The Model of Expansion from Local Enterprises to Multinational Enterprises

Multinational enterprises (MNEs) are playing more and more important roles in the development of world economic. A relative small set of multinational enterprises account for most of the world’s trade and investment (Rugman and Verbeke, 2004). Indeed, the largest 500 MNEs account for over 90% of the world’s stock of foreign direct investment (FDI) and they, themselves, conduct about half the world’s trade( Rugman, 2000).The empirical evidence, however, shows that MNEs are more regional than national versus global. “Data on the activities of the 500 largest MNEs reveal that very few are successful globally. For 320 of the 380 firms for which geographic sales data are available, an average of 80.3% of total sales are their home region of the triad, this means that many of the world’s largest firms are not global but regionally based, in terms of a balanced geographic distribution of sales across the triad.” (Rugman and Verbeke, 2004). Therefore, it is very significant to study where the regional impact is on multinational management. In this paper, I will discuss the model of expansion from local enterprises to multinational enterprises and how the regional factors affect enterprises operations.

Before we go further, we should, first, make a clear definition of MNEs (Multinational Enterprises), globalization, and regional triad.

MNEs (Multinational Enterprises)
The MNEs is defined as a firm with value-added activities in at least two countries.( Rugman and Verbeke, 2001)

The triad region
In 1985 Kenichi Ohmae, a Mchinsey consultant in Japan, firstly defined the triad as "a geographic space consisting of the United States, the EU and Japan.However, in this paper, we use a broad triad."(Rugman and Verbeke, 2004)the broad triad consists of NAFTA, the expanded EU and Asia.
NAFTA: North American Free Trade Agreement.EU: consisted of 25 countries in 2004.Asia: "in November 2002, China agree to a free trade agreement with the ten members of the association of south east Asian nations (ASEAN), signaling a wide trade ans investment agreement for Asia.In September 2003, India and the ASEAN members agree to forge a free trade area by 2012, while Japan and ASEAN agreed to begin negotiations on far-reaching trade and investment liberalization by 2005."(Rugman and Verbeke, 2004)

Globalization
The definition of globalization is very critical in this paper.It is a blurred word.There are many definitions for globalization.Such as economic and business school professor defines globalization as "the activities of multinational enterprises engaged in foreign direct investment and the development of business networks to create value across national borders".While other scholar such as Giddens gave a very different definition: "globalization is political, technical and cultural, as well as economic" (Giddens 1999, p.10).Obviously, we can not distinguish regional enterprises from global enterprises based on these definitions.Because the first is too narrow but the latter is too broad.In this paper, we adopt Rugman and Verbeke's (2004) definition of globalization: having sales of 20% or more in each of the three parts of the triad, but less than 50% in any region of the triad.Rugman and Verbeke's (2004) have classified the top 500 MNEs into global, bi-regional, host region oriented, and host region oriented.They concluded that only nine of the MNEs are global.Other MNEs are regional.It means that most MNEs do not have a balanced distribution of sales across the three triads.They either focus on one reign or two reigns.The data in table 1 told us that MNEs do not easily penetrate the three triads evenly, and intra-regional sales are easier than inter-regional sales.Obviously, there are some regional factors affecting a MNE to become global.

The evidence of conflicts among triad regions
The regional focus partly resulted from MNEs regional strategies because some of them merely want to establish a dominant position in their home regional market, but also from the conflicts among triad regions that prohibit MNEs entering these three regions equally.
The success of regional and bilateral agreement and the failure of multilateral agreements, such as the Organization for Economic Cooperation and Development's (OECD) multilateral agreement on investment (MAI) and the lack of progress at the World Trade Organization (WTO) in setting new agendas for trade and investment liberalization, are signal of the problems of globalization and the power of closed regional/triad blocs.(Rugman 2001,P3) Triad regions are attempting to stimulate intra-trade and investment and be against "outsiders" by setting up regional policies and regulations.They adopted nontariff barriers to trade and investment to limited access to their internal markets and/or give preferential access to certain partners I return for reciprocal advantages.

