- Multinational Corporations: Good or Bad?
- Benefits of Multinational Corporations
- Criticisms of Multinational Corporations
- What is a multinational company? Definition and examples
- Why do companies expand into other countries?
- Some people are anti-multinationals
- Multinationals offer benefits for the host country
- Multinational Corporation (MNC) — Overview, Characteristics, Advantages
- Characteristics of a Multinational Corporation
- 1. Very high assets and turnover
- 2. Network of branches
- 3. Control
- 4. Continued growth
- 5. Sophisticated technology
- 6. Right skills
- 7. Forceful marketing and advertising
- 8. Good quality products
- Reasons for Being a Multinational Corporation
- 1. Access to lower production costs
- 2. Proximity to target international markets
- 3. Access to a larger talent pool
- 4. Avoidance of tariffs
- Models of MNCs
- 1. Centralized
- 2. Regional
- 3. Multinational
- Advantages of Being a Multinational Corporation
- 1. Efficiency
- 2. Development
- 3. Employment
- 4. Innovation
- Foreign Direct Investment
- Additional Resources
- What is a Multinational Corporation (MNC)?
- Stages in the Development of a Multinational Corporation
- Globalization and Growth of Multinational Corporations
- Multinational Company (Definition, Examples) | Advantages,Disadvantages
- Types of Multinational Company (MNC’s)
- Examples of Multinational Company (MNC’s)
- Multinational Company Example #1
- Multinational Company Example #2
- Advantages of Multinational Company
- Disadvantages of Multinational Company
- Limitations of Multinational Company
- Recommended Articles
Multinational Corporations: Good or Bad?
Readers Question: List and briefly describe the positive and negative attributes of multinational corporations (MNCs).
Multinational corporations are large companies with operations in several countries across the world. For example, Apple, Ford, Coca-Cola, Alphabet (Google) and Microsoft. Their size and turnover can be greater than the total GDP of many developing economies.
Benefits of Multinational Corporations
- Create 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 & 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.
- Ensure minimum standards. The success of multinationals is often because consumers 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 something you are fairly familiar with. It may not be the best coffee in the district, but it won’t be the worst. People the security of knowing what to expect.
- Products which attain global dominance have a universal appeal. McDonald’s, Coca-Cola, Apple have attained their market share due to 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 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 – creating new sources of employment to offset the lost jobs from outsourcing manufacturing jobs.
Criticisms of Multinational Corporations
- Companies are often interested in profit at the expense of the consumer. Multinational companies often have monopoly power which enables them to make an excess profit. For example, Shell made profits of £14bn last year.
- Tax avoidance. Many multinationals set up companies in countries with the lowest tax rate. They funnel profit through the countries with the lowest corporation tax rates – e.g. Bermuda, Ireland, Luxemburg. For example: in 2011, Google had £2.5bn of UK sales, but only paid £3.4 million UK tax. A tax rate of 00.1% despite having a global-wide profit margin of 33%. (tax avoiding companies) This means the multinationals are ‘free-riding on smaller companies who cannot attain the same creative tax accounts.
- Cash reserves – Apple has cash reserves of $216bn, 93% of which is overseas. This represents deadweight welfare loss. It is not being used for investment
- Their market dominance makes it difficult for local small firms to thrive. For example, it is argued that big supermarkets are squeezing the margins of local corner shops leading to less diversity.
- In developing economies, big multinationals can use their economies of scale to push local firms business.
- In the pursuit of profit, multinational companies often contribute to pollution and use of non-renewable resources which is putting the environment under threat. For example, some MNCs have been criticised of outsourcing pollution and environmental degradation to developing economies where pollution standards are lower.
- ‘Sweat-shop labour’ MNCs have been criticised for using ‘slave labour’ – workers who are paid a pittance by Western standards.
- Outsourcing to cheaper labour-cost economies has caused loss of jobs in the developed world. This is an issue in the US where many multinationals have outsourced production around the world.
