A company that operates in its home country, as well as in other countries around the world
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A multinational corporation (MNC) is a company that operates in its home country, as well as in other countries around the world. It maintains a central office located in one country, which coordinates the management of all of its other offices, such as administrative branches or factories.
It isn’t enough to call a company that exports its products to more than one country a multinational company. The multinational needs to maintain actual business operations in other countries and must make a foreign direct investment there.
Reasons for Being a Multinational Corporation
There are various reasons why companies want to become multinational corporations. Here are some of the most common motivations:
1. Access to lower production costs
Setting up production in other countries, especially in developing economies, usually translates to spending significantly less on production costs. Though outsourcing is a way of achieving the objective, setting up manufacturing plants in other countries may be even more cost-efficient.
Due to their large size, MNCs can take advantage of economies of scale and grow their global brand. The growth is done through strategic manufacturing/service placement, which allows the corporation to take advantage of undervalued services across the globe, more efficient and inexpensive supply chains, and advanced technological/R&D capacity.
2. Proximity to target international markets
It is beneficial to set up business in countries where the target consumer market of a company is located. Doing so helps reduce transport costs and gives multinational corporations easier access to consumer feedback and information, as well as to consumer intelligence.
International brand recognition makes the transition from different countries and their respective markets easier and decreases per capita marketing costs as the same brand vision can be applied worldwide.
3. Access to a larger talent pool
Multinational corporations are also known to hire the best talent from around the world, which allows management to provide the best technical knowledge and innovative thinking to its product or service.
4. Avoidance of tariffs
When a company produces or manufactures its products in another country where they also sell their products, they are exempt from quotas and tariffs.
Models of MNCs
The following are the different models of multinational corporations:
In the centralized model, companies have an executive headquarters in their home country and then build various manufacturing plants and production facilities in other countries. The executive headquarters directly manages the offices and facilities in other countries.
The regionalized model states that a company keeps its headquarters in one country and supervises a collection of offices that are located in other countries. Unlike the centralized model, the regionalized model includes subsidiaries and affiliates that all report to the regional headquarters, which reports to the central headquarters.
In the multinational model, a parent company operates in the home country and puts up subsidiaries in different countries. The difference from the previous two models is that the subsidiaries and affiliates are generally allowed more independence in their operations.
Advantages of Being a Multinational Corporation
There are many benefits of being a multinational corporation including:
In terms of efficiency, multinational companies are able to reach their target markets more easily because they manufacture in the countries where the target markets are. Also, they can easily access raw materials and cheaper labor costs.
In terms of development, multinational corporations generally pay better than domestic companies, making them more attractive to the local labor force. They are usually favored by the local government because of the substantial amount of local taxes they pay, which helps boost the country’s economy.
In terms of employment, multinational corporations hire local workers who know the local culture and are thus able to give helpful insider feedback on what the locals want.
As multinational corporations employ both locals and foreign workers, they are able to come up with products that are more creative and innovative.
Disadvantages of Being a Multinational Corporation
Despite the benefits of being a multinational corporation, there are also several disadvantages as well:
1. Increased legal burden
A multinational corporation will face increased legal complexity due to operating in multiple jurisdictions. Different countries have different laws around corporate structure, torts, contracts, the environment and employment, to name a few. The MNC requires a local legal presence to help navigate these complexities.
2. Increased tax compliance
An MNC will also encounter different taxation regimes by operating in many different countries. There may be different rules around sales or value-added tax, tax deductions (e.g., depreciation), the ability to use net operating losses to offset future taxable income, not to mention different tax rates.
3. Public relations
A multinational corporation may be accused of sending or creating jobs outside of the corporation’s home country, thereby resulting in negative public relations and political rhetoric in the home country. Conversely, the MNC may be accused of exploiting local workers, resources and regulations in the foreign country as well.
4. Political instability
A multinational corporation may experience political instability depending on where the MNC has offices and resources. Most MNCs have politically stable and economically developed home countries but operate in less developed countries. Sometimes the less developed country will experience political turmoil, including local corruption, which can impact the MNC’s operations.
Foreign Direct Investment
Foreign direct investments are prevalent within multinational corporations. The investments occur when an investor or company from one country makes an investment outside the country of operation.
Foreign investments most often occur when a foreign business is established or bought outright. It can be distinguished from the purchase of an international portfolio that only contains equities of the company, rather than purchasing more direct control.
Examples of Multinational Corporations
The following is a brief list of well-known multinational corporations:
Proctor & Gamble
Thank you for reading CFI’s guide on Multinational Corporation (MNC). To keep learning and advancing your career, the additional CFI resources below will be useful:
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