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Chapter 7:

Multinational Formation

Keith Head

Sauder School ofBusiness

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The take-away for this

chapter Chapter 7 asks Where should we do thethings we do? At home: the country where top mgmt is

based. Abroad: offshore, overseas, in a foreign

country

The answer: It all depends on the 4elements of MN strategy: trade costs,factor advantages, PLEoS, marketsizes.

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Nestle

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IBM worldwide

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LG Electronics (part of LG Group,

formerly Goldstar Electronics)

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Levels of Multinational Strategy

Who is the we in Where should we do it?

An individual business unit business strategy

A collection of business units under the sameownership corporate strategy

A collection of business units linked through a

mix of equity ties and long term contractual

arrangements network strategy

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Multinational (single) Business Strategy

Home Country Foreign Country

Home Centralization

(Exporting)

Replication

Foreign Centralization

(Importing)

H-form

F-form

R-form

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Examples of Centralization

Home Centralization:

Boeing commercial aircraft assembly in U.S.

(mainly Seattle)

Airbus commercial aircraft assembly in EU

(mainly Toulouse)

Foreign Centralization:

Mattels Barbie dolls (2 factories inDongguan, China +1 in Malaysia +1 in Indon.)

Matsushitas TVs (Malaysia)

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Boeings Everett Factory:

the largest building in the world

(472 million cubic feet of space )

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Boeings Everett Factory:

sole location of 747 assembly

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Boeings 747

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Nestle, the Replicator

Area Sales Factories Employees

Americas 40% 32% 41%

Europe

(Switz.)

40%

(1.6%)

41%

(1.8%)

34%

(2.6%)

Asia, Africa

& Oceania

20% 27% 25%

254,000 Employees in 508 Factories in 85 Countries(2002 Management Report)

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Critical Foreign Market Size to Justify

Overseas Replication

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Critical Distance to Justify Overseas

Replication

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At Home, Abroad, or Both?

The Answer Depends (in part) on

Where Demand Is

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Home Centralization benefits

from Strong PLEoS Low trade costs to export to foreign

country Large home market

Home country has factor advantages

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Foreign Centralization benefits

from Strong PLEoS Low trade costs to import from foreign

country Large foreign market

Foreign country has factor advantages

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Replication Form benefits from

Weak PLEoS

Both markets are large

High trade costs impede exports &imports

Unimportant factor advantages: costs of

production similar across countries.

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Multi-product Multinationals

Corporate multinational strategy

considers best form for firms operating in

more than one business (product).

Relationships between products:

Unrelated

Vertical (intermediate inputs vs final

outputs)

Horizontal (complements vs substitutes)

Joint products

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Multinational Forms: Vertically

Related Products

Upstream (U) creates inputs

Downstream (D) uses U inputs to create outputs

Examples:

Teaching: U is PPT preparation, D ispresentation to students

Movies: U is writing & casting, D is filming &

editing (orU is movie production and D ismovie exhibition)

Steel: U is blast furnace, D is steel furnace &rolling mill

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Bao Steels integrated works

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ExxonMobil

Upstream: exploration in 37 countries

and production in 26 countries

Downstream: refining and marketing Owns 45 refineries, located in 25 countries

Operates 37,000 retail sites in 100+ countries

presence in about 200 countries

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ExxonMobils Upstream Sites

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ExxonMobils Downstream Sites

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Multinational Forms for 2 vertically

related products

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Vertical Specialization good if

Strong PLEoS

Low trade costs to export U to foreign

country

Low trade costs to import D fromforeign country

Home country has factor adv. for U

Foreign country has factor adv. for D

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Branching Form

Examples:

Coca Colas concentrate (U) and bottling (D)

Subarus engines (U) and car assembly (D) Benefits from

Low trade costs on U, high on D

Low PLEoS on D, high on U

Home factor adv. in U, weak factor advs. in D

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Multisourcing form

Defn: procuring same input from multiplesource countries

Examples: Refinery in one country, sourcing crude oil

from multiple drilling sites (in differentcountries)

Nikes network strategy in shoe mnfg.

Benefits from Low trade costs (for U & D)

Diseconomies of scale for U

Uncertain (unpredictable) factor adv. for U.

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Forms for 2 horizontally related

products, served by upstream

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Key trends in world economy

Falling trade costs

More efficient transportation (containers,

EDI, use of air transport)

Lower tariffs, WTO oversight of disguised

protection

Technology-powered improvements in long

distance communication Rising economies of scale?

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