- Some criticisms of MNCs may be due to other issues. For example, the fact MNCs pollute is perhaps a failure of government regulation. Also, small firms can pollute just as much.
- MNCs may pay low wages by western standards but, this is arguably better than the alternatives of not having a job at all. Also, some multinationals have responded to concerns over standards of working conditions and have sought to improve them.
What do you think of Multinational companies? – leave comment below.
What is a multinational company? Definition and examples
A multinational company, known more commonly as a multinational corporation or transnational corporation in North America, is a business with branches, offices or production facilities in more than one country.
Some people say that any firm that derives at least one quarter of all its business abroad is considered a multinational corporation. However, if all that foreign business comes purely from exports and the company has no offices, premises or production facilities abroad, it is not a multinational.
According to the United Nations, the largest 100 multinational corporations control about 40% of global trade.
For the past 100 years, the vast majority of the world’s largest multinational companies have been either Western European (Volkswagen, Nestle, BP), American (Ford, Coca-Cola, Procter & Gamble) or Japanese (Toyota, Sony, Mitsubishi).
Since the turn of the century, new multinationals have emerged in other regions, such as in South Korea (Samsung and Hyundai), Mexico (Grupo Bimbo, Cemex), and China (Lenovo, Huawei).
Why do companies expand into other countries?
Companies become multinationals for several possible reasons:
To gain new markets – a business may find that it has reached saturation point at home and needs to find new markets. Initially, they may begin by exporting to other nations, but eventually will set up production, distribution and sales facilities abroad.
Coca-Cola followed US solders around the world after WWI.
Lower costs – the cost of labor and land may be lower abroad. Businesses are always looking for ways to increase profits; lowering costs is one way of achieving this. A car-factory worker in Mexico, for example, earns less than one-sixth per hour than his or her US counterpart.
To avoid tax – different countries have varying levels of corporate tax. By setting up abroad, a company may be able to reduce its tax bil.
To overcome trade barriers – some countries are protectionist and will only let overseas businesses access their markets fully if they manufacture their products locally.
Government grants – in the 1980s, for example, the UK government attracted many overseas companies by offering them financial incentives.
There are literally thousands of multinationals across the globe. This is a list of just a few.
Some people are anti-multinationals
Anti-multinational advocates say these giant entities enter countries with low human rights and environmental standards and operate in ways they are not allowed to back at home or in the advanced economies.
There is also apprehension that multinational corporations might have too much influence on politicians and government policy, for example, by threatening to reduce the number of jobs in a country and move them elsewhere if decisions do not go their way.
As they operate in several different nations, with varying tax systems, multinationals are today criticized by the press for paying much less tax than they allegedly should.
They are accused of setting up sophisticated networks of subsidiaries and associated businesses in countries with extremely low rates of tax, such as Luxembourg, and through legislation loopholes in major economies devise ways to dramatically reducing their tax bills. Smaller companies say this makes it much harder for them to compete.
According to Tax Justice Network, an advocacy group:
“Pretty much every TNC (transnational corporation) in the world today has multiple affiliates in offshore tax havens. They hold trillions of dollars of untaxed or hardly taxed profits offshore – and The sums are growing fast.”
Multinationals offer benefits for the host country
Multinational companies (MNCs) offer the host country several benefits. By operating in a country, investment, employment and income levels increase. The host country’s industries also get the latest technologies from abroad through MNCs.
Management expertise enters the host nation, which over the long term spreads as local people learn about it.
By operating in the host country, local traders and market intermediaries have more business.
MNCs create competition and break local monopolies. Economists say this makes local competitors try harder, which leads to superior products and services.
By producing more goods because the MNC operates there, the host country can export more and reduce imports – this improves its balance of payments.
MNCs generally offer better pay than local employers in low-income and emerging nations. A Mexican worker employed in a BMW auto plant will earn more per hour and have better career prospects compared to working as a farm hand or other seeking employment with a domestic company.
