4.4: Types of International Business Organizations

Foreign Direct Investment and Subsidiaries

Foreign Direct Investment

Many of the approaches to global expansion that we’ve discussed so far allow companies to participate in international markets without investing in foreign plants and facilities. As markets expand, however, a firm might decide to enhance its competitive advantage by making a direct investment in operations conducted in another country. Foreign direct investment (FDI) refers to the formal establishment of business operations on foreign soil—the building of factories, sales offices, and distribution networks to serve local markets in a nation other than the company’s home country. On the other hand, offshoring occurs when facilities set up in a foreign country replace Canadian manufacturing facilities and are used to produce goods that will be sent back to Canada for sale.

FDI is generally the most expensive commitment that a firm can make to an overseas market, and it’s typically driven by the size and attractiveness of the target market. For example, German and Japanese automakers, such as BMW, Mercedes, Toyota, and Honda, have made serious commitments to the U.S. market: most of the cars and trucks that they build in plants in the South and Midwest are destined for sale in the United States.

Subsidiary

A common form of FDI is the foreign subsidiary: an independent company owned by a foreign firm (called the parent). This approach to going international not only gives the parent company full access to local markets but also exempts it from any laws or regulations that may hamper the activities of foreign firms. The parent company has tight control over the operations of a subsidiary, but while senior managers from the parent company often oversee operations, many managers and employees are citizens of the host country. Not surprisingly, most very large firms have foreign subsidiaries. IBM and Coca-Cola, for example, have both had success in the Japanese market through their foreign subsidiaries (IBM, Japan and Coca-Cola, Japan). FDI goes in the other direction, too, and many companies operating in the United States are in fact subsidiaries of foreign firms. Gerber Products, for example, is a subsidiary of the Swiss company Novartis, while H Mart stores in Ontario and British Columbia are Korean-themed grocery stores belonging to the Hanahreum Group, which is a Korean-American supermarket chain headquartered in  New Jersey, USA.

Foreign Acquisition

Walmart Example of Both FDI And Subsidiary

The acquisition of a foreign company by a domestic company is considered a form of foreign direct investment (FDI). When a company based in one country acquires a substantial ownership stake (typically 10% or more) in a business located in another country, it qualifies as FDI. The key feature of FDI is that it involves not only capital transfer but also control or significant influence over the foreign entity’s operations.

Walmart and Flipkart formed a significant business relationship when Walmart acquired a 77% majority stake in Flipkart for $16 billion in 2018. This move marked Walmart’s entry into India’s burgeoning e-commerce market, which is among the fastest-growing in the world. However, this is not a joint venture but rather an acquisition, as Walmart gained control of Flipkart while maintaining the existing brand and operations of the Indian company.

Flipkart is a leading e-commerce platform in India, and the acquisition allowed Walmart to establish a foothold in India’s online retail market to compete against Amazon. Walmart leveraged Flipkart’s extensive logistics network while also applying its own expertise to enhance supply chain efficiency and improve customer satisfaction. Flipkart benefited from Walmart’s resources and global reach, including its financial strength and technological capabilities, while Walmart tapped into Flipkart’s local market expertise and established customer base. Walmart had to navigate India’s restrictions on foreign direct investment in multi-brand retail. The deal was structured to comply with these laws, ensuring Flipkart’s operations could continue while adapting to regulatory requirements. This acquisition highlights how multinational corporations like Walmart strategically invest in emerging markets, often through partnerships or acquisitions, rather than joint ventures. The success of such strategies hinges on aligning operational strengths, navigating local regulations, and meeting competitive challenges.^[1]

Walmart’s investment in Flipkart qualifies as foreign direct investment (FDI) because it involved Walmart acquiring a controlling 77% stake in Flipkart, an Indian company, for $16 billion. This type of investment is categorized as FDI since it entails a direct investment by a foreign company (Walmart, based in the United States) into a business operating in another country (Flipkart in India). Walmart’s majority stake gives it control over Flipkart’s operations and strategic direction, which is characteristic of FDI.

Following the acquisition, Flipkart operated as a subsidiary of Walmart, meaning Walmart owned the company while Flipkart continued to function under its own brand and managed the local market. The deal exemplifies Walmart’s strategic move to enter India’s growing e-commerce sector and highlights the nature of FDI as a tool to penetrate foreign markets. This arrangement combines the principles of FDI with subsidiary operations, allowing Walmart to benefit from Flipkart’s established local presence while providing Flipkart with resources and expertise to expand its market share further​.^[2]

These strategies have been employed successfully in global business. But success in international business involves more than finding the best way to reach international markets. Global business is a complex, risky endeavour. Over time, many large companies reach the point of becoming truly multinational.

