When a corporation expands its activities across its borders and engages in international trade, it could be on the way to becoming a multinational corporation. A multinational corporation (MNC) has industrial and commercial organizations in foreign countries. Manufacturing plants are established abroad, together with supporting marketing systems. These activities have political and economic implications, and sometimes friction results between MNCs and sovereign states.
An MNC seeks international markets when it finds limitations in the home market. It tries to approach a foreign market in the most effective way-----either on a local or national level. For example, a French MNC may choose to adjust its approach to the United States market according to United States business customs. It would not set up three or four sales offices to sell machinery in the United States as it might do in France. Instead, a strong and extensive dealer network is usually most effective in the United States.Decisions made in an MNC are locally inspired, but major decisions are made by a central management, located in the country of origin of the MNC. In a transnational corporation, decisions are made by officials of the overseas nationality. No longer is the country of origin a major concern in the decision-making process.
How multinational can a corporation get? Some companies, like Nestle of Switzerland, make over 90 percent of their sales on exports and manufactured goods abroad. Today the large MNCs control from 50 to 200 foreign subsidiaries with 30 to 90 percent of their sales exported and produced abroad. In 1973 some experts estimated an annual turnover of＄600 billion for all MNCs combined. These MNCs owned over 80 000 subsidiaries worldwide. At that time the annual growth rate of MNC sales was estimated at around 10 percent-well above the average Gross National Product growth of many nations.
In 1960 less than 2 000 United States firms had invested abroad; by 1973 over 8 000 had done so. Western Europe was traditionally the most active on the multinational scene and therefore its growth rate in that decade had been less spectacular. Meanwhile number of Japanese firm with foreign investments increased stably, especially from 1985 to 1987, Japanese industrial subsidiaries 494, form 2 076 to 2 570. In general, however, the most active period of multinationalization is probably over for most countries. This may be due partly to the differences that arose between individual nations and MNCs.
A favorable aspect about MNCs is that they create jobs in foreign countries. They also contribute to innovation or creation of new products and technology. But when innovation levels off and local technology reaches a point of sufficiency, MNCs are sometimes considered to be no longer useful. At this point MNCs run the risk of nationalization, which is the confiscation of a company’s property (plant, equipment, etc.) by a foreign government with or without adequate compensation.
Multinational investment has a long history. The Dutch started trading with Japan on the island of Deshima in the seventeenth century. The British established their first trading company, the East India Trading Company, in 1600 and its Canadian company, Hudson Bay, in 1670. But basically these companies only traded and had no manufacturing capabilities abroad. In the early part of this century, European companies realized that their own home markets were small. European nations are relatively modest in size, and, of course, free trade zones like the Common Market (officially called the European Economic Community) or the European Free Trade Association (EFTA) had not yet been established. Just as the Americans went west in the 1800s, European companies like Nestle, Unilever, and Royal Dutch Shell went overseas for new markets and became MNCs well before World WarⅡ. United States companies, which have a large home market of over 218 million people, had other incentives to multinationalize. Establishment of an MNC was a way to generate income from diversified sources, thereby spreading recession risks. It was a way to maximize return on investments, and it was a way to benefit from cheaper labor abroad.
The formation of the European Economic Community (EEC) in 1958 spurred the growth of MNCs, especially the American ones. The EEC established import dutyfree associations of countries, thus creating vast markets. This meant that one Western Europe plant of a United States MNC could sell its products within the EEC to a market of 200 million people without running into customs duties between countries. United States multinational growth in European was soon followed by the establishment of United States bank branches. And as Japanese business increased in Europe a little later, Japanese banks followed the American example and opened their own offices. Up to 1988, were 63 Japanese bank branches in Europe.
Most MNCs are made up of vast numbers of foreign subsidiaries, companies in which over 50 percent is owned by the parent company. Like all corporations, MNCs are organized according to the goals they set for themselves. They strive to retain access to the resources that make a company tick: raw material, manpower, and capital. Furthermore, they try to grow in the global corporation by increasing their access to world resources. This leads them to expand their foreign market position, in other words, to increase their market share, MNCs grew into strong entities by reinvesting their prudently so as to further increase access to resources. They had to hire more and talented local people abroad, and they had to purchase raw materials in foreign countries.
Successful MNCs eventually must learn how to interrelate their subsidiaries with the parent company, how to delegate decision-making authority, and how to develop satisfactory methods of control and supervision. The most traditional organizational structure is the international division structure, in which communication with the parent company is channeled through an international division. In the global structure there is no international division for overseas activities; instead, the entire top management becomes involved in international as well as domestic matters. The global approach unifies domestic and international divisions into one global division. It therefore eliminates the danger of competition between an international division and a domestic one.