Economists say MNCs help emerging economies develop more rapidly.
The spread of multinationals across the planet is part of the rapid economic globalization which is taking place, i.e. the mobility of people, technology, capital goods and services across borders. Businesses and countries are becoming increasingly interdependent.
Multinational Corporation (MNC) — Overview, Characteristics, Advantages
A multinational corporation (MNC) is a company that operates in its home country, as well as in other countries around the world.
It maintains a central officeCorporate StructureCorporate structure refers to the organization of different departments or business units within a company.
Depending on a company’s goals and the industry located in one country, which coordinates the management of all its other offices, such as administrative branches or factories.
It isn’t enough to call a company that exports its products to more than one country a multinational company.
They need to maintain actual business operations in other countries and must make a foreign direct investmentForeign Direct Investment (FDI)Foreign direct investment (FDI) is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country. there.
Characteristics of a Multinational Corporation
The following are the common characteristics of multinational corporations:
1. Very high assets and turnover
To become a multinational corporation, the business must be large and must own a huge amount of assets, both physical and financial. The company’s targets are high, and they are able to generate substantial profits.
2. Network of branches
Multinational companies maintain production and marketing operations in different countries.
In each country, the business may oversee multiple offices that function through several branches and subsidiariesSubsidiaryA subsidiary (sub) is a business entity or corporation that is fully owned or partially controlled by another company, termed as the parent, or holding, company. Ownership is determined by the percentage of shares held by the parent company, and that ownership stake must be at least 51%..
In relation to the previous point, the management of offices in other countries is controlled by one head office located in the home country. Therefore, the source of command is found in the home country.
4. Continued growth
Multinational corporations keep growing.
Even as they operate in other countries, they strive to grow their economic size by constantly upgrading and by conducting mergers and acquisitionsMergers Acquisitions M&A ProcessThis guide takes you through all the steps in the M&A process.
Learn how mergers and acquisitions and deals are completed. In this guide, we'll outline the acquisition process from start to finish, the various types of acquirers (strategic vs. financial buys), the importance of synergies, and transaction costs.
5. Sophisticated technology
When a company goes global, they need to make sure that their investment will grow substantially. In order to achieve substantial growth, they need to make use of capital-intensive technology, especially in their production and marketing activities.
6. Right skills
Multinational companies aim to employ only the best managers, those who are capable of handling large amounts of funds, using advanced technology, managing workers, and running a huge business entity.
7. Forceful marketing and advertising
One of the most effective survival strategies of multinational corporations is spending a great deal of money on marketing and advertising. This is how they are able to sell every product or brand they make.
8. Good quality products
Because they use capital-intensive technology, they are able to produce top-of-the-line products.
Reasons for Being a Multinational Corporation
There are various reasons why companies want to become multinational corporations. Here are some of the most common motivations:
1. Access to lower production costs
Setting up production in other countries, especially in developing economies, usually translates to spending significantly less on production costs. Though outsourcing is a way of achieving the objective, setting up manufacturing plants in other countries may be even more cost-efficient.
Due to their large size, MNCs can take advantage of economies of scale and grow their global brand. The growth is done through strategic manufacturing/service placement, which allows the corporation to take advantage of undervalued services across the globe, more efficient and inexpensive supply chains, and advanced technological/R&D capacity.
2. Proximity to target international markets
It is beneficial to set up business in countries where the target consumer market of a company is located. Doing so helps reduce transport costs and gives multinational corporations easier access to consumer feedback and information, as well as to consumer intelligence.
International brand recognition makes the transition from different countries and their respective markets easier and decreases per capita marketing costs as the same brand vision can be applied worldwide.
3. Access to a larger talent pool
Multinational corporations are also known to hire only the best talent from around the world, which allows management to provide the best technical knowledge and innovative thinking to their product or service.
