Multinational Corporation – MNC

Learning Objectives
• define multinational corporations
• study the reasons for existence of multinational
corporations
• understand the advantages and disadvantages of
multinational corporations to host countries
Multinational Corporation – MNC
Multinational Corporation – MNC
 Multinational Corporation – MNC

A multinational company is one which is incorporated in

one country (called the home country); and which
carries on business in other countries (called the host
countries)
 Discussions about MNCs

 Multinational companies are companies who have

huge business operations and they operate in more
than one country.

 Inmost cases, the home country is a developed country

and the host country is a developing nation.

 Multinational
companies act locally but think globally
(Edwards, Marginson and Ferner 2013).
Discussions about MNCs……………….Con/…
 MNCs have offices and/or factories in different
countries. (facilities and other assets)
 Centralized
head office where they coordinate global
management.
 Global profit maximization
 Very large MNCs have budgets that exceed those of
many small countries.
 According to UN data, some 35,000 companies have
direct investment in foreign countries, and the largest
100 of them control about 40 percent of world trade.
 Nearly all major MNCs are either American, Japanese
or Western European.

 https://en.wikipedia.org/wiki/List_of_multinational_corp
orations

 Such as Nike, Coca-Cola, Wal-Mart, Toshiba, Honda and

BMW.
 Largest Multinationals
• The 10 largest multinational corporations in the world, as of
2015 revenue, are
• Volkswagen($244.81billion
• Wal-Mart ($485.65 billion)
• Sinopec ($433.31 billion)
• Royal Dutch Shell ($385.63 billion)
• Petro China ($367.85 billion)
• Exxon Mobil ($364.76 billion)
• Toyota Motors ($248.95 billion)

• http://fortune.com/global500/
• http://www.trendingtopmost.com/worlds-popular-list-top-
10/2017-2018-2019-2020-2021/business/multinational-
companies-world-biggest-richest-revenue-market-
capitalization/
 Manufacturing MNCs

 21 of top fifty firms are located in the U.S.

 12 are in China
 3 in Japan
 Petroleum companies: 6/10 located in the U.S.
 Food/Restaurant Chains. 10/10 are headquartered in
the U.S.
 US Multinational Corporations: Exxon, GM, Ford, etc.
 Three Stages of Evolution of MNCs

Export Stage

i. Initial inquiries ⇒ result in first export.

ii. Initially, firms rely on export agents. ⇒ expansion of
export sales
iii. Foreign sales branch or assembly operations are
established (to save transportation costs)
 Foreign Production Stage

Why?

 There is a limit to foreign exports, due to tariffs, quotas and

transportation costs.

 Wage rates may be lower in LDCs.

 Environmental regulations may be less in LDCs

 Meet Consumer demands in the foreign countries

 Foreign Production Stage
• Once the firm chooses foreign production as a method of
delivering goods to foreign markets
• It must decide whether to establish a foreign production
subsidiary or license the technology to a foreign firm
 FDI Vs Licensing

Once the firm chooses foreign production as a method of

delivering goods to foreign markets,

it must decide whether to establish a foreign production

subsidiary or license the technology to a foreign firm.
 Licensing & Its benefits
 Licensing is usually the first experience (because it is
easy)
• e.g.: Kentucky Fried Chicken in the U.K, MacDonalds
in Moscow

– Licensing does not require any capital expenditure

– Financial risk is zero.
– Royalty payment = a fixed % of sales
– licensor may provide training, equipment, etc.
 Licensing & Its disadvantages

• the parent firm cannot exercise any managerial control

over the licensee. (it is independent.)

• The licensee may transfer industrial secrets to other

independent firms, thereby creating rivals.

• In order to deter entry of copycat producers, MacDonald

may supply American ingredients or raw materials (e.g.,
beef)
 Foreign Direct Investment (FDI)
• It requires the decision of top management because it
is a critical step.

• It is risky (lack of information, large capital

requirement)

• Ex: US firms tend to establish subsidiaries in Canada

first. Singer Manufacturing Company established its
foreign plants in Scotland and Australia in the 1850s.

• Plants are established in several countries.

• licensing is switched from independent producers to its

subsidiaries.
 Multinational Stage
When a company becomes a multinational
enterprise?

• When it begins to plan, organize and coordinate

production, marketing, R&D, financing, and staffing.

• For each of these operations, the firm must find the

best location.
 Types of Multinational Companies

Horizontally Integrated Multinational

 A multinational involves itself in the production of the

same product but in different countries.

 The main objective is to continue to grow by the means

of expansion into many different types of new
markets.
 What is Vertically Integrated Multinational?

 Vertical integration is a competitive strategy by which a

company takes complete control over one or more stages
in the production or distribution of a product.

