Introduction
Today, the world is increasingly interconnected, and many business organizations have expanded their operations beyond national borders. This has significantly been influenced by the allure of new markets and untapped opportunities globally. As a result, multinational enterprises (MNEs) have been able to reach a wider market and increase sales. However, these operations are associated with many challenges that demand urgent strategies, adaptability, and cultural sensitivity. This paper holds that MNEs must strategically address liabilities of foreignness, understand and adapt to diverse cultural norms, optimize exchange rate regimes, and balance integration and local responsiveness to succeed in the global business landscape.
Liability of Foreignness
The Concept of “Liability of Foreignness”
The concept “liability of foreignness” refers to the additional costs that MNEs face when operating in a foreign nation relative to their competitors. According to Benischke et al. (2023), even though organizations operating in different countries have access to foreign markets, which increases their customer base, they also experience competitive advantages from local companies. These organizations are often disadvantaged in the host countries because of differences in languages, cultures, regulations, customs, and market environments. All these require a firm to set more funds in their budget, which is a disadvantage.
Sources of Liability of Foreignness
Cultural Differences
One factor that has often contributed to the liability of foreignness to many MNEs is cultural differences. According to Benischke et al. (2023), when business organizations expand to countries with different cultures, they need help adapting, leading to misinterpretations, misunderstanding, and ineffective communication with customers.
For instance, McDonald’s experienced this challenge when it expanded to Japan. Han (2023) notes that in Japan, people strongly prefer fresh and high-quality ingredients in their food. For this reason, McDonald’s was compelled to adjust its menu and offer their Japanese customers more premium ingredients and unique flavors aligning with their tastes. For example, they had to introduce “Ebi Filet-O” and “Teriyaki Burger” to appeal to local tastes and preferences (Kelly, 2023). McDonald’s also had to enhance its customer service, offer smaller-sized meals, and embrace most of their cultural aspects. To meet all these, McDonald’s had to set aside additional resources.
Regulatory and Institutional Differences
Expanding to foreign countries exposes MNEs to different regulations and institutions that might compel them to spend more than local firms. For instance, McDonald’s has expanded its operations to many European Union countries, where it encounters numerous regulatory and institutional challenges. For example, the EU has consistently implemented strict food safety and labeling regulations to protect consumer health and ensure they can access all information about the products they consume (Chatzopoulou et al., 2020). To increase sales in these countries, McDonald’s needed to comply with these regulations by offering their customers labeling allergens and nutritional information and abiding by the specific ingredient requirements (Han, 2023). To adhere to such regulations, McDonald’s and other MNEs must incur additional costs.
Ethical and Social Responsibility Differences
MNEs also encounter differences in ethical and social responsibility when they expand to foreign countries, increasing costs. For example, when expanding to India, McDonald’s faced differences in dietary preferences, religious sensitivities, sourcing and sustainability, and waste management (Pai, 2023). Since India has a diverse population of vegetarians and those who believe in religion, McDonald’s was compelled to change its menu completely to cater to them (Pai, 2023). Other sources of liability of foreignness include competitive environment, economic differences, and human resources challenges. These factors force MNEs to spend more than they do in their countries of origin.
Importance of Understanding Cultural Norms
Consumer Behavior and Preferences
Business organizations have realized that culture plays a part in shaping customer behaviors and preferences. Obiekwe & Nwaeke (2019) note that when MNEs plan a marketing strategy, they must consider a nation’s cultural background, psychological factors, and cultural identity. Understanding the cultural norms of their host countries helps MNEs understand the behaviors and preferences of consumers. According toObiekwe & Nwaeke (2019), people from different cultural backgrounds often have different lifestyles, tastes, and global consumption patterns. Therefore, for MNEs to make sales in foreign countries, they must adapt their goods and services to align with their cultural norms and bond with the locals.
Different MNEs all over the globe have made efforts to meet the needs and preferences of local consumers and succeed in foreign markets. For instance, since McDonald’s operates in many countries, it has always offered different kinds of food. It offers McSpaghetti in the Philippines and McLobster in Canada (Pai, 2023). Additionally, the company has tried adapting its menus based on these preferences. This ensures that customers are satisfied and become loyal to the brand. An MNE might only end up offering products and services that meet consumers’ needs if they understand the norms of host countries. Therefore, this McDonald’s example underscores how understanding cultural norms is important for succeeding in the international market.
Effective Communication
For a business organization to succeed in any market, it must communicate effectively to its customers, understand their concerns, and offer feedback. Obiekwe & Nwaeke (2019) note that understanding a community’s cultural communication norms helps MNEs interact appropriately with local stakeholders. Most of these individuals want to know that they can trust the organization and have faith that the image of their brands is safeguarded. This involves learning their communication gestures, styles, and language nuances. As a result, it helps them overcome challenges in marketing, such as language and cultural barriers. If the firms have employees with the right communication skills for a foreign market, they will find it easier to understand their needs and develop strong consumer bonds.
Many MNEs all over the globe have attempted to develop appropriate communication skills for specific markets. However, some still need to understand how this works and have failed. For instance, in China, Pepsi introduced a slogan, “Pepsi Brings You Back to Life,” which means in its traditional language that “Pepsi Brings Your Ancestors Back from the Grave” (Adams, 2019). The initial intention of this slogan was to instill the idea that consumers can be rejuvenated and invigorated after drinking Pepsi. However, the outcome was unintended and awkward due to a lack of a better understanding of the nation’s cultural norms. This statement highlighted the disadvantages of failing to understand the cultural context of the host country.
