal (1960) proposed that a firm might decide to become a MNE because of capital arbitrage which identifies no difference between the national and multinational firms other than the cost of capital in a capital intensive firm. Hymer (1960) points out that in an arena of perfect competition, it is important for companies to become a MNE and look forward to diversify markets in order to survive and compete successfully with its rivals. His hypothesis stresses the importance of the capabilities that a firm must possess and its size. The intangible assets theory says that a firm is likely to go international to acquire benefits of its unsellable assets such as research and development, advertising, etc (Grubaugh 1987). This was further confirmed by Horst (1974). According to Godiwalla (1986, p.110), the grounds on which a firm may decide to internationalize is to gain benefit from lower labour costs, transfer latest technology to a developing country from the developed one. He also says that becoming a MNE is a part of the firm's strategic planning to spread the risks and responsibilities to other countries and regions. Before taking the decision, firm needs to consider its contemporary growth rate and profitability, competition that may arise in future from its domestic rivals and also its future needs. Dunning and Lundan (2008) believe that there are some motivating factors that drove the national enterprises to think of investing abroad. First of these motives is resource seeking that prompts a firm to invest offshore to attain competitive advantage over its rivals in the home country by shifting the whole production line abroad to its subsidiary companies where there is availability of cheap, low cost and higher quality resources as well as to compete successfully with actors in the host country by transferring the latest technology, skills and knowledge. Cost minimization, marketing expertise, cheap and motivated labour, technological capabilities, securing specific resources are the motives that trigger a labour intensive firm to engage in foreign direct investment (FDI). Second motive is market seeking behaviour that stimulates a firm to invest offshore, to protect the existing market and capture a new market that is, market development. If the customer or the supplier moves from one country to another, then the company has to follow them in order to hold on to their business. Transportation costs of goods and services from a distance are higher than the production and transaction cost (depends on the volume) in the host country, so it is beneficial to locate production centres near the consumption centres. A portion of savings can then be transferred to the price sensitive consumers. Another reason is to establish its name in top global leading markets served by its rivals to create a positive brand image. Foreign investment is also encouraged by the actions of the host government that gives subsidies and tax concessions on investment made. It has been argued by Dunning (1989, p. 13) that a firm that has some competitive advantage in terms of technology or skills is likely to internationalize to gain benefits of these in offshore markets by achieving economies of scope and scale. Other reasons proposed by Dunning and Lundan (2008) are strategic asset and capability seeking and efficiency seeking. Long term objectives are promoted by means of obtaining assets of foreign companies by strategic asset seekers when they engage in FDI. They try to enhance their portfolio of assets that they believe will help in sustaining and advancing their competitiveness. Efficiency seekers try to gain advantage of the variations in consumer preferences and supply capabilities. "The intention of the efficiency-seeking MNE is to take advantage of different factor endowments, cultures, institutional arrangements, demand patterns, economic policies and market structures by concentrating production in a limited number of locations to supply multiple markets" (Dunning and Lundan 2008, p. 72).

Laughton (1995) suggests four basic ways of internationalizing mainly exporting, licensing or franchising, joint ventures and foreign direct investment. Which approach to choose depends on the level of resource commitment that a firm is willing to make. Every firm tries to select the option that will breed maximum return with minimum involvement of risk and the one that will allow it to possess control over the success factor. Once the experience is gained and confidence is generated, it does not mind penetrating deeper into the market. According to Whitelock (2002), there are four approaches that can be associated with the process of internationalization. First of them is Uppsala model that states that for a firm to decide that how it should become a MNE, it does not need to pay attention on its competitor's behaviour present in the country it is intending to do business in and nor on the other multinationals. As per this model, experiential knowledge is directly proportional to the expansion of the company in distant markets, that is, as the knowledge grows, market development takes place (Johanson and Vahlne 1977). They proposed the idea that when a firm is rich in resources, they might take huge steps; when the markets are similar and stable, knowledge from experience is not necessary and firms can exploit their target markets if they have good amount of experiential knowledge. Stage theory of international involvement showed that a company enters a market by exporting its products in the earlier stages and then moves on to production eventually (Bilkey and Tesar 1977; Cavusgil 1980). However, Buckley et al. (1987) later showed that firms may use mixed approaches based totally on individual market. In the view of Root (1987), licensing may be the method of entry for many high tech companies. The eclectic paradigm study that was set forth by Dunning (1988) says that market entry decision should be taken after considering the cost of transaction. The benefits that a firm would gain after integration is supposed to be compared with the expenditure associated with it and the selection of the right mode of entry must be based on the evaluation of the costs relative to the firm's goals (Dwyer and Oh, 1988). Then comes the interactive network approach which unlike the above two models says to take in to account not only on the firm's characteristics but also that of its competitors, market, buyers and suppliers (Johanson and Mattsson 1986; Turnbull 1986; Cunningham 1986). The executives of the supplier company will direct the firms as to which markets to enter and supply. "The firm will need to take into account and evaluate not only its [but also its rival's] position in relation to its customers in a given market" (Cunningham 1986). Foundation of business strategic approach develops from the concept of pragmatism (Welford and Prescott 1994, p. 344). Market attractiveness, ease to access, entry and exit barriers, psychic distance are the few elements put forward by Root (1987) and Turnbull and Ellwood (1986) that should be gauged while using this approach. Organizational structure is selected on the basis of above mentioned market properties "as well as company specific factors such as international trading history, size, export orientation and commitment" (Turnbull and Ellwood, 1986).


The theories discussed above exhibit multiplicity of opinions on the process of internationalization and stress the need to develop a paradigm that will unite the key aspects of all the various approaches which will reflect an explicit and unambiguous picture of the market entry decisions (Whitelock 2002). As said by Navaretti et al. (2004), MNEs have often proved to be beneficial for both; host and home country and would continue to enhance their growth in terms of technology, innovation and financial conditions. There are various options available to a firm on how to internationalize but it solely depends on the option that it can afford (Laughton 1995, p. 26). "The MNE is thus best considered as a coordinator of a system of domestic and foreign activities that are controlled and managed by it" (Dunning and Lundan, 2008).


Dunning, J. H. 1989. Multinational enterprises and the growth of services: Some conceptual and theoretical issues. The Service Industries Journal, Vol. 9, Issue 1.

Navaretti, G. B. et al. 2004. Multinational firms in the world economy. New Jersey: Princeton University Press.

Grubaugh, S. G. 1987. Determinants of direct foreign investment. The Review of Economics and Statistics, Vol. 69, Issue 1.

Whitelock, J. 2002. Theories of internationalisation and their impact on market entry. International Marketing Review, Vol. 19, Issue 4.

Godiwalla, Y. H. 1986. Multinational planning- Developing a global approach. Long Range Planning, Vol. 19, Issue 2.

Dunning, J. H. and Lundan, S. M. 2008. Multinational enterprises and the global economy. Massachusetts: Edward Elgar Publishing, Inc.

Laughton, D. 1995. How firms internationalise their operations, cited in Dawes, B. International Business: A European Perspective. Cheltenham: Stanley Thorns.

Source: ChinaStones - http://china-stones.info/free-essays/business/multinational-enterprises.php

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