Multinational Corporation (MNC)

What Is a Multinational Corporation (MNC)?

A multinational corporation, or multinational enterprise, is an international corporation whose

business activities are spread among at least two countries. Some authorities consider any
company with a foreign branch to be a multinational corporation; others limit the definition to
only those companies that derive at least a quarter of their revenues outside of their home
country.

Many multinational enterprises are based in developed nations. Multinational advocates say they
create high-paying jobs and technologically advanced goods in countries that otherwise would
not have access to such opportunities or goods. However, critics of these enterprises believe
these corporations have undue political influence over governments, exploit developing nations,
and create job losses in their own home countries.

Examples: Microsoft, Nestle Coca-Cola, Apple, Toyota

What Makes a Corporation Multinational?

A multinational corporation (MNC) is one that has business operations in two or more countries.
These companies are often managed from and have a central office headquartered in their home
country, but with offices worldwide. Simply exporting goods to be sold abroad does not make a
company a multinational.

Goals of Multinational Corporation

• A company may seek to become an MNC in order to grow its customer base around the
globe
• Increase its market share abroad.
• The primary goal is therefore to increase profits and growth.
• Companies may want to introduce their products in ways that are modified or tailored to
specific cultural sensibilities abroad.
• MNCs may also benefit from certain tax structures or regulatory regimes found abroad.

Characteristics of Multinational Corporations

1. Productive organization: this organization produces various types of goods and services. It is
supplies in many countries. It uses its own technology, patent right for manufacturing goods.

Worldwide: multinational companies operate in whole world. It extends its business worldwide.
It establishes many branches in various companies. They extend their business in more than one
country.
Ownership and control: ownership of company remains on both parent and host country. Parent
company control, manage and help in the operation of all host countries. They have control in
capital, high technology, and trade mark.
Marketing superiority: it is large organization which has international name and fame. It has
good network worldwide for distribution of goods.

High efficiency: these organizations operate their business with efficiency. They use advanced
technology. They also involve keenly in research works. They used many trained person that
helps in the production of quality goods.

Capital control

Multinational corporations control the company’s capital, either through the leading corporation
or through branch corporations. Money is one of the elements that might affect a business since
significant capital can aid in the company’s development.

Global distribution and management system

Many individuals also classify MNC as a multinational corporation, implying that management
and distribution are conducted worldwide and with outstanding professionalism. The
dissemination objective is also pursued on a global scale.

Adopting a global perspective and mission

Due to its several branches in other nations, it must also have a worldwide vision and goal. Even
the methods by which the firm accomplishes its purpose and objective must be global. As a
result, whatever the business does affects global conditions.

Huge Assets and Turnover:

Because of operations on a global basis, MNCs have huge physical and financial assets. This
also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many
MNCs are bigger than national economies of several countries.

International Operations through a Network of Branches:

MNCs have production and marketing operations in several countries; operating through a network of
branches, subsidiaries and affiliates in host countries.

Unity of Control:

MNCs are characterized by unity of control. MNCs control business activities of their branches
in foreign countries through head office located in the home country. Managements of branches
operate within the policy framework of the parent corporation.

Mighty Economic Power:

MNCs are powerful economic entities. They keep on adding to their economic power through
constant mergers and acquisitions of companies, in host countries.

Advanced and Sophisticated Technology:

Generally, a MNC has at its command advanced and sophisticated technology. It employs capital
intensive technology in manufacturing and marketing.

Professional Management:

A MNC employs professionally trained managers to handle huge funds, advanced technology
and international business operations.

Aggressive Advertising and Marketing:

MNCs spend huge sums of money on advertising and marketing to secure international business.
This is, perhaps, the biggest strategy of success of MNCs. Because of this strategy, they are able
to sell whatever products/services, they produce/generate.

Better Quality of Products:

A MNC has to compete on the world level. It, therefore, has to pay special attention to the
quality of its products.

Advantages of MNCs:
Advantages of MNCs from the Viewpoint of Host Country:

We propose to examine the advantages and limitations of MNCs from the viewpoint of the host
country.

(i) Employment Generation:

MNCs create large scale employment opportunities in host countries. This is a big advantage of
MNCs for countries; where there is a lot of unemployment.

(ii) Automatic Inflow of Foreign Capital:

MNCs bring in much needed capital for the rapid development of developing countries. In fact,
with the entry of MNCs, inflow of foreign capital is automatic. As a result of the entry of MNCs,
India e.g. has attracted foreign investment with several million dollars.

(iii) Proper Use of Idle Resources:

Because of their advanced technical knowledge, MNCs are in a position to properly utilize idle
physical and human resources of the host country. This results in an increase in the National
Income of the host country.

(iv) Improvement in Balance of Payment Position:

MNCs help the host countries to increase their exports. As such, they help the host country to
improve upon its Balance of Payment position.

(vi) Technical Development:

MNCs carry the advantages of technical development 10 host countries. In fact, MNCs are a
vehicle for transference of technical development from one country to another. Because of
MNCs poor host countries also begin to develop technically.

(vii) Managerial Development:

MNCs employ latest management techniques. People employed by MNCs do a lot of research in
management. In a way, they help to professionalize management along latest lines of
management theory and practice. This leads to managerial development in host countries.

(viii) End of Local Monopolies:

The entry of MNCs leads to competition in the host countries. Local monopolies of host
countries either start improving their products or reduce their prices. Thus MNCs put an end to
exploitative practices of local monopolists. As a matter of fact, MNCs compel domestic
companies to improve their efficiency and quality.

(ix) Improvement in Standard of Living:

By providing super quality products and services, MNCs help to improve the standard of living
of people of host countries.

