Uncertainty and Risks Regarding Multinational Corporations’ Functioning

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

Table of Contents

Introduction
Background
Risks
Uncertainty
Entry Strategy
Entry Mode
Investment Size
Discussion
Conclusion
Reference List

Introduction

The modern globalised world offers multiple opportunities for international companies to expand and enter new markets. Giant corporations benefit from these conditions and increase their revenues by broadening their target audiences and working in new regions. However, along with multiple benefits associated with functioning in the overseas market, there are also significant risks associated with uncertainty and a high probability of failure. Under these conditions, the correct choice of the entry mode acquires the top priority for multinational corporations (MNCs) as the guarantee of the successful growth and operating in the selected region.

Background

Multination corporations are nowadays the main facilitators of global trade as they impact international discourse and exchange between countries. This type of business organisation can be determined as a company that has facilities and assets in at least one country other than its country of origin (Barney and Hesterly, 2014). Usually, such formations have offices, departments, and plants in multiple regions and cause a positive effect on economies of states where they operate. In such a way, MNCs are associated with the emergence of opportunities for business and the generation of giant revenue by cooperating with numerous partners from different countries.

Another advantage of MNC is the ability to select the region which at the moment is considered a beneficial and strategically important area that might help to acquire a serious competitive advantage (David, David and David, 2016). However, the nature of such companies also serves as the source of uncertainty and risks related to new conditions, legislation, and the environment. It means that the choice of entry mode becomes a complex task.

Risks

MNCs expanding internationally and entering foreign markets face a set of risks related to the peculiarities of countries and regions where it plans to operate. The character of these risks depends on the current situation in the state and should be considered by a company during the expansion stage. In general, the choice of the entry mode is affected by six major types of possible risks, which include:

The incorrect vision of the market’s economic potential
fluctuations in the currency exchange rate
political issues
infrastructure
culture
state of the economy (Dess, 2018)

The given factors shape the strategy of an MNC and its entry mode as they introduce a certain level of uncertainty that should be taken into account to plan future actions and employ appropriate strategies to minimize the negative impact of risk factors and guarantee those positive outcomes will be generated.

Uncertainty

Uncertainty is another contextual factor that affects the decision-making and strategies of MNCs during their expansion phases. It can be defined as the lack of knowledge related to the probabilities of future actions affecting the speed of MNCs’ expiation, their internalization paths, entry mode choices, and results (Dess, 2018). The inability to minimize the negative impact of uncertainty or eliminate it decreases the effectiveness of a new entry and deteriorates expected outcomes. For this reason, the current strategies aimed at the creation of the basis for the successful entry are focused on the investigation of existing conditions and risk factors and forming of the complete image of a new location to guarantee that no risks or uncertainties would affect the corporation during its functioning and growth.

Entry Strategy

The analysis of the correlation between the choice of the entry strategy and uncertainty in the overseas market can be performed by using the cases of MNC operating in China as today it offers multiple opportunities for growth and attracts the attention of numerous actors who want to generate revenue and acquire a competitive advantage. The region has its unique peculiarities that impact the entry mode and also introduce certain uncertainty regarding future functioning. In general, any international corporation faces three major and interrelated questions: what market to enter (location), when to enter (time), and how to enter (entry mode) (Gamble, 2018).

These choices play a fundamental role in the final success of an MNC as they presuppose a certain level of control, amount of investment, risk exposure, and elaboration of practice strategies for foreign operations. The optimal scale of would be operations can be determined at the initial stage of the expansion (Gerschewski et al., 2018). For this reason, the choice of the entry mode becomes a major determinant of success.

Entry Mode

Any MCN that focuses on entry to the Chinese market has to establish a specific institutional arraignment. It presupposes permission for selling products in foreign markets or performing some other operations that might contribute to the generation of income (Wang, 2011). Different actions might demand specific investment, risk, control, returns, and uncertainty (Wang, 2011). For this reason, firms might increase their flexibility by selecting which entry mode to use regarding their commitment to the international markets and the desired outcomes (Beugelsdijk et al., 2018). At the moment, the successful strategies related to the Chinese market presuppose indirect exporting, direct exporting, licensing, franchising, joint venture, direct investing (Chand, n.d.). However, the choice of the appropriate strategy is preconditioned by existing uncertain conditions and how they can be handled. Otherwise, MNCs face a high probability of collapse and critical deterioration of their results.

