Ownership Advantages for Emerging Countries

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Table of Contents

Introduction
Main body
Ownership
Location
Internalization
Lack of Ownership Advantages for Emerging Countries
References

Introduction

It might seem obvious that a significant part of contemporary society utilizes the products made by multinational companies. The operation established in another country inevitably faces the essential tension between profit and loss, although the benefits of international production should cover its disadvantages. During the analytical researches of the multinational enterprises’ (MNE) expedience, the experts developed the OLI model “for organizing thoughts about the benefits of multinational production” (Ruhl, 2016). The purpose of this paper is to review the OLI framework, its sources, and its potential incapacity for the emerging countries, possible initiatives, and measures to overcome this problem.

Main body

Taking the decision to enter the international area, any domestic company considers the potential extra costs of production, shipping of supplies, long-distance communication, and expatriate employees. It confronts the differences in working cultures and languages, time zones, and legal systems as well. Though, despite this, the potential benefits and the gained income surpass the majority of difficulties. The OLI model, or known as Dunning’s Eclectic Paradigm, does not contain the formal theory and cannot be defended or confronted in a scientific way, though it provides a substantial explanation of the companies’ globalization (Mat Isa, Preece, & Saman, 2017, p.67). The OLI framework includes Ownership, Location, and Internalization, these three sources provide an understanding of why the domestic company decides to take all risks and become international.

Ownership

The ownership source contains the main reason for the multinational enterprises’ existence. The main idea of it is that the company should possess highly valuable assets which allow it to produce unique goods and to discharge the possible exposures. There are two types of assets – legal assets and intangible capital. The legal assets contain all certified documents which give the company the individual right for production, such as copyright and patents. For example, the pharmaceutical company owns a patent on a cholesterol drug (Ruhl, 2016). Until no other firm produces it, this asset gives the company the power to increase the profit substantively, minimize losses and enter the international area. The intangible capital includes non-material sources which create the goodwill of the enterprise, and frequently, it is the brand’s reputation, human potential, and administrative talent. For the globalization of the company, the higher-than-average assets should affect not only the rate of production but also its heterogeneity (“World Economy FDI” n.d.). With the unique resource and the affordable expenses for exporting, the firms determine their level of productivity. The low level and lack of product variety leave the company on the home market, while the highest productivity transforms it into an international enterprise.

Location

The location source explains the company’s advantages of working on the territory of more than one country, these benefits define two types of arrangement – horizontal foreign direct investment and vertical foreign direct investment (Ruhl, 2016). The first type is defined by providing access for external customers and reducing the transportation costs in the case of outsourcing. In this case, the location benefits are essential for the products which are impractical and expensive for shipping abroad. For example, for the McDonald’s company, it is inexpedient to transport the burgers to Canada for sale, instead of organizing its production in Canada for the McDonald’s restaurants on its territory. The vertical foreign direct investment means that the multinational brands chose to locate their production in foreign countries with the lower price for low-cost labor. For instance, the fabrication or toy assembling in Vietnam or Bangladesh will be more beneficial for American companies as the production cost is lower than in the United States.

Internalization

Internalization considers being the principal framework, it is needed in a very elementary stage of the firm existence as its advantage helps it to maintain. Explaining why the activities and the international expansion are performed within one company is the major souse for the economic researches. The company controls and coordinates the resources it possesses, while other resources are conducted by the market. One of the benefits for the firm internalization is connected with the protection of its assets – if the patent or the copyright can be copied, the company takes the decision to realize the manufacture within it, rather than to give the license for it to the external firm. Another advantage the enterprise can choose from the internalization consists of the personal production control resulting from the difficulties in the execution of the contracts and the cooperation, which may arise between the partners. Therefore, it is more substantively to execute the production and control over it within one corporation.