 A company opts for vertical integration to ensure full

control over the supply of the raw materials to
manufacture its products. It may also employ vertical
integration to take over the distribution of its products.
Vertical integration integrates a company with the units
supplying raw materials to it (backward integration), or with
the distribution channels that carry its products to the end-
consumers (forward integration).

• For example, a supermarket may acquire control of

farms to ensure supply of fresh vegetables (backward
integration) or may buy vehicles to smoothen the
distribution of its products (forward integration).

• A car manufacturer may acquire tyre and electrical-

component factories (backward integration) or open its
own showrooms to sell its vehicle models or provide after-
sales service (forward integration).
 Objective of Vertically Integrated Multinational
 The essential motive behind this strategy is to obtain or
have more control over the costs and to reduce the
uncertainty of the business environment.

 There is a third type of vertical integration, called balanced

integration, which is a judicious mix of backward and forward
integration strategies.
 Conglomerate Multinational

 In this strategy the multinationals produce a different

range of products in different countries.

 By this diversification process, conglomerate

multinationals looks to spread risks, and maximize returns
by careful buying of assets overseas.
 Various reasons for the emergence of multinational firms

 Search For Raw Materials

 Market Seeking

 Cost Minimization

 Knowledge Seeking

 Keeping Domestic Customers

 Exploiting Financial Market Imperfections

 SEARCH FOR RAW MATERIALS
Some firms become MNCs to exploit the raw materials that
can be found overseas, such as oil, coal, minerals, and other
natural resources.
 MARKET SEEKING

 Some firms become MNCs to exploit foreign markets for

their products.

 MNCs not only take advantage of the marketing

opportunities, but also gain from the economies of scale
obtained by selling large volumes across different
foreign markets.
 COST MINIMIZATION
Companies also become MNCs to seek out lower-
production-cost sites. Specific skills needed for production
may be available at lower costs in some countries, and
MNCs may locate plants specializing in specific aspects of
production in those countries.
 KNOWLEDGE SEEKING

 Some firms enter foreign markets to gain information and

experience that are expected to prove useful elsewhere.

 Especially in industries characterized by rapid product

innovation and technical breakthroughs, firms obtain
technical product and process knowledge, which they
leverage in other countries.
 KEEPING DOMESTIC CUSTOMERS
Suppliers of goods or services to MNCs often follow their
customers abroad to guarantee them a continuing product
flow. In the process, these firms also become MNCs.
 EXPLOITING FINANCIAL MARKET IMPERFECTIONS

 Companies may find it advantageous to reduce taxes

and circumvent currency controls when operating in
multiple foreign markets.

 Doing so enables them to obtain greater project cash

flows and lower costs of funds compared to a purely
domestic firm.
 Features of MNCs
• Huge Assets & Turnover
• International Operations through a network of branches
• Unity of Control
• Mighty Economic Power
• Advanced & sophisticated Technology
• Professional Management
• Aggressive Advertising & Marketing
• Better Quality of Products
 Features of Multinational Corporations (MNCs)
Huge Assets and Turnover
 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 control business activities of their branches in foreign
countries through head office located in the home country.

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

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 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 from the Viewpoint of Host
Country
Advantages of MNCs make for the case in favor of MNCs; while
limitations of MNCs become the case against MNCs.

• 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.

• 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.
• 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.

• 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.

• Technical Development
MNCs carry the advantages of technical development in 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.
• 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.

• 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.

In India, many Indian companies acquired ISO-9000 quality

certificates, due to fear of competition posed by MNCs.
• 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.

• 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.
 Disadvantages of Multinational companies on Host
country
Loss of Sovereignty
Multinational companies do not take the national policies
seriously. They disregard the national priorities of the
country and protect their own interests. Therefore, there is
continuous threat to the host country for protection of their
sovereignty and liberty.

Competition
For market promotion and development multinational
companies have big budgets. They provide competition to
domestic countries and this makes them gain monopoly
power.
Loss of Natural Resources
MNCs use natural resources of the home country in order to
make huge profit which results in the depletion of the
resources thus causing a loss of natural resources for the
economy

Inappropriate Technology
The use of technology by the multinational company may
either be out of date or too advanced for the host country
to follow. The local people may not receive proper training
for this leading to unemployment
Economic exploitation
Multinational companies are guided by a motive of profit.
It may offer low pay wages to local people and they can
charge high price of their products to make use of their
customers.

Socio cultural Evils

The multinational companies promote the values of their
home country and this may include dress, food and life
styles. This threats the local culture.

Transfer of capital takes place from the home country to

the foreign ground which is unfavorable for the economy.
Political Risks
As the operations of the MNCs is wide spread across
national boundaries of several countries they may result in
a threat to the economic and political sovereignty of host
countries.