Fixed and Floating Exchange Rate Regimes
When MNEs trade in the currency markets, they must do so around an exchange rate. An exchange rate refers to the value of a nation’s currency compared to its country of origin (Elgahry, 2022). Fixed exchange rates are when the currency of two countries is always changed at the same price while floating exchange rates are when market factors, particularly demand, and supply, determine prices (Elgahry, 2022). These two have advantages and disadvantages in the international market.
Merits of Fixed Exchange Rate Regime
A fixed exchange rate regime is linked to stability and predictability. According to Elgahry (2022), the exchange rate constantly fluctuates and sometimes hinders developing countries from importing products to developed ones, as they have to pay more when fixing to a superpower currency. Therefore, when there is no fixed exchange rate, companies in the international market cannot be sure of having a minimal exchange rate fluctuation.
A fixed one will ensure the market is stable and make it easy for them to predict prices. Fixed exchange rates ensure price transparency in the international market. When this regime minimizes exchanges, business organizations will not have issues disclosing their prices (Elgahry, 2022).
Ultimately, this will prevent sudden market import and export cost changes. Additionally, the fixed exchange rate is also linked to controlling inflation. Elgahry (2022) notes that this model can constrain the national bank of any country to ensure it controls inflation through prudent monetary policies. Lastly, it encourages the government to follow better ways to avoid deviating from policies.
Merits of Floating Exchange Rate Regime
One merit of the floating exchange rates is that they allow currencies to adjust when the international market is experiencing certain economic conditions. Elgahry (2022) notes that this helps nations effectively respond to shocks and keep up with international competition. Additionally, under this regime, a country risks its currency from depreciating if its inflation rises. This depreciation will be a way of maintaining price competitiveness in exports (Elgahry, 2022).
Unlike fixed exchange rates, nations with this model can use independent monetary policies more freely. This involves adjusting the money supply and interest rates without facing any constraints from the international community (Elgahry, 2022). Lastly, this regime helps prevent speculative activities if there is a belief that a market is being overvalued.
Conducive System for International Business
Based on the discussion above, the floating exchange rate regime is more conducive to international business. One factor that makes the floating exchange rate regime the best choice is its flexibility and adaptability (Elgahry, 2022). This system makes a country less vulnerable to external shocks; it is flexible and allows independent monetary policy and automatic adjustment during inflation. The international market faces many changes today regarding demands, market conditions, and supply chains, making this system more effective.
Conflicting Pressures for Integration and Local Responsiveness
Apple’s iPhone Strategy
One perfect example of how MNEs respond to integration-local responsiveness dilemmas when entering new markets is the iPhone used by Apple. Over the years, people all over the globe have recognized Apple as a business organization committed to offering products with consistent design aesthetics and exemplary user experience (Zeng, 2021). This can be witnessed in the iPhone product, which reflects its commitment to ensuring a worldwide uniform software, design, and user interface. As a result, the company has met its integration pressure. Additionally, Apple’s local responsiveness pressure stems from varying preferences and needs in different markets. For instance, China has a larger population that buys from Apple, and most prefer WeChat Pay and Alipay (Zeng, 2021). To address such issues, it has introduced new features like Apple Pay to enable people from different countries to pay easily (Zeng, 2021). Therefore, Apple has maintained a global brand with consistent designs and functionalities and adopted new payment methods to respond to conflicting pressures for integration and local responsiveness when expanding to new regions.
Coca-Cola
Over the years, Coca-Cola has maintained a global brand that offers products with a consistent formulation to respond to the pressure of integration. For instance, according to Gómez (2019), the company has ensured that all global products have the same branding and taste. This helps them build a strong brand that everyone recognizes.
Meanwhile, Coca-Cola acknowledges the need to adapt to host countries’ local preferences and cultural norms. For instance, the company offers various non-carbonated beverages in India to cater to consumers’ local preferences for no-sparking drinks (Gómez, 2019). It has always provided regional flavors, packaging sizes, and formats that vary depending on individuals’ habits and lifestyles (Gómez, 2019). Therefore, Coca-Cola responds to the conflicting pressures for integration and local responsiveness by maintaining the core elements of its products and adapting to local preferences and ways of living.
Toyota’s Production Strategy
Toyota is experiencing significant challenges related to integration while expanding into a new market. However, people have known Toyota for its “lean manufacturing” approach (Kumar et al., 2022). According to Kumar et al. (2022), Toyota has maintained consistent production processes and attained cost efficiencies with this approach.
Toyota has also often addressed the varying regulations and customer preferences in different countries. For instance, regarding safety and emission regulations, the company has manufactured its vehicles to adhere to local laws while aligning with global quality standards (Kumar et al., 2022). Therefore, Toyota responds to the integration-local responsiveness dilemma by implementing standardized production processes globally and customizing their vehicles to meet specific market preferences.
Conclusion
MNEs experience many challenges in the international business environment that must be addressed urgently. The liability foreignness highlights the need for these business organizations to adapt and allocate resources when expanding to new markets. Additionally, they must understand the cultural norms of the host countries, as it will help them build strong customer relationships and be relevant in the market. With the decision between floating and fixed exchange rate regimes influencing their international competitiveness, their success hinges on finding a balance between local responsiveness and global integration.
References
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