Indirect Exporting

One of the possible choices regarding the high level of uncertainty is indirect exporting. It means that companies can use domestically based agents operating on a commission basis without taking title to goods (Hill, Schilling and Jones, 2016). Moreover, merchants can sell products of MNC in the international markets or use the facilities of other corporations or firms to deliver their goods to clients (Wang, 2011).

The use of this entry mode is one of the possible options regarding the existence of multiple risks or significant uncertainty. It does not presuppose an extremely significant investment of the use of substantial resources; at the same time, it provides an opportunity to monitor the market and conclude about the further expansion and selection of other modes that can help to generate additional income. For the majority of MNC operating in China at the moment, indirect exporting was one of the first modes used to enter the market and analyze customer behavior (Wang, 2011). It also helps to immunize risks and elaborate on future strategies.

Direct Exporting

Direct exporting is another possible option that might be chosen by companies regarding the existing level of uncertainty. It presupposes the development of overseas contacts via marketing research and the use of foreign-based agents or distributors (Grewal et al., 2018). It might also involve cooperation with an agent or a specific distribution that is responsible for sales. Direct exporting might be an effective mode to affect foreign markets, especially when the level of uncertainty is average and further expansion can be considered beneficial as there are a solid client base and conditions for the rise.

Companies might also establish sales offices in foreign markets to simplify access to the desired goods (Hitt, Ireland and Hoskisson, 2019). The given strategy is usually preferred by MNCs that are sure in their ability to handle the existing level of uncertainty and organize the active work of their assets.

Licensing

Another possible entry mode presupposes licensing as a specific sort of business relations between an MNC and a local firm. It can be determined as a provision of a licensee that grants access to technologies, patents, trademarks, and brands for some other actors with the primary goal to benefit from specific fees. Applying this concept to the idea of uncertainty and risks, licensing is a preferable option for MNCs that possess the correct understanding of peculiarities of the local infrastructure, economics, and the overall readiness to meet the requirements to the quality and other characteristics of provided services or goods (Hopkinson and Aman, 2019). Otherwise, the incorrect analysis and vision might precondition the critical deterioration of the brand’s image, reputational losses, and the inability to guarantee its further evolution in the selected region.

Franchising

Franchising is another possible opportunity for MNCs to enter the desired market by using local businesses or cooperating with them. It presupposes the provision of a package of services by a franchiser to a franchisee in return for payment that is acquired due to the sales of these services or goods (Keller, 2014). For instance, the Coca-Cola group divides its bottling system in China between two partners such as COFCO Corp and The Swire Group (Sniazhko, 2019). The given solution offers an opportunity to affect local markets and deliver goods to clients who are interested in them. The employment of this entry mode is associated with a comparatively low level of uncertainty as the franchisee should give guarantees of success and prove that the existing infrastructure, legislation, and distribution channels are sufficient to ensure the further evolution of the brand and its successful entry.

Joint Venture

MCN might also prefer to enter a specific joint-venture agreement with a firm or organization from the region that is selected for the expansion. It means that two or more actors will join a partnership to share all possible costs, risks, and long-term profits (Pearce. and Robinson, 2014). The duration and frame of this cooperation are determined regarding the goals of the project and the desired outcomes. Usually, a joint venture presupposes a low level of uncertainty because of the need to evaluate all factors that exist at the moment and affect the market and both potential partners. That is why MCNs might prefer this entry mode as a continuation of their strategy focused on the increase of their presence in a certain region and the creation of the basis for future growth and evolution.

Direct Investment

Finally, an MCN can enter the foreign market by investing in manufacturing facilities that are located in the desired area. This strategy is called direct investing and presupposes that a company devotes the maximum amount of capital, resources, and managerial efforts to this entry mode (Clegg, Geppert and Hollinshead, 2018). MCNs might buy specific plants, factories, or other facilities, or create new ones to guarantee that products or services will be designed and delivered to clients.