Foreign Mergers

A strategic alliance with a foreign company is not the same as a merger. These two concepts involve different types of business relationships and commitments. A strategic alliance is a formal agreement between two or more companies to collaborate and leverage each other’s resources, expertise, or market presence without forming a new legal entity or transferring ownership. A merger involves two or more companies combining to form a single new entity, often with shared ownership, resources, and management. In a merger, ownership and control are consolidated. It involves permanent restructuring. Often, one company may dissolve into the other, or both may dissolve into a newly formed entity. A strategic alliance focuses on mutual benefit without ownership transfer, while a merger represents a deeper level of integration where the entities combine to form a single organization.

A well-known example of a domestic company merging with a foreign company is the merger between Vodafone Group, based in the UK, and Idea Cellular, an Indian telecom provider. This merger created Vodafone Idea Limited, a major player in India’s telecommunications market. The merger combined the resources and market strengths of both companies to enhance competitive positioning and operational efficiencies in a rapidly evolving market. This type of cross-border merger is complex, involving regulatory approvals, alignment of corporate strategies, and integration of operations across different legal and cultural environments. These collaborations are essential for companies looking to expand their global footprint and leverage each other’s strengths in their respective markets.

Both mergers and joint ventures facilitate collaboration, but they differ significantly in purpose, scope, and legal integration.

Refer to Table 4.2 for a comparison of the key differences between strategic alliances, joint ventures, and mergers.

Multinational Corporations

A company that operates in many countries is called a multinational corporation (MNC). According to Fortune’s Global 500 2024 rankings, Walmart is the world’s largest company by revenue for the eleventh year in a row, with almost $648 billion in revenue in 2024. Walmart also has the most employees of any company in the world.^[3] Microsoft is one of the most profitable companies in the world, along with Apple and Alphabet. As of June 2024, Apple was the most profitable company in the world, with a net income of $100 billion. Apple was also one of the companies with the largest corporate annual earnings of all time in 2021 and 2022.

Many MNCs have made themselves more sensitive to local market conditions by decentralizing their decision-making while still maintaining a fair amount of control. Today, fewer managers are dispatched from headquarters; MNCs depend instead on local talent. Not only does a decentralized organization speed up and improve decision-making, but it also allows an MNC to project the image of a local company. IBM, for instance, has been quite successful in the Japanese market because local customers and suppliers perceive it as a Japanese company. Crucial to this perception is the fact that the vast majority of IBM’s Tokyo employees, including top leadership, are Japanese nationals.^[4]

Some MNCs standardize their products globally, while others adapt their products to the local region in which they operate. Standardization delivers a single unified product that sits comfortably in all markets. Standardization allows manufacturers to keep costs down using one set of manufacturing tools and the same packaging, creating a truly global product in the process. Production is more straightforward with only one set of options, as opposed to multiple versions of the same product, which creates considerable additional costs; in addition, waste is also kept to a minimum. Compared to alternative versions that appeal directly to local users, standardized products have a mass-market appeal, ideal for travellers who can immediately appreciate what they’re getting wherever they acquire it.^[5]

Here are a few examples of product standardization in foreign markets:^[6]

• Sporting manufacturers, such as Nike and Adidas, retain global standardization across global markets with strict branding, marketing, and product themes that remain the same throughout. However, the sports and teams they sponsor and supply locally in each region are culturally considered to match the brand’s values and the product’s sales potential.
• Red Bull, despite its Austrian roots, with its typically European style, remains almost untouched across its international markets. It retains the same packaging, product size, and branding throughout to stay instantly recognizable. And with its prime marketing tactic supporting every type of extreme, high-energy sports, it’s market-appropriate across the masses too.

MNCs often adopt the approach encapsulated in the motto “Think globally, act locally”. They often adjust their operations, products, marketing, and distribution to mesh with the environments of the countries in which they operate. Because they understand that a “one-size-fits-all” mentality doesn’t make good business sense when they’re trying to sell products in different markets, they’re willing to accommodate cultural and economic differences. Adaptation involves modifying the product—and potentially its pricing and promotional strategies—to align with local cultural norms and legal requirements. MNCs supplement their mainstream product line with products designed for local markets.

