A multinational corporation (MNC) is a company that operates businesses in at least one country other than its home country, generating revenue outside of its home base.
The East India Company, established in 1600, was an early example of a multinational corporation. This British enterprise participated in international trade and exploration and operated trading posts in India. Other historic examples include the Swedish Africa Company, founded in 1649, and the Hudson’s Bay Company, founded in 1670.
Key Takeaways
- Diversified Markets: Multinational corporations conduct business in two or more countries.
- Economic Impact: An MNC can have a positive economic effect on the countries where it operates.
- Portfolio Diversification: Investing in a multinational corporation is a way to add international exposure to an investment portfolio.
The Mechanics of a Multinational Corporation
A multinational corporation has business activities in at least two countries. Some define any company with a foreign branch as a multinational corporation. Others reserve this term for companies that derive at least a quarter of their revenue outside their home country.
Expanding internationally offers new markets and sales opportunities. Companies can optimize costs and efficiency by operating where their capital is used most effectively. If an MNC can produce high-quality goods at lower costs, they can reduce prices, enhancing consumers’ purchasing power worldwide. Additionally, MNCs may take advantage of lower tax rates in countries eager for direct investments.
Critics of multinational companies point out the risk of them becoming monopolies, which can elevate prices, stifle competition, and inhibit innovation. They also highlight the potential negative impacts on small, local businesses and accused breaches of ethical standards to advance business agendas.
A downside of globalization is the shift of domestic jobs to overseas, potentially increasing unemployment in the home country and making it challenging for displaced workers to find new employment.
Characteristics of a Multinational Corporation
- Global Presence: Operations and sales in multiple countries.
- Multilingual Operations: Conduct business in various languages.
- Complex Structure: Intricate business models and structures.
- Foreign Investments: Direct investments in countries abroad.
- Job Creation: Employment opportunities in international markets.
- Efficiency and Market Share: Enhanced efficiencies, lower production costs, broader market share.
- Tax Obligations: Pays taxes in countries of operation.
- Financial Reporting: Adhere to International Financial Reporting Standards (IFRS).
In 2021, U.S. multinational corporations employed 43.3 million workers globally.
Types of Multinational Corporations
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Decentralized Corporation: Maintains a home country presence with autonomous offices globally, facilitating faster and more independent decision-making.
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Centralized Global Corporation: Operates with a central headquarters overseeing global and domestic operations, requiring major activities to be approved by headquarters personnel.
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International Division: Manages all international operations, aiding decision-making in local and foreign markets. However, independence may pose challenges in achieving overall corporate consensus.
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Transnational Corporation: A parent company supervises subsidiaries in foreign countries. Subsidiaries utilize the parent’s resources, such as R&D, while the parent oversees domestic and international operations.
Examples of multinational corporations include IBM, Berkshire Hathaway, Apple, Microsoft, Amazon, and Walmart. Nestlé S.A. exemplifies a transnational corporation, managing business beyond its headquarters with subsidiaries like Nespresso.
Defining a Multinational Corporation
A multinational corporation maintains business operations in two or more countries. Management typically resides in a central office headquartered in the home country. Merely exporting goods abroad doesn’t qualify as multinational operations.
Motivations for Becoming Multinational
Businesses aim to increase profits and growth. By tapping into a global customer base and expanding market share abroad, the benefits often justify the expenses and efforts of international expansion. Companies might also capitalize on favorable tax schemes or regulatory environments found internationally.
Risks Faced by Multinational Corporations
MNCs face various risks, including regulatory or legal challenges, political instability, cultural sensitivities, crime, violence, and currency exchange fluctuations.
Conclusion
Multinational corporations operate or establish offices in multiple countries. One of the earliest was established in 1600. Today, corporations like IBM, Apple, and Microsoft serve as prominent examples of these global entities.
Related Terms: globalization, monopoly, foreign direct investment, international financial reporting standards, political risk
References
- The East India Company. “History”.
- African American Registry. “The Swedish Africa Company is Formed”.
- Hudson’s Bay Company. “About HBC”.
- U.C. Berkeley. “Do Multinational Corporations Exploit Foreign Workers? Q&A with David Levine”.
- U.S. Bureau of Economic Analysis. “Activities of U.S. Multinational Enterprises (MNEs)”.
- Insider Monkey. “20 Biggest Multinational Companies Headquartered in the US”.
- Nestle. “About Us”.
- Nestle. “Nespresso”.