Exports in the broad triad
For example, according to data for 1997, the triad's export total was US$ 4,145.8 billion, with 60.6 per cent of the EU exports of US$ 2,092.3being internal, at US$ 1,268.5 billion.The EU exports only 8.7 per cent to NAFTA (US$ 182.1 billion) and 9.4 per cent to Asia (US$ 197.6 billion).NAFTA exports 15.4% per cent of its total to the EU (US$ 155.3 billion) and 22.4 per cent to Asian (US$ 226.0 billion).Asia exports 21.1 per cent of its total to NAFTA (US$ 220.0 billion) and 14.7 percent to the EU (US$153.3 billion).

Expansion Models of MNEs
When a company decides to become a multinational company, how will it expand abroad in terms of region?Totally there are four models it can adopt.

Model 1 Model 2 Model 3 Model 4
Many MNEs adopted Model1.It will need three steps to become a global company from a local one.MNEs will build upon the strong home base diamond characteristics of the Unite States, the European Union, or Japan and use the appropriate triad market as a staging ground for activities in other markets.( Rugman, 2001) But the great majority of MNEs sales are from its home traid.The home triad region sales weighted averages are as follows: (Rugman and Verbeke, 2004) (1) home region oriented (320 firms) :80.3% (2) bi-regional (25 firms ): 42% (3) host region oriented(11 firms): 30.9% ;and (4) global (9 firms) :38.3% In this process, they carefully analyze costs, revenues, factor conditions, growth potential, political risk, cultural factors, and environmental issues.Step 1 Step 2 Step 3 The problem is that why most MNEs adopted Model 1 instead of other Models.This is also told us that there is some regional factors rather than global factors affecting MNEs's operation.Up to now, there are only nine global companies.
The study shows that only consumer electronics and high-value-added goods with low transport costs can approach being global.(Rugman 2001, P2)

Regional Factors affecting MNEs operations
The analysis above has showed that a MNEs's manager should not think merely in terms of the nation-state-global market dichotomy, he should think about triad regions and regional factors.Here I will divide regional factors into internal factors and external factors.
Internal factors are the factors that MNEs can control, such as MNEs strategy and structures.

Strategy
The MNEs need different competitive strategies if they are in the different markets position in the various regions."a leadership role in one market may require different patterns of decisions and actions than the role of a (perhaps ambitious ) junior player in other market.These differential roles should then be reflected in the deployment of specific combinations of non-location-bound and location-bound FSAs in each region."(Rugmanand Verbeke's, 2004)

Structure
MNEs strategy, intra-regional or inter-regional sales, and upstream or downstream activities will determine MNEs's structure.A good MNEs structure should serve MNEs regional strategy, and maximize FSAs in that region.
Regional headquarters are an important regional component in MNEs organizational structure.The other elements are organizational physiology and psychology.These regional elements "may increase the difficult of managing multidivisional (M-form) companies, as performance evaluation should be differentiated for units operating in the various regions, even within similar businesses, given the enormous differences in environmental circumstanced faced by the affiliates in each region".( Rugman and Verbeke's, 2004) External factors is the factors that MNEs can not control but will affect MNEs's operation and management, such as social , political and economic factors.
When MNEs decide to venture into other regions from home triad region, they may face a liability of regional foreignness, including several additional risks that were absent in the host region and may be of an economic, cultural, administrative or geographic nature.

Regulations and policies
Government regulations and policies differences are major factors affecting MNEs's operation.Inter-triad business is likely to be restricted by government-imposed entry barriers.The EU and the US are likely to fight trade wars and respond to domestic business lobbies seeking shelter in the form of subsidies and/or protection.Moreover, there are significant health care and political differences between Triad regions, but far fewer within them.therefore, most of the advantages of standardization that can often be achieved within the home triad region may be lost or transferred into disadvantages in host triad regions.