4. Avoidance of tariffs
When a company produces or manufactures its products in another country where they also sell their products, they are exempt from import quotas and tariffs.
Models of MNCs
The following are the different models of multinational corporations:
In the centralized model, companies put up an executive headquarters in their home country and then build various manufacturing plants and production facilities in other countries. Its most important advantage is being able to avoid tariffs and import quotas and take advantage of lower production costs.
The regionalized model states that a company keeps its headquarters in one country that supervises a collection of offices that are located in other countries. Un the centralized model, the regionalized model includes subsidiaries and affiliates that all report to the headquarters.
In the multinational model, a parent company operates in the home country and puts up subsidiaries in different countries. The difference is that the subsidiaries and affiliates are more independent in their operations.
Advantages of Being a Multinational Corporation
There are many benefits of being a multinational corporation including:
In terms of efficiency, multinational companies are able to reach their target markets more easily because they manufacture in the countries where the target markets are. Also, they can easily access raw materials and cheaper labor costs.
In terms of development, multinational corporations pay better than domestic companies, making them more attractive to the local labor force. They are usually favored by the local government because of the substantial amount of local taxes they pay, which helps boost the country’s economy.
In terms of employment, multinational corporations hire local workers who know the culture of their place and are thus able to give helpful insider feedback on what the locals want.
As multinational corporations employ both locals and foreign workers, they are able to come up with products that are more creative and innovative.
Foreign Direct Investment
Foreign direct investments are prevalent within multinational corporations. The investments occur when an investor or company from one country makes an investment outside the country of operation.
Foreign investments most often occur when a foreign business is established or bought outright. It can be distinguished from the purchase of an international portfolio that only contains equities of the company, rather than purchasing more direct control.
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What is a Multinational Corporation (MNC)?
A multinational corporation may be defined company that operates in more than one country.
According to the United Commission, Multinational Corporations or Global Corporation is a corporation, which operates in addition to the addition in which; it is incorporated, in one or more other, countries. Such a corporation owns and controls, business in two or more countries.
In the words of W H Moreland, “Multinational Corporations or Companies are those enterprises whose management, ownership and controls are spread in more than one foreign country”.
In common usage, multinational corporations are also called global corporations and international corporations. While in general these terms may be used interchangeably, there are actually subtle differences between them.
Global corporation and multinational corporation represent two extremes whereas International corporation falls somewhere between these two. In a global corporation production facilities are generally centralized. These are located in oneor two countries to get the advantage of economy of scale and cost.
The products are exported from these countries to the others depending on demand. On the contrary, in a -multinational corporation, production facilities are decentralized and located in each country. Operations in each country totally Independent in organization.
However; within such interdependence, there is always a need for integrating the operations of local subsidiaries with a view to achieve overall optimality for the parent company. Such optimality may be in terms of economy, monetary repatriation, surplus, growth, etc.
An international corporation shall move towards becoming a Global Corporation or Multinational Corporation depending on the relative strengths a global pull factors and regional Pull factors.
When the global pull factors the international corporation shall tend to, become a global corporation.
On the other hand, if regional pull factors are stronger, the corporation will become a multinational corporation.
Stages in the Development of a Multinational Corporation
Typical stages in the growth of a multinational corporation are as follows
- The domestic firm begins to export its products abroad through middlemen in the home country.
- As sales of products increase abroad, the firm begins to sell directly to an importer located abroad. The firm establishes an export department or division in the home country.
- The firm establishes a sales branch abroad to handle sale:, and promotional work in a given foreign market. The manager of the sales branch is directly responsible to the home office.
- An overseas sales subsidiary is established. It is incorporated in a foreign country and hence enjoys, greater autonomy than a sales branch.
- The firm starts production in the, foreign country through contract, manufacturing or assembly operations.
- A manufacturing facility is established abroad. Now the fain has a subsidiary abroad that, manufactures and sells the product in the foreign -market.