Direct investment also means that a firm controls a significant part of operations in the targeted location and can guarantee the stable functioning of its facilities. From the perspective of uncertainty and risk assessment, this option presupposes the minimal level of vagueness and the correct understanding of all possible barriers and challenges that can be faced during the expansion phase (Fey et al.,2016). Furthermore, direct investment presupposes the existence of aligned relations with other actors within the selected area.

Investment Size

The size of the investment is another specific aspect of the MNC’s functioning along with the mode of entry that depends on the level of uncertainty. Thus, strategic options for MCN exist in various forms and can be allocated to three layers within an organization: on the country level, subsidiary level, and operational level (Thurner, 2005). Each of these classes has its own peculiarities and characteristics that affect the choice of the mode of entry and investment size.

At the same time, flexibility and commitment regarding these domains shape investment and organizational considerations. At the same time, high levels of flexibility cannot be achieved without significant investment and cost as the creation of multiple strategic options presupposes additional coordination costs and spending. (Rothaermel, 2018). For this reason, the determination of the appropriate investment size regarding the existing uncertainty becomes a complex issue.

Determination of the investment size is also linked to the necessity to reduce risks that might be associated with the failure or inability to achieve planned goals. The current peculiarities of the market, available resources, risks, and potential precondition the selection of strategies and financing that might help to function effectively regarding the selected paradigm (Chu, Girdhar and Sood, 2013).

Moreover, investment size reflects option characteristics, or, in other words, the given factor directly depends on the desired outcome and preferable option for entry (Søderberg and Romani, 2017). If the company possesses low limited information about the region for expansion and prefers to select such modes as indirect exporting or other option that does not demand significant resources, investment size will remain comparatively low because of the high level of uncertainty and inability to operate at the country level.

In other words, there is a correlation between the financing of a possible expansion, risks, and outcomes. Relatively ow investment size preconditioned by the existence of a significant uncertainty will have a positive effect on the subsidiary value and create conditions beneficial for the future rise (Dörrenbächer and Gammelgaard, 2016). This assumption can be explained by the fact that gaps in knowledge related to the areas of interest give rise to emergencies and undesired outcomes. For this reason, MNCs prefer to avoid huge investment if an exogenous uncertainty exists as it might precondition unnecessary and ineffective spending and the collapse of the brand.

Discussion

In such a way, the choice of the entry option and investment size becomes one of the critical elements that should be considered by MNCs during their expansion. For instance, IKEA’s first attempt to operate in China was followed by a significant analysis of the market and consideration of its opportunities. In 1998, the corporation created a joint venture with a local partner renting land from the government to open a first store (Miller, 2004).

The choice of the entry mode was preconditioned by the existence of multiple restrictions introduced by the Chinese government to regulate a newly created retail industry (Fenton, n.d.). In such a way, the choice of this mode was impacted by the existence of multiple risk factors and the desire to devote minimal investment because of the uncertainty regarding the future of the project and its evolution (Jiang, 2017).

DHL, the international logistic company, also entered the Chinese market by using the joint venture model. The primary cause for selecting this option was the impact on the government that wanted to preserve control over the sphere; however, at the same time, the company devoted large investments to the development of infrastructure needed to guarantee that clients will be satisfied with the quality of provided services (Teixeira and Grande, 2012). At the same time, service networks and financing were protected due to the existence of guarantees offered by the government, which also explains the choice of the investment size and its relation to uncertainty.

Conclusion

Altogether, the functioning of MNCs presupposes the existence of numerous risks and uncertainties that affect the choice of strategies and entry modes. Along with multiple advantages that are associated with the work of giant corporations, they also suffer from threats that might precondition their collapse or inability to continue evolution. For this reason, there are strategies that are utilized to select the most suitable entry mode and determine the size of the investment. Additionally, there is a need for the mitigation of risks and reduction of uncertainty to ensure that a new project will be able to achieve outlined goals and contribute to the further rise of the brand.

