Everything about Multinational Corporation totally explained
Multinational corporation (or
transnational corporation) (MNC/TNC) is a
corporation or enterprise that manages production establishments or delivers services in at least two
countries. Very large multinationals have budgets that exceed those of many countries. Multinational corporations can have a powerful influence in
international relations and local economies. Multinational corporations play an important role in
globalization; some argue that a new form of MNC is evolving in response to globalization: the
'globally integrated enterprise'.
Incentive
There are many reasons for multi-national enterprises to locate to other countries. One reason is to escape trade tariffs. The decision made by Toyota to produce in the UK was almost certainly to gain access to the European markets without having to pay tariffs. Others may be seeking the lowest cost location for their production facilities or be attracted by skilled or cheap labour. Other businesses may want to reach foreign markets more effectively; for example Marks & Spencer, Laura Ashley and The Body Shop. Avoiding transport cost isn't really an incentive because transport on a large scale is relatively cheap. Only heavy or large product may be produced in the market they're intended to sell in, products such as building materials.
Ethical issues
Many MNC's are large in relation to the national income of the countries they're located in. This means that it isn't as easy for the governments to enforce laws on the MNC's. Generally speaking, governments want investment from these MNC's because they generate jobs and incomes and may lead to people becoming skilled. Technology transfer is also an incentive. In a highly competitive world, companies seek to reduce their costs as much as possible. The prospect of a foreign company setting up in a country where labour is cheap is attractive both for the company and the government.
Multinational corporate structure
Multinational corporations can be divided into three broad groups according to the configuration of their production facilities:
- Horizontally integrated multinational corporations manage production establishments located in different countries to produce the same or similar products. (example: McDonalds)
- Vertically integrated multinational corporations manage production establishment in certain country/countries to produce products that serve as input to its production establishments in other country/countries. (example: Adidas)
- Diversified multinational corporations manage production establishments located in different countries that are neither horizontally nor vertically nor straight, nor non-straight integrated. (example: Microsoft)
Others argue that a key feature of the multinational is the inclusion of
back office functions in each of the countries in which they operate. The
globally integrated enterprise, which some see as the next development in the evolution of the multinational, does away with this requirement.
International power
Large multinational corporations can have a powerful influence in
international relations, given their large economic influence in politicians' representative districts, as well as their extensive financial resources available for
public relations and political
lobbying.
Tax Competition
Multinationals have played an important role in
globalization. Countries and sometimes subnational regions must compete against one another for the establishment of MNC facilities, and the subsequent
tax revenue, employment, and economic activity. To compete, countries and regional political districts offer
incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax
environmental and
labor standards. This process of becoming more attractive to
foreign investment can be characterized as a
race to the bottom, a push towards greater freedom for corporate bodies, or both.
Market Withdrawal
Because of their size, multinationals can have a significant impact on
government policy, primarily through the threat of market withdrawal. For example, in an effort to reduce health care costs, some countries have tried to force
pharmaceutical companies to license their
patented drugs to local
competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force companies to make their
intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantage and withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been most successful in this type of confrontation with multinational corporations are large countries such as
India and
Brazil, which have viable indigenous market competitors.
Lobbying
Multinational corporate lobbying is directed at a range of business concerns, from
tariff structures to
environmental regulations. There is no unified multinational perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. For every tariff category that one multinational wants to have reduced, there's another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones.Says Ely Oliveira: Manager Director of the MCT/IR This is very serious and is very hard and takes a lotof work for the owner.
Government Power
In addition to efforts by multinational corporations to affect governments, there's much government action intended to affect corporate behavior. The threat of
nationalization (forcing a company to sell its local assets to the government or to other local nationals) or changes in local business laws and regulations can limit a multinational's power.
Micro-Multinationals
Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers. These multinationals start operating in different countries from the very early stages. These companies are being called micro-multinationals. What differentiates micro-multinationals from the large MNCs is the fact that they're small businesses. Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries. Internet tools like Google, Yahoo, MSN, Ebay, Skype and Amazon make it easier for the micro-multinationals to reach potential customers in other countries.
Service sector Micro Multinationals, like Indigo Design & Engineering Associates Pvt. Ltd., Facebook, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities
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