Multi national Corporations
Multinational enterprises do many things
in many places. Why?
• Ford has manufacturing operations in six continents
- in Europe alone there are around thirty-five sites
in nine separate countries. These include assembly
plants, stamping plants, engine plants, and casting,
forging and aluminum plants.
• Henry Ford owned his own steel mill and glass
factory. He also owned a rubber tree plantation in
Brazil, an iron mine in Minnesota, and railroads and
ships used to transport the inputs.
• Nike sells its sportswear in 82 countries (63% of sales are in
US). It operates 61 retail outlets. It has administrative offices
in Austria, Canada, Hong Kong, the Netherlands, and the US.
The shoes are manufactured at 40 different locations, mostly
in East Asia. Since the 1970s, Nike's manufacturing locations
have gradually been changed, from Japan in the early years,
to Korea, and Taiwan (80% in the 1980s), to China and
Indonesia which currently make 62% of Nike's shoes. All
product development and marketing are carried out at
headquarters in Beaverton, Oregon. That is also where Nike
makes the little air bags that cushion the heels of its shoes.
Nestle makes infant formula, powdered milk, instant
coffee, chocolates and other food products which are
sold in over 100 countries. It has factories in 74
nations, almost 500 factories. Nestle engages in
manufacturing and wholesale distribution but it is
not vertically integrated into farming or retail.
Although about half its sales come from Europe, only
2% come from Switzerland. It has 12 factories in
Canada, the same number as in Switzerland. In
Africa,it has offices in 17 countries and factories in 12
(including 12 factories in South Africa).
Definition and meaning
• Crtiteria used –
• Size – the term MNC implies massive proportions. -
factors such as market value, sales, profits, return on
equity
• Structure – no. of countries in which the firm does
business and the citizenship of corporate owners and
top managers.
• Performance – depends on characteristics such as
earnings, sales and assets. Indicate the extent of
commitment of corporate resources to foreign
operations and the amount of rewards from that
commitment.
• Behaviour – abstract measure of multinationalization
and refers to mostly behaviour of top mgmt.
globalization is basically a mindset that reflects the
global orientation of the company.
• “ The essential nature of the multinational
enterprises lies in the fact that its managerial
headquarters are located in one country(home
country) while the enterprise carries out the
operations in no. of other countries (host
countries)”
• “ A corporation that controls production facilities
in more than one country, such facilities having
been acquired thro’ the process of FDI. Firms that
participate in intl business, however large they
may be, solely by exporting or by licensing
technology are not MNCs.”
Benchmarks used to define
multinationality
• Produce (rather than distribute) abroad as well as
in HQ ctry.
• Operate in a certain min no. of nations (6 for ex)
• Derive some min % of its income from foreign
operations (e.g. 25%)
• Have a certain min ratio of foreign to total no of
employees, or of foreign to total value of assets
• Possess a mgmt team with geocentric
orientations.
• Directly control foreign inv. (as opposed to simply
holding shares in foreign countries)
Continuum of International Involvement
High Involvement LEVEL 4
Transnational
Organizations
LEVEL 3
Multinational
Organizations
LEVEL 2
International
Organizations
LEVEL 1
Domestic
No or Low Involvement Organizations
Six Stages of Multinationalization
Stage 6. Multinationalizes ownership of
corporate stock
Stage 5. Multinationalizes management from
top to bottom
Stage 4. Establishes foreign manufacturing
facilities
Stage 3. Licenses use of its patterns and know-how to
foreign firms that make and sell its products
Stage 2. Establishes sales organizations abroad
Stage 1. Exports its products to foreign countries
• Multinational corporation –
characteristics – decentralized federation
of assets and responsibilities, mgmt
process defined by simple financial
control systems overlaid on informal
personal coordination, dominant
strategic mentality that views the
company’s worldwide operations as a
portfolio of national businesses.
• Decisions are decentralized.
International organization model
• Predominant in American companies
• Structural configuration - coordinated federation ->
many assets , resources, responsibilities and decisions
are decentralized but controlled from the
headquarters.
• Overseas operations are regarded as appendages to a
central domestic corp.
• HQ transfers knowledge and expertise to overseas
envts that were less advanced in tech and mkt
development.
• local subsidiaries are free to adapt new products and
strategies, but their dependence on parent company
for new products, processes or ideas dictated a great
deal more coordination and control by HQ than in the
MNC.
Global organization models
• Adopted by Japanese companies
• Based on centralization of assets, resources and
responsibilities; overseas operations are used to
reach foreign markets in order to build global
scale.
• Role of local sub is to assemble and sell products
and to implement plans and policies developed at
HQ.
• Much less freedom to create new products or
strategies or even to modify existing ones.
• Mgmt treats overseas opns as delivery pipelines
to a unified global mkt.
Transnational
• Seeks to eliminate some of the drawbacks of the
other models.
• It endeavours to achieve global competitiveness
through multinational flexibility and worldwide
learning.
• Specialized resources and capabilities are
dispersed among the various operating units
globally.
• Interdependent and integrated units having large
flows of components, products, resources,
people and information among them.