NGOs
The nongovernmental organizations also challenged the MNEs.The NGOs are new and powerful actors on the stage of international business.(Rugman, 2001).NGOs have defeated the OECD's multilateral agreement on investment (MAI).

Environmental protection
Over the past decade the number of trade disputes arising from such environmental regulations and coalitions has increase sharply.Environment disputes are a global problem but are resolved regionally (Rugman, 2001).For example, in NAFTA triad region, they signed North American Agreement on Enviromental Cooperation(NAAEC), which created three surveillance and enforcement mechanisms to constrain national environmental regulatory activity that affects trade.

Culture
Culture differences have a great influence on MNEs operations.Culture differences lead to different demand conditions.A commodity that is best seller in home region may be rejected in other triad region.For example, the car designs that are popular in one area of the world are often rejected by customers in other geographic areas

Rivalry
Competitions vary in three triad regions.A MNE which is the biggest company in its home region may be a very small one in the host region.Obviously, this needs the MNEs's subsidiary to adopt different strategy and structure from its parent company.Another disadvantage for newcomers is that they will cost much time and money to satisfy local regulations and policies.

The implications of studying regional factors
The purpose of MNEs going abroad is to pursue low cost or differentiation competitive advantages.In order to achieve their targets, MNEs must carefully deal with: How they transfer country NLB and LB FSAs (firm-specific advantage) to regional NLB and LB FSA.
How they take advantage of regional-specific advantages What entry model they should adopt when they decide to touch triad region.
6.1 How they transfer country NLB and LB FSAs (firm-specific advantage) to regional NLB and LB FSA.
MNEs should design strategies on a regional basis.They are responsive to local consumers, rather than global and uniform.Therefore, they also should analyze their location-bound and Non-location-bound FSAs in term of region.It means MNEs should extend the concept of NLB and LB FSAs across national borders to geographic region, namely regional bound.While new regional-bound FSAs need regional integration."Hence regional integration creates both a threat and an opportunity for MNEs as they need to complement the conventional bundles of non-location-bound FSAs and location-bound FSAs with a set of region-bound FSAs." (Rugman and Verbeke's, 2004) FSAs (firm-specific advantage): there are two types of FSAs: non-location-bound (NLB-FSAs) and location-bound ones( LB-FSAs).The former are defined as FSAs that can be exploited globally and lead to benefits of scale, scope or exploitation of national differences.While location-bound FSAs can be defined as FSAs that benefit a company only in a particular location (or set of locations), and lead to benefits of national responsiveness.(Rugman and Verbeke, 1992) Obviously, NLB-FSAs can be transferred abroad at low marginal costs and used effectively in foreign operations without substantial adaptation in view of firm.But whether NLB-FSAs can be transferred abroad successfully also depends on the permission of host country or region.So we should find what factors the host country or region will consider when they permit a foreign company to operate in it.
location-bound FSAs are effective in one location but will be ineffective in other locations.But Location-bound FSAs depends on the definition of location.Location can be referred as a sub nation, a nation, a triad region or two triad regions.Therefore we should detect what factors affecting LB-FSAs's effectiveness.
MNEs should redefine their location-bound and non-location bound FSAs in terms of region.Some location-bound FSAs in their home country may still be LB FSAs in region (such as Process 1 in table 2) or may not (such as Process 2).While some NLB FSAs in their home country may turn into LB FSAs in region (such as Process 3) or may still be NLB FSAs (such as Process 4).
Table 2 also can interpret why many MNEs adopt Expansion Model 1: home country---home region-other region.
Obviously, more location-bound and non-location-bound FSAs in home country are effective in home region than host region due to external factors.