Lack of Ownership Advantages for Emerging Countries

The ownership-location-internalization model suggests that the globalization of the companies from the emerging countries is not effectively displayed due to the lack of advantages. Among other reasons, the deficiency of the ownership advantage plays an essential role as the economy of the developing countries is defined by the high level of nationalization. As the government possesses large-scale enterprises, the manufacture is realized less productively as the companies are not oriented on the development and the introduction of new technologies. Although, private companies “run a business more efficiently because of the profit motive” (Pettinger, 2017). Privatization can be regarded as one of the measures to increase the number of companies from emerging countries, affording their products for the international market.

The United Kingdom, an industrially advanced country, privatized a significant number of enterprises in the 1990s, and currently, British Telecom, British Petroleum, and British Airways are world-renowned transnational corporations. On the contrary, in the 1990s Egypt started its privatization having more than 200 state-owned profitable enterprises, as the government entered an Economic Reform and Structural Adjustment Program (“Ownership Structures,” n.d., p. 21). It began when the government sold the famous beverage companies, Coca-Cola and Pepsi-Cola, and this action was followed by a significant number of privatized enterprises. Despite the increasing amount of private businesses over the years, at the current time, the process of privatization is performed deficiently.

The authoritative source of the OLI model explains the advantages of becoming an international corporation if the enterprise possesses the patents. Certainly, multinational corporations are “both important generators of innovation and significant drivers of technology diffusion across countries,” and their patents, as the individual, intellectual property, is, undoubtedly, internationalized (Berry, 2016, p. 1). The assets in the high-tech sector are most valuable, and, as the multinational corporations from the developed countries afford the high expenses for the innovations, their elaborations help to compete in the international area. The patents are divided into single-country or foreign-origin (patents on the territory of the home country or foreign country), foreign equivalent family patent (patent, transferred to the foreign country after using at home), and the family ones (patents introduced in several countries simultaneously) (Berry, 2016). According to Galan, in 2017 Oracle (an American computer technology corporation) registered 753 patents, SAP AG (a German multinational software enterprise) obtained 521 patents, Nokia (a Finnish information technology, telecommunications, and consumer electronics company) incorporated 1381 patents (Galan, 2018, p. 16). The financing of the innovations and researches within the companies of the countries with the developing economy by the foreign direct investments can stimulate their globalization.

China may be considered as a presentable example of an emerging economy that attracts investors from all over the world. The Chinese market became “one of the world’s most hyped investment locations” not only for the foreign transnational corporations; the substantial number of the Chinese global companies develops rapidly (“How many multinational corporations operate in China?” 2015). The reason for this economic extension underlies the Chinese modification of the OLI model – the majority of companies benefits from the country-specific advantages, the combination of access to the home resources with the particular working culture, and corporate integrity. As the globalization of the company determines by the variety of its products, it is impossible not to point to the Chinese multinational holding company Alibaba, which specialized in e-commerce and retail. It provides sales services among customers and the companies, as well as electronic transaction and shipping services. The exceeding offering of the products performed through this company led it to the international area and made as one of the most prosperous global brands.

The excessive number of companies from the developing countries has the potential to release their products to the industrialized countries’ markets. Though, the difficulties with the globalization of these companies, among other reasons, underlie the lack of ownership advantages. The growing privatization, the investments in developing private innovations, and the enrichment of the products contain the potential resolution of this problem.

References

Berry, H. (2016). The Global Family Patents of Multinational Corporations. Academy of Management Annual Meeting Proceedings.
Galan, A-M. (2018). The Innovative Activity of the Multinational Companies in the International Business Environment. “Ovidius” University Annals, Economic Sciences Series, 18(2), 13-19. Web.
How many multinational corporations operate in China? (2015). Web.
Mat Isa, C.M., Preece, C.N, & Saman, H.M. (2017). Development of OLI+S Entry Decision Model for Construction Firms in International Markets. Construction Economics and Building, 17(4), 66-91.
Ownership Structures in MENA Countries: Listed Companies, State-Owned, Family Enterprises and Some Policy Implications. (n.d.). Web.
Pettinger, T. (2017). Advantages and Problems of Privatisation. Web.
Ruhl, K.J. (2016). The Ownership-Location-Internalization Framework.Multinationals and the Globalization of Production, 1-3. Web.
World Economy FDI: The OLI Framework. (n.d.).

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