(x) Promotion of international brotherhood and culture:

MNCs integrate economies of various nations with the world economy. Through their
international dealings, MNCs promote international brotherhood and culture; and pave way for
world peace and prosperity.

Limitations of MNCs from the Viewpoint of Host Country:

(i) Danger for Domestic Industries:

MNCs, because of their vast economic power, pose a danger to domestic industries; which are
still in the process of development. Domestic industries cannot face challenges posed by MNCs.
Many domestic industries have to wind up, as a result of threat from MNCs. Thus MNCs give a
setback to the economic growth of host countries.

(ii) Repatriation of Profits:

(Repatriation of profits means sending profits to their country).

MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign exchange
reserves of the host country; which means that a large amount of foreign exchange goes out of
the host country.

(iii) No Benefit to Poor People:

MNCs produce only those things, which are used by the rich. Therefore, poor people of host
countries do not get, generally, any benefit, out of MNCs.

(iv) Danger to Independence:

Initially MNCs help the Government of the host country, in a number of ways; and then
gradually start interfering in the political affairs of the host country. There is, then, an implicit
danger to the independence of the host country, in the long-run.

(v) Disregard of the National Interests of the Host Country:

MNCs invest in most profitable sectors; and disregard the national goals and priorities of the host
country. They do not care for the development of backward regions; and never care to solve
chronic problems of the host country like unemployment and poverty.

(vi) Misuse of Mighty Status:

MNCs are powerful economic entities. They can afford to bear losses for a long while, in the
hope of earning huge profits-once they have ended local competition and achieved monopoly.
This may be the dirties strategy of MNCs to wipe off local competitors from the host country.

(vii) Careless Exploitation of Natural Resources:

MNCs tend to use the natural resources of the host country carelessly. They cause rapid
depletion of some of the non-renewable natural resources of the host country. In this way, MNCs
cause a permanent damage to the economic development of the host country.

(viii) Selfish Promotion of Alien Culture:

MNCs tend to promote alien culture in host country to sell their products. They make people
forget about their own cultural heritage. In India, e.g. MNCs have created a taste for synthetic
food, soft drinks etc. This promotion of foreign culture by MNCs is injurious to the health of
people also.

(ix) Exploitation of People, in a Systematic Manner

MNCs join hands with big business houses of host country and emerge as powerful monopolies.
This leads to concentration of economic power only in a few hands. Gradually these monopolies
make it their birth right to exploit poor people and enrich themselves at the cost of the poor
working class.

Challenges faced by Multinational corporations

Market Imperfections

It may seem strange that a corporation has decided to do business in a different country, where it
doesn’t know the laws, local customs or business practices of such a country is likely to face some
challenges that can reduce the manager’s ability to forecast business conditions.

Tax Competition

Countries and sometimes subnational regions compete against one another for the establishment
of MNC facilities, subsequent tax revenue, employment, and economic activity. To compete,
countries and regional political districts must offer incentives to MNCs such as tax breaks, pledges
of governmental assistance or improved infrastructure. When these incentives fail they are liable
to face challenges which limit their chance of becoming more attractive to foreign investment.

Political Instability

Many multinational enterprises face the challenge of political instability when doing business in
international markets. This kind of problem mostly occurs when there is an absence of a reliable
government authority. When this happens, it adds to business costs, increase risks of doing
business and sometimes reduces manager’s ability to forecast business trends. Political instability
is also associated with corruption and weak legal frameworks that discourage foreign investments.

Market Withdrawal

The size of multinationals can have a significant impact on government policy, primarily through
the threat of market withdrawal. Countries that have been the most successful in this type of
confrontation with multinational corporations are large countries such as United States and Brazil,
which have viable indigenous market competitors.

Lobbying

Multinational corporate lobbying is directed at a range of business concerns, from tariff structures
to environmental regulations. Companies that have invested heavily in pollution control
mechanisms may lobby for very tough environmental standards in an effort to force non-compliant
competitors into a weaker position. Corporations lobby tariffs to restrict competition of foreign
industries. For every tariff category that one multinational wants to have reduced, there is another
multinational that wants the tariff raised..

Foreign Government Regulations

A multinational firm faces the challenge of dealing with different sets of government regulations
that may cause it to incur additional costs. According to an Ernst & Young guide written in 2010,
foreign governments are increasing value-added taxes in goods and services, in addition to
tightening compliance regulations. A change in compliance regulations often means that a firm
has to adapt its operational strategies and the way in which it delivers its goods and services.
This may require increased costs to hire local specialists who are able to keep abreast of changes
and deal directly with local government officials.

Product Strategy

When introducing a product to a foreign country, a firm needs to conduct market research to
determine whether adaptations need to be made. Brand names, logos and product attributes
might all need to be modified to ensure market success. This is a challenge for firms that are
entering unfamiliar markets and cultures. Language translations of names and advertising
slogans might also prove to be a challenge as wording and sentence structure might skew the
intended meaning.

Operation Coordination

A multinational firm faces the challenge of deciding how to coordinate and streamline operations
between its home country and its foreign operations. Decisions have to be made regarding when
and how to establish a local physical presence and how to gain the support of local organizations,
such as labor unions and parts suppliers. A certain number of local experts need to be brought on
board to ensure that the firm is able to effectively network and communicate in a foreign
environment. Operations may need to be standardized as much as possible between countries,
which could lead to increased overhead and duplication.

Human Resources

The administration of benefits and salaries often proves to be a challenge for a multinational
firm. Different labor market conditions might result in the firm offering a set of benefits that it
otherwise wouldn't. To attract and retain the talent it needs, a multinational firm could find it
challenging to maintain a balance between its administrative costs and recruiting the necessary
human capital to effectively perform in a foreign country.