Reference List

Barney, J. and Hesterly, W. (2014) Strategic management and competitive advantage: concepts and cases. 5th edn. New York, NY: Pearson.

Beugelsdijk, S. et al. (2018) ‘Cultural distance and firm internationalization: a meta-analytical review and theoretical implications’, Journal of Management, 44(1), pp. 89–130. Web.

Chand, S. (n.d.) How multinational corporations enter to a foreign market (6 different modes of entry). Web.

Chu, V., Girdhar, A. and Sood, R. (2013) ‘Couching Tiger tames the dragon’, Business Today. Web.

Clegg, S., Geppert, M. and Hollinshead, G. (2018) ‘Politicization and political contests in and around contemporary multinational corporations: an introduction’, Human Relations, 71(6), pp. 745–765. Web.

David, F., David, F. and David, M. (2016) Strategic management: a competitive advantage approach, concepts and cases.16th edn. New York, NY: Pearson.

Dess, G. (2018) Strategic management: text and cases. 9th edn. New York, NY: McGraw-Hill Higher Education.

Dörrenbächer, C. and Gammelgaard, J. (2016) ‘Subsidiary initiative taking in multinational corporations: the relationship between power and issue selling’, Organization Studies, 37(9), pp. 1249–1270. Web.

Fenton, E. (n.d.) Case analysis Ikea in China. Web.

Fey, C. F. et al. (2016) ‘Internationalization strategies of emerging market multinationals: a five m framework’, Journal of Leadership & Organizational Studies, 23(2), pp. 128–143. Web.

Gamble, J. (2018) Essentials of strategic management: the quest for competitive advantage. 6th edn. New York, NY: McGraw-Hill Education.

Gerschewski, S. et al. (2018) ‘Post-entry performance of international new ventures: the mediating role of learning orientation’, International Small Business Journal, 36(7), pp. 807–828. Web.

Grewal, R. et al. (2018) ‘Marketing channel management by multinational corporations in foreign markets’, Journal of Marketing, 82(4), pp. 49–69. Web.

Hill, C., Schilling, M. and Jones, G. (2016) Strategic management: theory & cases: an integrated approach. 12th edn. Thousand Oaks, CA: Cengage Learning.

Hitt, M., Ireland, D. and Hoskisson, R. (2019) Strategic management: concepts and cases: competitiveness and globalization. 13th edn. Boca Raton, FL: Cengage Learning.

Hopkinson, G. C. and Aman, A. (2019). ‘Micro-political processes in a multinational corporation subsidiary: A postcolonial reading of restructuring in a sales department’, Human Relations, 72(12), pp. 1869–1890. Web.

Jiang, L. (2017) IKEA marketing entry strategy in China. Web.

Keller, K. (2014) Strategic brand management: building, measuring, and managing brand equity. 4th edn. New York, NY: Pearson.

Miller, P. (2004) ‘IKEA with Chinese characteristics, China Business Review. Web.

Pearce, J. and Robinson, R. (2014) Strategic management. 14th edn. New York, NY: McGraw-Hill Education.

Rothaermel, F. (2018) Strategic management. 4th edn. London: McGraw-Hill Education.

Sniazhko, S. (2019) Uncertainty in decision-making: a review of the international business literature, Cogent Business & Management, 6(1). Web.

Søderberg, A.-M. and Romani, L. (2017) ‘Boundary spanners in global partnerships: a case study of an Indian vendor’s collaboration with western clients’, Group & Organization Management, 42(2), pp. 237–278. Web.

Teixeira, A. and Grande, M. (2012) ‘Entry mode choices of multinational companies (MNCs) and host countries’ corruption: a review’, African Journal of Business Management, 6(1). Web.

Thurner, M. (2005) Foreign expansion under uncertainty – the case of multinational companies in China. PhD Thesis. The University of St.Gallen. Web.

Wang, S. (2011) Determinants of MNCs’ entry mode strategies in China. Master Thesis. Uppsala Universitet. Web.

Click Here To Order Now!