• Complex process of coordination and cooperation
in an envt of decision making.
Characteristics of diff organizational
models
Organizational
Multinational Global International Transnational
characteristics
Sources of core
Configuration Decentralized competencies Dispersed,
Centralized and
of assets and and nationally centralized, independent
globally scaled
capabilities self-sufficient others and specialized
decentralized
Differentiated
Adapting and contributions by
Role of Sensing and Implementing
leveraging parent national units to
overseas exploiting local parent company
company integrated
operations opportunities strategies
strategies worldwide
operations
Knowledge Knowledge
Knowledge Knowledge
Development developed at the developed
developed and developed and
and diffusion centre and jointly and
retained within retained at the
of knowledge transferred to shared
each unit centre
overseas units worldwide
The Benefits of MNC’S
• A MNE investing in an area may result in a
significant injection into the local economy.
This may provide jobs directly or through the
growth of local ancillary businesses such as
banks and insurance.
• It might initiate a multiplier process
generating more income as newly employed
workers spend their wages on consumption.
The Benefits of MNC’S
• MNEs may provide training and education for
employees thus creating a higher skilled labour force.
These skills may be transferred to other areas of the
host country. Often management and
entrepreneurial skills learned from MNEs are an
important source of human capital.
• MNEs will contribute tax revenue to the government
and other revenues if they purchase existing national
assets through the privatization process.
The Benefits of MNC’S
• Domestic companies can make use of R&D
outcomes of MNC’s.
• MNC’s break protectionism, create
competition among domestic companies and
hence enhance their competitiveness.
• The host country’s imports get reduced and
export increase.
The Problems of MNC’s
• The MNE may employ largely expatriate
managers ensuring that incomes generated
are maintained within a relatively small group
of people. The attraction for the MNE may be
the large supply of cheap manual labour who
they can employ at low wages. This may
contribute to a widening of the income
distribution. It will also not lead to the transfer
of management skills.
The Problems of Multinational Enterprises
• MNE investment in LDCs often involves the use of
capital intensive production methods. Given that
many LDCs are often endowed with potentially large
low wage labour forces and have high level of
unemployment this might be considered
inappropriate technology. More labour intensive
production methods might be a more appropriate
option for alleviating poverty and aiding
development. Any resulting growth might be
considered anti-developmental.
The Problems of Multinational Enterprises
• MNEs engage in transfer pricing where they shift
production between countries so as to benefit from
lower tax arrangements in certain countries. By doing
this they can minimize their tax burden and the tax
revenue of national governments.
• As many MNEs are very large and have considerable
power they can exert influence on governments to
gain preferential tax concessions and subsidies and
grants
• MNC’s may kill the domestic industry by
monopolizing the host country’s market.
• MNC’s may exploit all the natural resources of a host
country and hence it is criticized in many parts of the
world.
• For the home country too, an MNC may be harmful
as it transfers capital out of the country, reduce the
chances of opportunity, neglects the home country’s
economic development.
Importance and dominance of MNCs
• Economic clout
• MNCS and international production
• Employment
• MNCs and international trade
Economic clout
• GDP of most countries is smaller than the
value of annual sales turnover of
multinational giants.
• Wal-Mart - $288bn
• Only a very small no of developing ctries like
Brazil, Russia, Republic of Korea, India had
GNP higher than this figure.
MNC and intl production
• The output value of foreign affiliates of MNCs
as a percentage of global GDP doubled in the
last two decades.
• Gross product associated with intl production
is about one-tenth of global GDP, compared
with one-twentieth in 1982
Employment
• In 2003, foreign affiliates of MNCs employed
over 54 million people, compared to 24
million in 1990.
• The greater part of the increase in emp in
foreign affiliates in recent years has taken
place in developing countries.
• Esp China, and South-East asia – in particular
in EPZ
MNCs and intl trade
• Foreign affiliates of MNCs account for one-
third of the world exports.
• Significant increase in export intensity (% of
exports to total sales) of foreign affiliates of
MNCs
Goals of MNCs
• Manufacture in those ctries where it finds
greatest competitive advantage
• But and sell anywhere in the world to take
advantage of the most favourable price to the
company
• Take advantage, throughout the world, of
changes in labour costs, productivity, trade
agreements and currency fluctuations
• Expand or contract, based on worldwide
competitive advantages
• Obtain a high and rising return on invested
capital
• Achieve greater sales
• Hold risks within reasonable limits in relation
to profits
• Maintain and improve technological and other
company strengths
• Maintain control of imp decisions
• Encounter fewer barriers in host countries
Fundamental goals of host govts
• Achieve economic growth
• Achieve full emp of people and resources
• Improve managerial and worker skills
• Maintain price stability
• Develop a favourable BoT
• Achieve a more equitable distribution of income
among the population
• Retain a fair share of profits made by MNCs in
their country
• Improve tech development
• Improve worker productivity
• Increase local ownership of the means of
production
• Retain hegemony over the economic system
• Control national security decisions
• Develop and maintain social and political
stability
• Advance the quality of life of its people
• Protect the nation’s physical envt.
