Multinational Corporation Mechanics: Definitions, Operations, and Types

Jan 04, 2024 By Susan Kelly

An MNC or a multinational corporation is an enterprise with operations extending outside the country of establishment. Not only do they have international operations, but these are enterprises with a truly global economic presence. Normally, around 25 % of their revenue is earned abroad.

Generally, these corporations will have a network of offices, factories, and other facilities in different countries. Meanwhile, their headquarters would oversee the organization's worldwide work. These companies, of many different names--international corporations, stateless, or transnationals--are prominent players in the world economy. In some cases, their financial resources are greater than the budgets of smaller sovereign states.

The definition varies for a multinational corporation. For some, operations in just one foreign country make a company multinational. But others use a stricter criterion: only those with income accounting for about one quarter coming from international sources are counted. Industrialized countries account for most of the direct investing done by multinational corporations in foreign nations. Supporters say they create high-level employment opportunities and provide advanced technology to lacking regions. On the other hand, there is a downside to their presence. Critics say these corporations are powerfully politically involved, take advantage of resources and labor in the developing world at their expense, and destroy domestic jobs.

The ancestry of multinational companies is closely bound up with the history of colonialism. The European Age of Exploration produced some early multinational corporation businesses Frequently established with royal support, they were involved in foreign trade and exploration. The East India Company, founded by the British in 1600 to trade and colonize parts of India, was arguably one of its earliest examples. Other historical examples are the Swedish Africa Company (est. 1649 and the Hudson's Bay Company (founded in 1670), for example. This was instrumental in trade and, to a certain extent, colonial expansion for Great Britain.

Features of Multinational Corporations

Several distinctive features characterize multinational corporations:

  • Global Operations: They often have a widespread presence, conducting business on an international scale.
  • Organizational Size and Influence: These corporations are usually large and influential entities.
  • Multilingual Business Practices: Their operations often encompass multiple languages.
  • Complex Organizational Structures: They typically exhibit intricate business models and organizational frameworks.
  • International Investments: Direct investments in overseas markets are common.
  • Job Creation Abroad: These corporations often create jobs in foreign nations, sometimes offering higher wages than local standards.
  • Pursuit of Business Efficiency: They hope to improve efficiency, reduce production costs, and increase market share.
  • Navigational Challenges: They devote considerable resources to complying with their host countries' various rules and laws.
  • Tax Contributions: They pay taxes in every country where they do business.
  • Financial Reporting Standards: Financial reporting mostly meets International Financial Reporting Standards (IFRS).
  • Controversies: Sometimes, this outsourcing is even charged with unfavorable impact on the economy or environment abroad and negatively influencing social conditions back home. However, it is not always true that multinational corporations have brought the benefits of cross-cultural incorporation across all levels and departments.

4 Types of Multinational Corporations

Multinational corporations can be categorized into four primary organizational structures. The following are the types of multinational corporation:

Decentralized Corporation

This model maintains its base in the home country while having autonomous branches globally. Each branch operates independently, making localized decisions swiftly.

Centralized Global Corporation

A central headquarters, typically located in the home country, oversees domestic and international operations. Major decisions are made by the executive team at the headquarters, with foreign offices reporting back to them.

International Division Model

In this setup, a specific division within the corporation is dedicated to managing all international operations. This model facilitates localized decision-making, although it can present challenges in maintaining a unified corporate brand and consensus.

Transnational Corporation

This type involves a parent company and its subsidiaries, which may operate in home and foreign countries. The parent company sets direction, taking advantage of its resources--such as research and development--in the network it owns under different brands.

Advantages of Multinational Corporation

  • Access to New Markets: One of the major advantages of multinational corporation is that MNC can directly reach local needs by setting up branches in foreign countries. This approach often avoids long-distance shipping costs and creates unattainable new markets through operations restricted to purely domestic activity.
  • Cost-Effective Operations: These companies often set up operations in regions where they can utilize capital more effectively, benefiting from lower wage impacts on their financials compared to their home country.
  • Lower Consumer Prices: By producing goods more economically, multinational corporations can offer lower prices, enhancing global consumer purchasing power.
  • Tax Benefits: Several corporations enjoy lower tax rates in investment-friendly countries that appreciate the employment opportunities they can offer. But one should not forget that this landscape is changing. For example, the European Union announced recently its plans to establish a minimum corporate tax rate of 15 %, effective startling in 2023.
  • Economic Contributions: Direct financial investments in foreign nations and the subsequent job creation in local economies are also significant advantages of multinational corporations.

Challenges Faced by Multinational Corporations

While multinational corporations bring several advantages, they also face various challenges and criticisms:

  • Job Displacement: One major effect of globalization is moving jobs from the corporation's home country into foreign locations. It often also increases unemployment in the home country, leaving workers from outsourced industries at a loose end.
  • Risk of Monopolization: If multinational corporations achieve a monopoly over the production of certain products, consumer prices will rise, and competition will be reduced to a minimum. At worst, innovation itself may be stifled.
  • Environmental Impact: Environmentalists point out that the operations of these corporations can contaminate and destroy our environment. This includes ecological worries and the depletion of local resources, as well.
  • Threat to Local Businesses: Small firms' future is threatened by multinational corporations, which could drive them out of business.
  • Ethical Concerns: Activists frequently charge multinational corporations with bending or circumventing laws for their benefit, highlighting ethical questions.

Motivations Behind Becoming a Multinational Corporation

Multinational corporation business typically aspire to expand their profit margins and growth. By cultivating a global customer base and boosting market share internationally, companies often find the investment in setting up foreign offices worthwhile. Additionally, they may be attracted to favorable tax structures or regulatory environments in other countries.

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