How can MNEs take advantage of regional-specific advantages?
When MNEs are in home country, they have Country-specific (or locational) advantages (CSAs), "which state that some benefits are associated with locating certain activities in particular countries.These benefit may arise from (a) structural market imperfections such as government regulation (Rugman et al, 1985) and Table 2.
transaction costs by reducing risks and to benefit from local opportunities ( Rugman 1990)" ( Rugman and Verbeke, 1992).
when MNEs operate in a region, MNEs' managers set up strategy or business structure based on regional-specific advantages not Country-specific advantages.So they should think regional regulations rather than country's regulations.And they should think regional transaction cost, risks and benefits from regional opportunities.Home region commonly have similar regulations with home country.So MNEs can have more regional-specific advantages in home region than host region.Certainly, they not only reduce transaction costs but also reduce risk because they are more familiar with home regional market than host region.

6.3
What entry model should they adopt when they decide to touch triad region.
MNEs have relative benefits associated with different entry models (e.g., exports, licensing, joint venture, FDI and other forms of investment) when serving foreign markets.(Rugman and Verbeke, 1992).But some time what MNEs think is how they can enter a region rather than how efficiently they enter.A related point is that inter-block business is likely to be restricted relative to intra-regional sales by government imposed barriers to entry.For example, the E.U. and the United States are likely to fight trade wars and be responsive to domestic business lobbies seeking shelter in the form of subsidies and/or protection.Cultural and political differences among members of a single triad region may remain, but these will mostly be less significant than across triad regions, Rugman (2000).Value added through aggregation, in the sense of exploiting similarities across coutries (Ghemawat, 2003), can be achieved in the home region but appears difficult across regions.(Rugman and Verbeke's, 2004)

Case studies
We have tested that many MNEs are more regional than global.Next, I will analyze the strategy and structure of a specific MNE, Wal-Mart, and how the regional factors affecting Wal-Mart's strategy and structure.

Background of Wal-Mart
Wal-Mart is the world's largest retailer.Sam Walton found the first Wal-Mart store in Rogers, Arkansas in 1962.
Wal-Mart's international expansion began in 1992, when it entered into a joint venture with Cifra S.A., a successful Mexican retailer.In 1998, it acquired a controlling interest in Cifra and officially changed the company'sname to Wal-Mart of Mexico.Since 1992, it has also expanded into eight other international markets: Argentina, Brazil, Canada, China, Germany, South Korea, Puerto Rico, and the UK.In the year ending of 2002, its revenue was almost $218 billion.

Regional-based Wal-Mart
Wal-Mart is a regional, not a global business.There are two arguments to back up this conclusion.
First, most its stores located in NAFTA triad region.For example, at the beginning of 2002, Wal-Mart had a total of 3,989 stores.A total of 3,609 of its stores are in the NAFTA region, with 2985 in the domestic US market, 458 in Mexico and another 166 in Canada.Only 380 are truly "international"-outside Wal-Mart's home triad region, only about 10 percent of its stores.Second, although Wal-Mart became the largest company in term of sales revenues in 2001, its most revenue came from NAFTA.For example, Wal-Mart's revenue was almost $218 billion for the year ending in 2002, ahead of General Motors and Exxon Mobil.But about 83.7percent is from United Stated and only16.3percent is from international sales.The NAFTA market stands at an estimated 94.1 percent, and only 5.9 percent was from EU and Asia regions.

Distribution of
district, store, department within a store, or even at the level of an item within a department(Wal-Mart stores, http://mba.tuck.dartmouth.edu/pdf/2002-2-0013.pdf)

Conclusion
Most of MNEs are home regional -based companies rather than global companies.One of important reason is influence of regional factors.Home regional factors can bring more advantages than host region's.And MNEs can easily transfer FSAs into regional FSAs.Therefore, MNEs should follow home country-home region-host region model.MNEs's manager must "think regional and act local", and design regional strategy and organization structure that develop triad-based internal know-how capabilities and organizational competences.
(b) the potential to economize on Type of FSAs (home country based)

Table 1 .
Classification of the top 500 MNEs Wal-Mart Stores