A multinational corporation is a company that has other assets in another country(s) other than its mother company in the home turf. By assets, the reference is factories and offices which are coordinated by a main head office for efficient global management. Perlmutter, (2017). Given that the world has become a global village, it has made it quite easy for companies to expand their operation to foreign nation with ease thanks to better communication and travel facilities. However, globalization dates back to 3000 BC an attribution of the Sumerians and later was adopted in the Asian and European regions. Some of the common characteristics of multinational corporations are; use of multiple currencies, they have a centralized ownership and control, are quite large in size and operation in multiple countries. However, despite the numerous advantages they have and enormous profits they accrue, not all is smooth for the multinational corporations as they face various challenges while operating abroad. This report will seek to look into these challenges, their remedies and other factors such as entry strategies and sustainability.
1. For this report I will focus the study on Inditex. Inditex is a multinational corporation which is Spanish based and has its headquarters at Arteixo. The company bases it operation in the apparel industry and is regarded as the most major player in the world’s fashion industry. By the end of January 2006, Inditex has spread to over 63 countries and currently they have over 7,200 stores in 93 countries. The company started as a small family firm in the 1960’s operating locally and was established and run by Amancio Ortega (currently owns 59% of the company) and Rosalio Mela his wife. However, Inditex was officially established in 1985 with Jose Maria Castellano as the C.E.O. Jaouhari and Wu (2013).
In 1988, the company set up its first abroad investment by venturing in Portugal and a year later, they it ventured into the United States market. Since then, the company has set up in many countries in the European and Asian markets with only South Africa as their only venture in Africa. Initially, the company concentrated its international venture exclusively in men’s and children wear but in 1995, it ventured to the women’s wear line.
Currently, the C.E.O. and chairman is Pablo Isla. The company’s total revenue based on 2016 data was 23.311 euros, operating income 4.021 billion euros, net income of 3,161 billion euros, total assets stood at 19.621 billion euros and total equity was 12.752 billion euros. In 2016, the company had a total of 162,450 employees. Scott, (2017).
2. A major take away from topic one is that multinational corporations operate in many counties outside their mother country and have vast monetary resources. Shenkar, Luo, and Chi, (2014). Looking into Inditex profile, it operates in 93 markets globally and as per 2016 data, the company amassed 23.311 billion euros in terms of revenue which is a really huge return thus ranking at number 213 in the Forbes 250 to multinational performers. For this reason, it can be concluded that Inditex status is of a multinational corporation.
3. For a company to venture in another country, there are major influences which push it to invest in a particular country. Inditex has established branches in over 93 countries but the case study in this scenario is the Britain. Britain has high-entry requirements for foreign investors in order to protect their home grown firms. Since Inditex has already met the entry requirements and are now well established, it is a plus for as it means there is minimal competition since the number of firms in the industry is limited. Also, for the same reason, Inditex is a price maker rather than a price taker. Also, London Britain’s capital is a fashion capital meaning they have a ready market for their products especially designer clothing and also has a pull modern technology. Bruzzi and Gibson, (2013).
4. To support the above argument, the theory to be used is the Porters Diamond Theory. The model seeks to explain the competitive pros that firms have in certain nations due to some factors at their avail. The theory states that when competition is minimal, then firms have an upper hand over buyers when it comes to bargaining power over prices. Also, it states that high-entry requirements reduce competition as it discourages foreign firms from investing due to the same reason. Brosnan, Doyle, and O’Connor, (2016).
In this case scenario, Inditex has a better bargaining power over their buyers due to minimal or controlled competition thus the reason they are price makers. This means that their profitability will be high. The model also brings forth the theory of comparative advantage. Inditex has a comparative advantage in terms of customers given that Britain is a fashion capital and also in manufacturing and advertising given the high level of technology in Britain. Nagle and Müller, (2017).
5. Foreign Entry Strategy is the method to be adopted to ensure that a company’s products reach the customers and also their mode of delivery. Holtbrügge, and Baron, (2013). Inditex used the own subsidiaries or direct investment method as their market entry strategy in Britain characterized by the many retail outlets it owns there. This method simply involves setting up retail outlets and manufacturing firms owns greater than 50% of the voting stock of the subsidiary company. On the hand the subsidiary company must adhere to the laws of the hosting country. Also, the subsidiary company and the mother company have different entities for the purpose of regulation and taxation. López-Duarte and Vidal-Suárez, (2013).
The benefits of own subsidiaries as a foreign entry strategy are as follows:
The subsidiary company in receives support in terms of employees and resources. The mother being already well established has accumulated employees with vast experience. This means that the mother company can therefore export a readymade network of employees to work in the subsidiary company. Thus, the parent company will provide guidance, support and direction to the infant subsidiary company. The subsidiaries also receive monetary support from the mother company. This means that the subsidiary has more financial resources at its disposal.
The mother company either wholly controls or has a firm grip on the operations and decision making of the subsidiary company. This will mean that the subsidiary company will have similar policies to those of the mother company thus making it easier to run and manage them. Decision making will be much simpler and faster as the mother company needs little or no consultation when making decisions. Also, since the parent company controls the assets of the subsidiary, it means that the mother company has the mandate to invest as little or much as they want into the subsidiary, taking into consideration how well the new market location goes. The outcome is that company significantly reduces the financial losses. Kynighou, (2014).
Subsidiary companies tend to have speedy execution of strategic priorities. For example, the mother company may prompt one of its subsidiaries to direct all their resources maybe towards launching of a new product. This speedy execution translates to quicker market penetration. Cooperation in marketing, development and research and information technology will translate to reduction in cost and a long term strategic positioning.
