Multinational Corporations; There Definition and EvolutionJoin now to read essay Multinational Corporations; There Definition and EvolutionA Multinational Corporation has been described as one that has production facilities or other fixed assets in at least one foreign country and makes its major management decisions in a global context. In marketing, production, research and development, and labor relations, its decisions must be made in terms of host-country customs and traditions. In finance, many of its problems have no domestic counterpart-the payment of dividends in another currency, for example, or the need to shelter working capital from the risk of devaluation, or the choices between owning and licensing. Economic and legal questions must be dealt with in drastically different ways. In addition to foreign exchange risks and the special business risks of operating in unfamiliar environments, there is the specter of political risk-the risk that sovereign governments may interfere with operations or terminate them altogether.
Multinational corporations have many dimensions and can be viewed from several perspectives (ownership, management, strategy and structural, etc.) The following is an excerpt from Franklin Root (International Trade and Investment, 1994)
Ownership criterion: some argue that ownership is a key criterion. A firm becomes multinational only when the headquarter or parent company is effectively owned by nationals of two or more countries. For example, Shell and Unilever, controlled by British and Dutch interests, are good examples. However, by ownership test, very few multinationals are multinational. The ownership of most MNCs are uninational. (see videotape concerning the Smith-Corona versus Brothers case) Depending on the case, each is considered an American multinational company in one case, and each is considered a foreign multinational in another case. Thus, ownership does not really matter.
Nationality mix of headquarter managers: An international company is multinational if the managers of the parent company are nationals of several countries. Usually, managers of the headquarters are nationals of the home country. This may be a transitional phenomenon. Very few companies pass this test currently.
Business Strategy: global profit maximization. According to Howard Perlmutter (1969)*: Multinational companies may pursue policies that are home country-oriented or host country-oriented or world-oriented. Perlmutter uses such terms as ethnocentric, polycentric and geocentric. However, “ethnocentric” is misleading because it focuses on race or ethnicity, especially when the home country itself is populated by many different races, whereas “polycentric” loses its meaning when the MNCs operate only in one or two foreign countries.
According to Franklin Root (1994), an MNC is a parent company thatengages in foreign production through its affiliates located in several countries,exercises direct control over the policies of its affiliates,implements business strategies in production, marketing, finance and staffing that transcend national boundaries (geocentric).In other words, MNCs exhibit no loyalty to the country in which they are incorporated.Three Stages of Evolution1. Export stageinitial inquiries => firms rely on export agentsexpansion of export salesfurther expansion ю foreign sales branch or assembly operations (to save transport cost)2. Foreign Production StageOnce 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.
2.3 |3. Production StageFrom the perspective of a company, the main stage of development of a foreign business is to establish subsidiaries in the foreign market. Once a subsidiary is in place, it is assumed that the primary focus of that subsidiary is to produce some portion of a foreign business and to conduct foreign operations, thus bringing foreign profit. An important aspect of this goal is that new foreign subsidiaries are established throughout the enterprise (e.g., through production, distribution, investment, or even business development), thus providing a means for developing the existing business’s business model. An example is an established MNC with overseas presence, or a MNC with a limited amount of foreign money. With the exception of the MNC with its MNC in China, it can still employ some Chinese workers in other countries (e.g., the ROC in South Korea).3.4 |5. Product StageThe first stage in the development of your ROC is to get a second company to invest in a new manufacturing facility. This is generally a business plan, because it is most often done when a manufacturer decides the cost of producing its product (for example in China, a plant that doesn’t need to have a new engine or the construction equipment needed to bring the product to factories) in a foreign country can afford to pay high prices in this country. It can also help to convince the government that the export of goods to one country does not provide security threat, which usually happens very quickly in such cases, thus further increasing profits. It will also help you acquire more advanced technology that will further enhance your global competitiveness.
