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Multinational Enterprises

Multinational enterprises (MNEs) have become the key player in the world economy linking trade, foreign direct investment (FDI), finance, and technology. As a point of reference, the United Nations in its literature uses the term transnational corporations to describe MNEs, but over time the definitional differences have become obscure and irrelevant. Most agree that MNEs engage in foreign direct investment and own or control value-adding operations in at least two countries. The degree of an enterprise's multinationality is often measured using one or more of the following criteria:

  • The number and size of foreign subsidiaries or related companies that it owns or controls.
  • The number of countries where value-adding activities take place, for example, factories, sales offices, and so forth.
  • The proportion of its global revenues, assets, employment, or income that is accounted for by its foreign affiliates.
  • The extent that its higher value-adding or innovative activities, such as research and development, are located in a country other than the home country, signaling the depth and quality of foreign production.
  • The extent and pattern of systematic advantage due to governance of a network of activities located in different countries.

Recent estimates by the United Nations indicate that there are over 61,000 MNEs worldwide, with about 900,000 foreign affiliates. Foreign affiliates alone account for a third of world exports and one tenth of the world's GDP. In total, MNEs account for sales of approximately $20 trillion, more than double world exports. (Just a decade ago, MNE sales were equal to exports.) Over the same period, MNEs' foreign direct investment almost quadrupled and now totals over $7 trillion. Not surprisingly, the largest MNEs dominate the picture, with the top 100 accounting for half of the total sales and employment of foreign affiliates.

Conceptual Overview

Within the last 20 years, there appear to have been three main drivers of the tremendous increase in international commerce and MNE activity: policy liberalization, rapid technological change, and increased competition. With regard to policy liberalization, governments are increasingly opening up their national markets toward all kinds of inward foreign investment including acquisitions, joint ventures, and strategic alliances; for example, in 2001, 71 governments made 208 procompetitive changes in FDI laws. Concerning specific linking technologies, communication (Internet) and transportation (containerization) initiatives are shrinking the world and permitting MNEs to seek efficient solutions globally. Technology change in general, particularly in biological sciences, telecommunications, microprocessors, and process engineering, has never been faster, more costly, or riskier, thereby forcing firms to seek global markets to achieve higher returns. Increased competition is the result of the combination of the first two factors, and that in turn is causing MNEs to extend their international market reach earlier in the product life cycle, find new ways to increase their efficiency, and explore structural alternatives such as outsourcing and alliances to increase their knowledge base and reduce their costs.

All firms that choose to become multinational enterprises must overcome what is called the “liability of foreignness.” Upon initial entry into a country, new MNEs do not fully understand the local culture, politics, employment base, and competitive environment as well as domestic firms that are familiar with local customs and nuances. Thus, MNEs must possess some proprietary advantages, unique combinations of resources or processes, that permit them to effectively compete in foreign markets against domestic competitors. These sustainable advantages can be tangible assets such as a patented technology, but increasingly they involve intangible assets associated with the combining of a firm's worldwide knowledge or routines into a unique value web that is targeted to meet customer needs around the world.

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