As mentioned earlier, the parent company has total control over a wholly-owned subsidiary. This means that the company controls the marketing, sales, production and management of the subsidiary. This means that if their competitive advantage is company secret, then it will not be as it will remain a patent right. Also, the assets of the subsidiary are controlled by the parent company which means that there will be no misuse as they will be closely monitored by the parent company. Dhar, and Joseph, (2016).
However, despite the wholly-owned entry method having numerous advantages, it also has some flaws as follows:
Establishing a subsidiary in a foreign country involves setting up or leasing of premises and they must also acquire employees who are competent in the new market. The parent company must foot the full cost of capital and bear all the risks involved. The most efficient and fastest way of establishing a subsidiary is acquiring an existing company. However, this may prove to be quite expensive especially if there is a bidding war as this will drive the prices up. Also, some countries have a minimum wage limits which may be quite high compared to the mother country thus reducing profitability. Also, in case of sudden exit say due to political reasons, the company may not fully recover the cost it incurred while setting up leading to major losses. Brouthers, (2013).
Establishing a subsidiary in a foreign country mean they there will a conflict in culture which is quite different in most countries. The cultural barriers vary from language and diverse corporate cultures. Language is quite essential for effective communication. Cultural diversity particulary language barrier may prove to be a major impediment especially for the workforce who are exported by parent company to the subsidiary and need time to acclimate to new culture and even learn their language. Peltokorpi, and Vaara (2017).
The subsidiary companies are governed by the laws of the existing government regimes of the host country. A change in regimes may mean the laws which were initially favoring the subsidiary companies may be amended to their disadvantage. Also, a company may have established a subsidiary when the host country was politically stable but may run losses in case of political instability which is quite unpredictable.
Opportunity cost is that expenditure involved when making the best choice given many alternatives. DRURY, (2013). To establish the subsidiary company, they need to choose the best alternatives for example in advertising. In this case, the most appropriate and best advertiser will need a lot of time and money to find thus making the opportunity cost high.
6. The UN Global Compact Principles encourage companies to adopt sustainability in their production to provide way for a green and cleaner environment. Compact, (2014). Currently, Inditex is lagging behind other apparel companies in terms of sustainable production. However, they are increasingly advocating for sustainable production via the “closing the loop” program which entails recycling of synthetic textile products.
However, there are future plans to fully implement sustainability via use of green materials such as organic cotton and wool. Also, Inditex seek to achieve sustainability via an initiative of “zero discharge of hazardous chemicals” in their wet processing units which include; tanneries, dying and printing mills among others.
By going green, Inditex will receive tax rebates and subsidies from numerous host nations who are seeking to encourage environmental sustainability. Green sustainability in the apparel industry is being adopted quickly by many countries thus a major selling point. This will in turn translate to more profits. Despite the financial point of view, Inditex will be adhering to the UN Global Compact Principles for a green environment in the future. Krass, Nedorezov, and Ovchinnikov, (2013).
Conclusion
From the report, it is quite clear that multinational corporations face various challenges when entering a new market. In order for them to remain relevant and profitable, they have to adopt the most suitable market entry strategy most appropriate to the circumstances of the host nation. Also, they must also adhere to UN Global Compact Principles on sustainability for a greener and cleaner environment. Inditex should consider all the above factors in their existing subsidiaries and when establishing other subsidiaries.
References
Brosnan, S., Doyle, E. and O’Connor, S., 2016. From Marshall’s Triad to Porter’s Diamond: added value?. Competitiveness Review, 26(5), pp.500-516.
Brouthers, K.D., 2013. A retrospective on: Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 44(1), pp.14-22.
Bruzzi, S. and Gibson, P.C., 2013. Fashion Cultures Revisited: Theories, Explorations and Analysis. Routledge.
Compact, U.G., 2014. Overview of the UN Global Compact. Recuperado de https://www. unglobalcompact. org/ParticipantsAndStakeholders/business _associations. html.
Dhar, B. and Joseph, R.K., 2016. Foreign direct investment, intellectual property rights and technology transfer. Economic Challenges for the Contemporary World: Essays in Honour of Prabhat Patnaik, Sage, New Delhi, pp.131-142..
DRURY, C.M., 2013. Management and cost accounting. Springer.
Holtbrügge, D. and Baron, A., 2013. Market entry strategies in emerging markets: An institutional study in the BRIC countries. Thunderbird International Business Review, 55(3), pp.237-252.
Jaouhari, C. and Wu, M.D., 2013. Company’s History.
Krass, D., Nedorezov, T. and Ovchinnikov, A., 2013. Environmental taxes and the choice of green technology. Production and operations management, 22(5), pp.1035-1055.
Kynighou, A., 2014. Variations in corporate influence over HRM between the early and later stages in the life of foreign subsidiaries. The International Journal of Human Resource Management, 25(1), pp.113-132.
López-Duarte, C. and Vidal-Suárez, M.M., 2013. Cultural distance and the choice between wholly owned subsidiaries and joint ventures. Journal of Business Research, 66(11), pp.2252-2261.
Nagle, T.T. and Müller, G., 2017. The strategy and tactics of pricing: A guide to growing more profitably. Routledge.
Peltokorpi, V. and Vaara, E., 2017. Language policies and practices in wholly owned foreign subsidiaries: A recontextualization perspective. In Language in International Business (pp. 93-138). Palgrave Macmillan, Cham.
Perlmutter, H.V., 2017. The tortuous evolution of the multinational corporation. In International Business (pp. 117-126). Routledge.
Scott, L., 2017. It Is 2017. Is Your CEO Thinking about Current Issues?
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