Multinational Corporations; There Definition and Evolution

A 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 that

• engages 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 Evolution

1. Export stage

• initial inquiries => firms rely on export agents

• expansion of export sales

• further expansion ю foreign sales branch or assembly operations (to save transport cost)

2. 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.

Licensing

Licensing is usually first experience (because it is easy)

• it does not require any capital expenditure

• it is not risky

• payment = a fixed % of sales

Problem: 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 Investment

It requires the decision of top management because it is a critical step.

• it is risky (lack of information) (US -> Canada)

• plants are established