Choice of Best Variable to use for a Company

With the six modes available, the choice of the best one to use for a company in particular situation is crucial. Among the many variables that need to be considered the following ones are the most important in selecting the best mode.

Risks: The degree of risk associated with each mode is of major importance. In a joint venture, the risks of investment can be shared; in licensing and franchising, the risks of investment are assumed by the license or franchisee, thus relieving the foreign company of owning property in the country; in management contracts and exporting, capital is not required outside the home country, and thus the risks are considerably less than when a foreign subsidiary is used. For companies without foreign experience, the less risky modes are initially more attractive. After gaining valuable experience, other modes with greater risks can be used.

Legal restrictions: The MNC must operate within the legal restriction of both the home and host countries. The home country may restrict actions through extensions of its antitrust laws, foreign exchange controls, and tax structure. The host country may restrict the amounts of profits that can be repatriated and may prohibit private ownership in sensitive industries such as extractive ore, banking, and those critical to economic development. The host country can restrict foreign exchange and use its tax structure to regulate operations of foreign companies. Finally, host countries may have different legal systems from the home country. An MNC with a home office in a country having a common law system may have complex legal problems in operating in countries using a civil law system or a Moslem legal system.

Competition and Markets: The selection of the mode of foreign operations depends upon the modes used by competitors and by the intensity of competition in the prospective market. The size of the market and sales potential together with the intensity of competition from local companies and other multinationals are important, for example, in choosing to build a plant in the host country or merely to export from the home country.

Foreign expertise and experience: Companies with extensive experience in foreign operations can better afford to make the commitment of investing in a foreign subsidiary, while a company with limited expertise in foreign operations would choose to export, license its product, or use a franchisee agreement.

Degree of managerial control: Probably of greatest importance to the decision of mode selection is the degree of managerial control desired. A 100% ownership in a foreign subsidiary offers maximum control. Exporting and licensing offer limited managerial control.

Diverse environments create many problems for the international manager not faced by the domestic manager. A geocentric attitude helps keep the problem in perspective. We can list some of these problems.

Different languages create problems of translation and communications. Interpreters may be needed for oral communications; translators may be required for written communications. The best method for handling this problem is undoubtedly for managers to be multilingual or, at least, to learn the languages that enable them to communicate in the language of the home country and the languages of the host countries.

Different currencies are used by the many sovereign nations. The values of these different currencies introduce risks of changes in foreign exchange rates, that is, the value of one currency stated in the units of another currency. Companies with profitable operations may have financial difficulties solely from losses due to currency fluctuations. Companies with otherwise efficient operations have faced bankruptcy simply as a result of losses in the foreign exchange market.

Laws and regulation differ among governments and political systems. Common law, which is used in the United States, differs from civil law (the Napoleonic code, which is predominant in Europe), and religious law (such as Moslem law, which is used in the Middle East).