Multinational Companies

The multinational label has been attached to a growing number of privately owned corporations over the last decades. These multinational corporations (MNCs) have many characteristics in common. They tend to be quite large in terms of assets they control: they tend to wield a great deal of social, political and economic power on a global scale; and they tend to be the subject of controversy and criticism. One authority has defined the multinational corporation as “…a number of affiliated business establishments that function as productive enterprises in different countries simultaneously. To have such capacity the firm must possess host-country-based production units such as factories, mines, retail stores, insurance offices, banking houses, or whatever operating facility is characteristic to its business”.

All major industrialized countries have their own multinational companies, owned by shareholders in their own countries, but operating internationally. Some multinationals have major shareholders in several other countries as well. Multinational companies often have complicated structures. There is likely to be a parent company. This is a company with shareholders which owns other companies called subsidiaries. In a mature MNC, capital, technology, goods and services, information, and managerial talent flow freely from one country to another as business conditions dictate. Profit potential rather than national boundaries determines the multinational manager’s strategies.

Full-fledged multinationalism does not occur overnight. Instead it is the result of an evolutionary “internationalization” process with six identifiable stages.

Stage 1. Licensing. Companies in foreign countries are authorized to produce and/or market a given product within a specified territory in return for a fee.

Stage 2. Exporting. Goods are produced in one country and sold for use or resale to one or more companies in foreign countries.

Stage 3. Local warehousing and selling. Goods that are produced in one country are shipped to the parent company’s storage and marketing facilities located in one or more foreign countries.

Stage 4. Local assembly and packaging. Components rather than finished products are shipped to company-owned assembly facilities in one or more foreign countries for final assembly and sales.

Stage 5. Joint venture. A company in one country pools resources with one or more companies in a foreign country to produce, store, transport, and market products with resulting profits/losses shared appropriately.

Stage 6. Direct foreign investment. A company in one country produces and markets products through wholly owned subsidiaries in foreign countries.

According to traditional international management theory, each successive stage in this internationalization process increases the parent firm’s political and economic risks. However, many argue which stage is more risky. But many support that direct foreign investment, or multinationalism, is recommended as the way to protect the fir’s technology and competitive knowledge advantage, because management can directly oversee and control its application.

The growth of multinationals has had both benefits and drawbacks. On the positive side it has tied the world more closely together economically and has helped spur development in poor nations. It has also increased free-market competition by providing consumers with greater choice in the goods they may buy. Among the drawbacks, especially for home-country firms, have been a great outflow of money for overseas investment and a net loss of jobs to foreign workers. Some firms locate plants abroad in regions where labor is cheaper and ship the products back to the home country to compete with more expensive domestically made goods.

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