The question of how much power and autonomy a subsidiary should have is a critical subject. In MNCs centralized guidance and decision making are important. On the other hand, the parent company’s decisions are very much dependent on feedback received from abroad. If foreign subsidiaries have no decision-making authority, they might become less enthusiastic partners. They may not report fully to the parent company. Cultural differences, distance, time lag, and problems of international finance could then become even bigger problems than they already are. Therefore, some sort of balance has to be achieved. Long-range goals are normally set by a parent company, but subsidiaries will usually have authority for operations and sometimes for development of new products. Giving more decision-making power to subsidiaries is called decentralization. The trend, however, appears to be toward increased centralization whereby the parent company more decision-making power. An MNC’s prime role is to take optimum use of resources in order to remain competitive in the market. Decentralization can easily lead to fragmentation of the use of resources. Thus, centralized management can better achieve optimum results.
Having entered the international arena, an MNC faces an awesome task. It must worry not only about how to overcome the communication barriers already mentioned (cultural differences, distance, and environment) but also how to deal with the different legal and tax structures in the various countries. An MNC also has to cope with foreign currency so that it can protect its foreign assets. It must decide whether to delegate the authority to subsidiaries or centralize. Some other problems an MNC has to consider are: how to secure continued-access to resources; how to increase market share in view of foreign competition; how to deal with increased criticism and interference by foreign governments; and how to deal with labor laws and antitrust legislation both at home and abroad.
The key to success is continued access to natural resources as well as human resources. A successful MNC will exploit position by hiring the most knowledgeable people possible. These people, experts in labor law, antitrust law, finance, and marketing, provide the input for an MNC’s approach to a foreign market.Continuous innovation is also necessary for success. This helps to fight competition; and it heads off political criticism of foreign intervention in national affairs. Research and development is usually centralized at the parent company, although some occurs at the subsidiary level.
To handle foreign currency problems, MNCs hire foreign exchange experts. They buy and sell foreign currency and borrow or repay the loans abroad. This finances an MNC’s foreign assets.
In recent years MNCs have come under heavy criticism at home and abroad. Domestically they have been accused of exporting jobs, meaning that jobs are lost at home because the MNCs set up plants in other countries, sometimes exporting the products back home for consumption. Less developed countries, on the other hand, charge that for years they have been underpaid for their natural resources. In a 1973 report, the United Nations came to the conclusion that the foreign operations of MNCs and their influence on the host countries may be regarded as a challenge to national sovereignty. In other words, this policies. This obviously reflects the majority voting power of developing and producing countries in the United Nations.
Widely publicized reports of payoffs to government officials by MNCs, and even interference in local politics, have brought heavy pressure on MNCs to exercise greater care, police their tactics, and redefine their strategy.
The economics of the United States, Western Europe, and Japan are increasingly interrelated by a flow of trade, technology, tourism, and culture. MNCs have contributed enormously to this development. But are they indispensable? In recent years European governments have assumed the responsibility of negotiating with the OPEC countries on oil prices, whereas before, the oil companies assumed this role. Would international trade suffer without MNCs? Is it possible to have other vehicles to develop and prosper in their planse?
As some MNCs become politically oriented, they may lose their private status altogether. Many European MNCs, especially those in energy-related industries, are already state owned or state influenced. Others may withdraw from markets that were once profitable. For example, labor laws which do not allow companies to lay off workers have led some American MNCs to shut down subsidiaries. Germany’s commitment to fifty-fifty workers participation on the supervisory boards of corporations is especially troublesome to many MNCs.
In July 1976 the Organization for Economic Cooperation and development (OECD) in Paris adopted voluntary guidelines for the behavior of MNCs. These include: commitments to cooperate with local business; the inclusion of national goals into an MNC’s planning and operations; promotion of local personnel to management positions; and the avoidance of improper involvement in political activities.
In short, it is clear that MNCs will more accountable for their actions in the future. How they will respond to growing local and international controls is subject to speculation. It can be argued, of course, that the MNCs simply adjust to different customs and codes of behavior, and that they are usually pressured into acceding to the demands of local officials. The frequent choice is to do business their way, or lose it to a competitor and perhaps lose considerable effort and money spent in promotion and preparation costs.
Apart from such isolated cases of misconduct, it is clear that MNCs will continue to grow and expand in the world and constantly adjust to changing conditions. Developing countries and MNCs are entering into new relationships, such as in the sale of entire technological or production systems. For instance, American, German, or Japanese MNCs now install entire automobile and fertilizer plants in African or Latin American countries. In some cases the MNC retains a minority interest; in others the host country owns 100 percent and the MNC stays on after the installation is completed to perform managerial and supervisory functions for a period of time. The MNC gets the initial sale, a participation in the profits or a service fee, and probably additional payments in the form of royalties or special trade concessions. Thus what results is a new type of MNC-host country relationship that is more of a partnership and that will vary from country to country more than in the past.
Here Figure 7-1 and Figure 7-2 show the Structure Models of Multinational Companies.