- The subsidiaries or operating units abroad are integrated, the parent company takes strategic, or, policy decisions, for all subsidiaries. The subsidiaries operation under capitalized planning and control.
Globalization and Growth of Multinational Corporations
Globalization via the development and spread of the MNCs through direct foreign investment is a more recent phenomenon. The earliest MNCs were mainly European firms, setting up manufacturing facilities in the colonies to extract primary resources for conversion to finished goods back home.
However, by the mid-nineteenth century, many US firms began to globalize — for example, Singer Sewing Machines set up a joint venture in France in 1855, Westing House, which set up a plant in Paris in 1878, and Kodak set up a plant in London in 1889.
The expansion of US firms was furthered after World War II when both European and Japanese industrial infrastructure was largely destroyed by the war. Resource transfers for rebuilding these economies through programs such as the “Marshall plan” gave US firms the ability to consolidate their position even more firmly.
Japanese firms were relatively late entrants into the world of MNCs. Although they were major exporters prior to World War II, most did not begin to set up subsidiaries abroad until well into the second half of this century.
The process of globalization propelled by the MNCS as an organizational from had broken free; it had acquired a life of its own and become irreversible.
In terms of its ability to move knowledge, people, capital, goods and service, and technology access borders, the process of globalization, led by MNCs, had done far beyond the reach of any national sovereign government or international agreement.
To borrow a phrase from scholar of international business, Raymond Vernon, the MNCs had reached a level of maturity and influence worldwide whereby it could keep “sovereignty at bay”.
Until recently, nearly all major multinationals were either American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW. Now, the emerging economies are adding home grown MNCs into the scene.
With the development of a truly global economy by the 1990s, opinion with respect to the multinational corporations in home and host countries varied considerably.
Multinationals have often been viewed abroad as purveyors of technology and business efficiencies and as bearers of products meeting an insatiable appetite for American goods. But a more negative image also developed.
The growing competitiveness of the new world economy and a heightened emphasis on cost efficiencies, job reductions, retooling, and relocation led to complaints in home and host nations about declining market shares and lost jobs.
The transnational character of the multinationals proved irksome to the Government officials who sensed a loss of their sovereignty because of the ability of these corporations to move their operations, transactions, and profits upstream or downstream as their self-interests dictated.
By the beginning of the twenty-first century more and more of the national economies were dominated by a relatively few multinational giants.
Transfers of technology were another issue pitting MNCs and host and home governments against one another, as they jockeyed to maintain or gain control of technological breakthroughs for reasons of national security and profits.
Despite, the jurisdictional disputes, cultural differences, nontariff barriers to trade, international agreements among the multinational corporations, and conflicting political agendas on such matters of principle as the environment, energy, human rights, accessibility to proper medical treatment and high-cost pharmaceuticals, sweatshops, and child labor laws, MNCs are galloping their clout over the economy of the world.
Multinational Company (Definition, Examples) | Advantages,Disadvantages
The multinational company (MNC) is known as a company with headquarter in one country and its branches or subsidiaries are spread across many different countries. Presence across one more geography allows the generation of higher revenues for the MNC.
Types of Multinational Company (MNC’s)
The following are types of multinational corporations.
- A company having a strong home presence and a decentralized corporation.
- Centralized firms having a cost advantage through the global presence and having head office at home country
- An international company that is the parent company’s technology or R&D.
- A transactional firm with having all the above three components.
Examples of Multinational Company (MNC’s)
The following are examples of multinational companies (MNC’s).
Multinational Company Example #1
Apple inclusive is one of the biggest companies as per market capitalization. The product of apple is available everywhere. Apple purchases its hardware from china and technology from India. The raw materials and labor required for mobile and computer hardware are cheapest in china compare to the U.S.
Whereas, the cost of the software developer is cheapest in India. Thus, Apple is sourcing its raw materials and technologies from different parts of the world and selling it at the same rate. Though the pricing is made as per the U.S. market. Thus, the company is making maximum profits by producing at a nominal cost, in terms of U.S.
dollars and selling as per the market rate of the U.S.
