Competitive Advantages of Mnes and Global Supply Chain Management

Introduction

According to Grimwade (2000), from the enterprise level, the most significant mission is how to maximise profits or sales to reply a variational global environment, in such a environment full of rapid technology improvement, globalization, scarcity of resources and increasingly fierce competition. In response to these challenges, multinational enterprises (MNEs) play a huge role and highlight the powerful competitive advantages. A definition of MNEs is that enterprises own and control activities in more than two countries (Buckley and Casson, 2009). Buckley and Casson analyzed it based on three principles, first, the boundaries of firms were located at the margin and the benefits of internalisation were offset by costs, second, firms searched for locations which cost the least and combined different activities, third, innovation and R&D enhance a firm’s ability to make profits. The main characteristics of MNEs are that (1) companies own productive assets in at least two countries and (2) the parent company takes control of the affiliate company (Buckley and Casson, 2009).

MNEs have the ability to expand production chains, create more opportunities and occupy broader markets, resulting in more profits. By using worldwide resources, it is able to improve the efficiency of resource utilization and reduce transportation costs. Popularity is an invisible asset for firms, and multinational enterprises have a worldwide reputation to some extent (Caves, 1996). Therefore it is a good way for firms to promote themselves and advertise their products. For instance, Sony, a Japanese multinational conglomerate, focuses its business mainly on electronics such as pocketbooks, TVs, digital cameras, game machines and CD players, consumers around the world are familiar with Sony’s products and favour the high quality of its items. What’s more, MNEs provide sufficient resources to the host country, push forward the growth of economy, as well as do good to the balance of payments (Grimwade, 2000).

Along with the prevalence of MNEs, global supply chain also plays a vital role. Harvey and Richey (2001) anticipated that globalization will last a long period of time because of the advancement of information technology, lower industry entry barriers, and rapid rise of emerging markets. Globalization provides advantages to both domestic and global economy, making the relatively small markets within each country link together to form a broader international market. It is global supply chain that strings each link together. Supply chains are defined as more than two different handlers of products which are well organized; such products include physical goods, services, and information (Cooper, Ellram, Gardner, and Hanks, 1997). Globalization also shows the significance of supply chain management (SCM) and emphasizes the need to reexamine the requirements used in SCM (Harvey and Richey, 2001).

This paper explains the competitive advantage of MNEs by discussing the development of economic theories, along with introducing how SCM plays a part in MNEs strategy with some examples.  

The determinants of FDI and expansion of MNEs

Hymer (1976) and Kindleberger (1969) explained the existence of market imperfections for both goods and assets as the reason of FDI decision. They argued that, if markets were perfectly competitive, firms would not take part in overseas production due to lacking of cost disadvantages (Grimwade, 2000). Besides, local firms have better understanding of local market conditions, laws and customs, culture and language. So they expose to lower exchange rate risk. Foreign firms ought to win over specific advantages which local firms cannot have (Grimwade, 2000). Under these circumstances, firms are able to occupy larger markets and gain more benefits. Caves (1996) proposed some advantages that successful firms in most industry possess. On one hand, foreign firms may own the technological knowledge about how to produce products in a more efficient way (Grimwade, 2000). On the other hand, firms could possess special skills in promoting its products.(Caves, 1996). In addition, Caves (1996) analyzed that once knowledge has been produced, it costs almost nothing to put that knowledge into use and MNCs can enjoy economies of scale by operating a number of plants in different places (Grimwade, 2000). For example, as the world’s top 500 enterprises, Wal-Mart sets up about 8500 stores in nearly 15 countries. Headquartered in Bentonville, Arkansas, branch companies are managed by the directors who are appointed by the head office, and then a global distribution network is formed.

Buckley and Casson (2009) put forward the internalisation theory. They believed that, in imperfect markets, when companies attempt to get higher profits, it is necessary to minimize the cost of intermediate products. Buckley and Casson analyzed a series of benefits for firms get access to internal resources instead of using external resources. They indentified that external markets are inefficient to sell products (Grimwade, 2000). For instance, with regard to high technology industries, internal market as an internal network has the capability to let buyers and sellers communicate better on the basis of understanding. By internalisation, it can shorten transaction time, reasonably distribute recourses and enhance economic efficiency. While costs still exist, the best way is try to keep a balance between costs and profits(Buckley and Casson, 2009).

Vernon(1966) first proposed the product life cycle theory in his journal article. He compared the development of products to individual’ life process and then divided three specific stages:

Location of new products: According to Vernon(1966), there are location implications with the nonstandard nature of the new products, firstly, when there is no guarantee for the inputs of new products, transportation costs to any potential locations should be considered of; secondly, with innovation and monopoly in this period, firms’ price elasticity of demand is relative low; thirdly, it is particularly crucial to establish a friendly and continuous communication between producers, suppliers, distributors and customers.

The maturing product: As the items are widely accepted by consumers, demand is supposed to increase, and more profits will be made in some extent. Vernon (1966) said that subcategories may multiply, but it is going to be more typical of an increasing acceptance of certain general standards.

The standardized product: First of all, firms’ price elasticity of demand becomes extremely high in order to face the price competition; second, more competitive advantages will be acquired if the production depend less on external economies; third, the implications of remoteness are also important (Vernon, 1966).