MNC Detailed Notes

Introduction to Multinational Corporations (MNCs)

Lecture Aims

• Definition of a multinational corporation (MNC).

• Characteristics and types of MNCs.

• Entering foreign markets and reasons for rapid growth.

• Advantages and disadvantages of MNCs.

• The role of foreign direct investment (FDI).

Examples of MNCs

• A wide range of companies are listed, including Colgate, Siemens, Experian, Nissan, Unilever, P&G, Johnson & Johnson, Bridgestone, Baxter, Sanofi Aventis, Xerox, Lucent Technologies, Thales, Citibank, Abbott Laboratories, Sony, HP, Oracle, Ford, Pfizer, etc.

Top 10 Multinational Corporations (MNCs)

1. Microsoft (US); CEO - Bill Gates

2. Nestle (Switzerland); CEO - Ulf Mark Schneider

3. Pepsi (US); CEO - Ramon Laguerta

4. Hewlett Packard (US); CEO - Enrique Lores

5. Coca-Cola (US); CEO - James Quincey

6. Sony (Japan); CEO - Kenichiro Yoshida

7. Procter & Gamble (US); CEO - David Taylor

8. Citigroup (US); CEO - Michael Corbat

9. Nike (US); CEO - Mark Parker

10. Apple (US); CEO - Tim Cook

Defining a Multinational Corporation (MNC)

• A multinational corporation operates in its home country and other countries worldwide.

• It maintains a central office in one country to coordinate the management of all other offices (administrative branches or factories).

• Reasons for a business going ‘international’:

  • Profits

  • New markets

  • Financial capital

  • Raw materials

  • Lower labor costs

Managerial Control in MNCs

• Managerial control enables the firm to make decisions about how and where to employ resources.

• Decisions are based on global strategies for corporate success, rather than conditions within any of the countries in which the firm conducts its business.

• MNCs highlight the tensions inherent in an economy organized along global lines and political systems that reflect exclusive national territories.

Types of MNCs

• Transnational Corporation (TNC): operates on a borderless basis, usually not identified with one national home (e.g., McDonald’s & Apple).

• Ethnocentric: operates with strict headquarter control over foreign operations and expects to operate abroad as they do at home (e.g., Sony, Panasonic, Harley-Davidson & Hitachi).

• Polycentric: gives foreign operations more freedom, respecting market differences amongst countries, treating them as separate domains in the process (e.g., Phillips & John Deere).

• Geocentric: seeks total integration of global operations without ‘home country’ prejudices, using senior executives from many countries (e.g., McDonald’s, KFC & Viacom).

Perspectives on MNCs

Positive Perspective:

• MNCs as productive instruments of a liberal economic order:

  • Ship capital to where it is scarce.

  • Transfer technology and management expertise from one country to another.

  • Promote the efficient allocation of resources in the global economy.

Negative Perspective:

• MNCs as instruments of ‘capitalist domination’:

  • Control critical sectors of their hosts’ economies.

  • Make decisions about the use of resources, with little regard for host country needs.

  • Weaken labor and environmental standards.

• Regardless of these divergences, there is consensus that MNCs are the primary drivers and beneficiaries of the dynamics of globalization.

Characteristics of an MNC

• High asset turnover

• Network of branches

• Control

• Continued growth

• Sophisticated technology

• Highly skilled

• Aggressive marketing and advertising

Advantages of MNCs

• Enhanced investment in host country.

• Tax revenue for home country.

• Research and development becomes a potentially profitable venture.

• Large international companies create a lot of jobs for the global economy.

• Companies can provide consumers with better consistency when they exist internationally.

Disadvantages of MNCs

• Preferential treatment over local industry.

• Loss of jobs at home.

• The presence of MNCs creates monopoly-building opportunities.

• Environmental concerns can develop with the presence of MNCs.

Host Country Complaints about MNCs

• Extraction of excessive profits.

• Domination of the local economy.

• Interference with the government at many levels.

• Failure to assist domestic firms in their development.

• Hiring the best local personnel leaving domestic firms disadvantaged.

• Failure to transfer advanced technologies.

• Failure to respect many local customs, laws, and needs.

MNC Complaints about the Host Country

• Limitations placed on profit making.

• Resources are often overpriced.

• Rules are exploited by the host government and companies.

• Restrictions are applied to foreign exchange.

• Failure to meet contract obligations.

Rapid Growth of MNCs: Microeconomic & Political Explanations

Firm-Specific Motivations:

• Vertical integration: stable supply chains.

• Horizontal integration: economies of scale.

• Technological change: improved ability to control operations in other countries.

• Exporting/Importing.

• Licensing: gives local firms right to manufacture their products in exchange for a fee.

• Franchising: the firm provides sales or service strategies in exchange for fees.

Environmental or Structural Motivations:

• Global economic growth.

• Liberalised financial markets.

• Security of investment.

• Liberal trade barriers.

• Maximise shareholder and stakeholder wealth.

Foreign Direct Investment (FDI)

• Foreign Direct Investment (FDI) is an international capital flow undertaken by an MNC.

• FDI can be either:

  • Greenfield - a brand new facility is established in the host country.

  • Brownfield – an existing facility in the host country. Also known as a Merger and Acquisition (M&A).

Reasons for MNCs & FDI

• Three reasons MNCs undertake FDI:

  1. To seek access to new markets;

  2. To grow beyond a small domestic market; and,

  3. To achieve cost and other competitive advantages over competitors.

FDI Inflows by Country (Visualization)

• A world map illustrating FDI inflows by country, with larger countries indicating higher inflows. Examples include:

  • United States: 275.4B

  • China: 136.3B

  • Hong Kong: 104.3B

  • Brazil: 62.7B

  • Sweden: 15.4B

Foreign Direct Investment: Pros and Cons

Pros

• Diversifies investors' portfolios

• Promotes stable long-term lending

• Provides financing to developing countries

• Provides technology to developing countries

Cons

• Not suitable for strategically important industries

• Investors may have less moral attachment

• Unethical access to local markets

A Country’s Economic Openness

Advantages

• Savings are put to more productive uses.

• Risk sharing is beyond what is possible domestically.

• Domestic recessions can be minimized by borrowing.

• Cost of capital is lowered.

Disadvantages

• Sometimes capital is not used wisely.

• Foreign capital may leave quickly and cause financial volatility in the process.

• Difficulty in taxing profits – MNCs shift to avoid.

• Capital control effectiveness decreases.