Multinational Company Example #2
Unilever is a consumer discretionary company having headquarter at Amsterdam, Netherland. The company has a presence across the U.S., Australia, Europe, India, Bangladesh, etc. The company opened subsidiaries in each country and controls from its local country.
The products of HUL are almost the same and is available everywhere across the world. The motive of the business is not cheap sourcing or taking any resource advantages, but to get expansion from the entire world, the company has a subsidiary at every place. However, the price of the product is not the same across the globe.
The price has been fixed as per the currency and economic condition of that country.
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Advantages of Multinational Company
Some of the advantages of the multinational company are as follows:
- Presence across one more geography allows the generation of higher revenues. Thus, for an efficient company with having demand for its products will have top-line growth.
- Cheaper sourcing of raw materials or services allows creating cost efficiency for the business. Thus, the margin of the company gets improved.
- Presence across several countries creates a brand for the company. With higher product demand and higher usage with wide acceptability, the price of the product rises. If the consumers are satisfied with the above products, the chances of an increase in prices of the product are high.
- The work culture becomes cosmopolitan in nature. Several people across the world will participate to fulfill one goal, i.e. primary goal of the company.
- The cost advantage is one of the prime factors. Suppose Company XYZ ltd have a presence across country A, B and C. Country A is the origin of the business, Country B has a manufacturing plant because of a cheaper source of raw materials while country C has a higher demand of the produced products. Thus, company XYZ will be producing the product at the lowest range and selling at the best price (as the demand for the product is higher in country C).
Disadvantages of Multinational Company
Some of the disadvantages of the multinational corporation are as follows:
- Due to several socio-political scenarios in the other country, the business environment might be hindered causing erosion of investments.
- Due to several stringent laws and legal procedures, the operation of the companies might be restricted and hence the outcome might not be the same as budgeted.
- There is a logistic cost involved when one product is delivered to another geography. Taxes including import duty and freight might increase the price of the product sky high.
- There is a possibility of trade-war between two countries which might lead to a higher imposition of excise duties and hence, there will be enough rise in the prices of exported goods.
- The products made as per special standardization requires specialized people for research and development, which is another factor of cost increment.
- There is volatility in the currency of the two countries. Thus, erosion of the country is not good news for MNC. It can generate higher pricing of the existing product and services. Thus, it can impact negatively the business of MNC. There are several local players which can take the market share of the MNC’s.
Limitations of Multinational Company
Some of the limitations of the multinational corporation are as follows:
- Due to a global presence, a multinational corporation cannot hide its own technology, data, etc. In many cases, there are chances of data leakage, conflict of interests, etc.
- Due to the availability of cheap labor, MNC pays wages which is lower the wage rate of its own country.
- Sometimes, the negativity and socio-cultural of the other country dominates the workflow or the work culture of MNC. This kind of phenomenon hinders MNC culture.
- There are chances of resource outflow as the resource workforce, technology, data cannot be a secret anymore. The other country can copy the technology and misuse them for their own interest.
- MNC runs to make a profit from the business. Preservation of nature, natural resources, wages of the workforce can be marred due to the benefits MNC’s.
- MNC sometimes appears to be a treat to the monopoly business in the local country. Due to better payment, good overall development programs, MNC can impact other company’s businesses.
In the era of globalization, business firms can adopt different policies for creating wealth. One of the procedures of creating wealth is to market the company’s product to different countries.
The evolution of MNC’s has created new avenues for business, resulting in a higher profit to the employer and better job facilities to the employees or the labors.
Through this, the cosmopolitan culture has evolved during the last two-three decades.
This has been a guide to what is the multinational company and its definition. Here we discuss types and examples of the multinational company (MNC’s) along with limitations, advantages, and disadvantages. You can learn more about financing from the following articles –