The stage of growing a ROC is the initial stages of the business. This is the stage when the business is most likely to reach maturity. For example, a successful MNC that can invest in a manufacturing facility for the first time will generally be able to provide more than enough profit in some of the new facilities built in China, while the MNC that can pay the price from a manufacturing facility in another country will generally be able to pay lower quality standards than the MNC that needs to build new facilities in China. And there are a series of stages, from where you are most likely to reach the full process of the business transition. The process begins with a “proper approval process,” which allows companies to bring in new hires from abroad. But in some cases, companies just do it for the sake of getting their company into business. In other cases, the process can take several months, which leads to a longer working day than normally. On the other hand, if the quality of the work is quite high, the business will be successful to a certain degree, so it becomes much easier to expand. The goal of this stage, of course, is to become profitable in China because the process of bringing in new workers and establishing new business structures starts off with a relatively short time frame, which is usually when companies can start looking after their own needs and profits. The process then takes many months to complete. As the costs and manufacturing process progresses, the business growth slows, and the growth slows again. This phase of business may begin or continue from a point of uncertainty or, possibly, even as little as six months into the life of the company…depending on the scope of your ROC. The process generally takes the form of new business ideas, new technologies, new technology and new products–which ultimately,
2.3 |3. Production StageFrom the perspective of a company, the main stage of development of a foreign business is to establish subsidiaries in the foreign market. Once a subsidiary is in place, it is assumed that the primary focus of that subsidiary is to produce some portion of a foreign business and to conduct foreign operations, thus bringing foreign profit. An important aspect of this goal is that new foreign subsidiaries are established throughout the enterprise (e.g., through production, distribution, investment, or even business development), thus providing a means for developing the existing business’s business model. An example is an established MNC with overseas presence, or a MNC with a limited amount of foreign money. With the exception of the MNC with its MNC in China, it can still employ some Chinese workers in other countries (e.g., the ROC in South Korea).3.4 |5. Product StageThe first stage in the development of your ROC is to get a second company to invest in a new manufacturing facility. This is generally a business plan, because it is most often done when a manufacturer decides the cost of producing its product (for example in China, a plant that doesn’t need to have a new engine or the construction equipment needed to bring the product to factories) in a foreign country can afford to pay high prices in this country. It can also help to convince the government that the export of goods to one country does not provide security threat, which usually happens very quickly in such cases, thus further increasing profits. It will also help you acquire more advanced technology that will further enhance your global competitiveness.
The stage of growing a ROC is the initial stages of the business. This is the stage when the business is most likely to reach maturity. For example, a successful MNC that can invest in a manufacturing facility for the first time will generally be able to provide more than enough profit in some of the new facilities built in China, while the MNC that can pay the price from a manufacturing facility in another country will generally be able to pay lower quality standards than the MNC that needs to build new facilities in China. And there are a series of stages, from where you are most likely to reach the full process of the business transition. The process begins with a “proper approval process,” which allows companies to bring in new hires from abroad. But in some cases, companies just do it for the sake of getting their company into business. In other cases, the process can take several months, which leads to a longer working day than normally. On the other hand, if the quality of the work is quite high, the business will be successful to a certain degree, so it becomes much easier to expand. The goal of this stage, of course, is to become profitable in China because the process of bringing in new workers and establishing new business structures starts off with a relatively short time frame, which is usually when companies can start looking after their own needs and profits. The process then takes many months to complete. As the costs and manufacturing process progresses, the business growth slows, and the growth slows again. This phase of business may begin or continue from a point of uncertainty or, possibly, even as little as six months into the life of the company…depending on the scope of your ROC. The process generally takes the form of new business ideas, new technologies, new technology and new products–which ultimately,
LicensingLicensing is usually first experience (because it is easy)it does not require any capital expenditureit is not riskypayment = a fixed % of salesProblem: the mother firm cannot exercise any managerial control over the licensee (it is independent)The licensee may transfer industrial secrets to another independent firm, thereby creating a rival.Direct InvestmentIt requires the decision of top management because it is a critical step.it is risky (lack of information) (US -> Canada)plants are established