Here are a few examples of product adaptation in foreign markets:

• Coca-Cola, for example, sells a coffee alternative and citrus-juice drinks developed specifically for the Japanese market.^[7]
• McDonald’s adapts its menu for many global markets, retaining the same branding throughout yet bolstering the phrase ‘glocal’ through regional changes so you can enjoy Chicken McArabia in the Middle East, McSpaghetti in the Philippines, and Macarons in France.^[8]
• Domino’s Pizza changed its topping preferences for local diners. They played to the popular diets of seafood and fish in Asia and curries in India.^[9]
• Dunkin’ Donuts amends its menus to cater to each of the 36 countries where it operates. You might not instantly warm to the idea of a dry pork and seaweed donut, but they’re all the rage in China.^[10]
• P&G Diapers completely remodelled its product when moving into alternative local markets. Their research into local markets found that many features weren’t considered necessary in lower-income countries, and the price seemed to be the critical factor. So, by amending packaging and product materials, they managed to match the price point (to the same as a single egg) without damaging the brand.^[11]

Benefits of MNCs

Supporters of MNCs respond that huge corporations deliver better, cheaper products for customers everywhere; create jobs; and raise the standard of living in developing countries. They also argue that globalization increases cross-cultural understanding.

Some of the benefits of MNCs include:^[12]

• The creation of wealth and jobs around the world. Inward investment by multinationals creates much-needed foreign currency for developing economies. They also create jobs and help raise expectations of what is possible.
• Their size and scale of operation enable them to benefit from economies of scale, enabling lower average costs and prices for consumers. This is particularly important in industries with very high fixed costs, such as car manufacture and airlines.
• Large profits can be used for research and development. For example, oil exploration is costly and risky; this could only be undertaken by a large firm with significant profit and resources. It is similar for drug manufacturers who need to take risks in developing new drugs.
• Adherence to standards. The success of multinationals is often because consumers like to buy goods and services where they can rely on minimum standards. i.e., if you visit any country, you know that the Starbucks coffee shop will give you something you are fairly familiar with. It may not be the best coffee in the district, but it won’t be the worst. People like the security of knowing what to expect.
• Products that attain global dominance have a universal appeal. McDonald’s, Coca-Cola, and Apple have attained their market share by meeting consumer preferences.
• Foreign investments. Multinationals engage in foreign direct investment. This helps create capital flows to poorer/developing economies. It also creates jobs. Although wages may be low by the standards of the developed world, they are better jobs than the available alternatives and gradually help to raise wages in the developing world.
• Outsourcing of production by multinationals enables lower prices; this increases disposable incomes of households in the developed world and enables them to buy more goods and services, thereby creating new sources of employment to offset the lost jobs from outsourcing manufacturing jobs.

Criticisms of MNCs

The global reach of MNCs is a source of criticism as well as praise. Critics argue that they often destroy the livelihoods of home-country workers by moving jobs to developing countries where workers are willing to labour under poor conditions and for less pay. They also contend that traditional lifestyles and values are being weakened, and even destroyed, as global brands foster a global culture of American movies, fast food, and cheap, mass-produced consumer products. Still others claim that the demand of MNCs for constant economic growth and cheaper access to natural resources does irreversible damage to the physical environment. All these negative consequences, critics maintain, stem from the abuses of international trade—from the policy of placing profits above people, on a global scale.

Some of the criticisms of MNCs include:

• In the pursuit of profit, multinational companies often contribute to pollution and the use of non-renewable resources, which is putting the environment under threat. For example, some MNCs have been criticized for outsourcing pollution and environmental degradation to developing economies where pollution standards are lower.^[13]
• Outsourcing to cheaper labour-cost economies has caused a loss of jobs in the developed world. This is an issue in the US, where many multinationals have outsourced production around the world.^[14]
• MNCs possess substantial financial and technological resources, enabling them to dominate markets. This often leads to monopolistic or oligopolistic practices, pushing smaller, local businesses out of competition. For example, global retail giants have faced criticism for undermining small-scale retailers in developing countries, disrupting local economies and livelihoods.^[15]
• MNCs are frequently criticized for repatriating their profits to their home countries rather than reinvesting them in the host nations. This practice can drain foreign exchange reserves in developing countries and limit the local economic benefits of their operations. Host economies often see minimal returns despite significant contributions to MNC revenues.^[16]
• MNCs are often accused of exploiting natural resources in host countries without adequate regard for sustainability. Industries such as mining, oil extraction, and agriculture are particularly notorious for depleting resources and leaving host countries with long-term environmental degradation.^[17]

Media Attributions

“Parachuting, Red bull, Chute image” by WikimediaImages, used under the Pixabay license.

“Drink, Soda, Glasses image” by stevepb, used under the Pixabay license.