What is a Multinational Corporation?

When we split the word ‘Multinational’ into two, ‘Multi’ and ‘National,’ it explains the concept. It means a multinational corporation. When a company operates its business and owns assets in two or more countries, it becomes a Multinational Corporation.

What is a Multinational Corporation?

A Multinational Corporation or MNC represents a company that operates its business in more than one country. It is generally headquartered in its home country, which works as a center of global management. It may also own assets and investments and generate significant revenue through these corporations. It is a good way of expanding a business and giving it a global presence.

Many companies prefer to operate these corporations in developed countries. One of the reasons is that these countries are technologically advanced, giving businesses an excellent opportunity to expand and better produce goods and services. Developed countries may also have a high-skilled workforce, benefiting the company. 

What are the Criteria for an MNC Company?

Looking at the different definitions given by various authorities, an MNC can be interpreted in multiple ways. Some would say that it should earn at least 25% of its revenue through business operations in other countries. At the same time, others say that a company must own an operational foreign branch to be considered an MNC.

Specific criteria or characteristics can designate a company as a multinational. They are:

  • An MNC has a global presence. This means that apart from being operational in its home country, it has business expanded globally into other countries. 
  • Most MNCs are large and complex regarding technology, production, capital, and people (employees).
  • There is a centralized control system. It is generally based in the company’s home country and manages the control and operations of its global business. 
  • There are various objectives behind making a business multinational, like gaining access to multiple markets and advanced technology. Other goals may include an inexpensive or high-skilled workforce. 
  • A Multinational Corporation has transactions in multiple currencies. A company making transactions in a single currency cannot be considered multinational. 

Just selling or purchasing goods and services in different countries or making international transactions does not make a corporate company multinational. There is a broader scope of an MNC than just trading. 

How Do Multinational Companies Operate?

A significant similarity amongst all MNCs is that they have business in more than one country. Operating an MNC depends upon the type of industry the company is in and the corporation’s objectives. However, the conduct is somewhat similar if we look at how the MNCs function. 

A parent company incorporated in its home country becomes a multinational by opening subsidiary branches in different countries. The management of these subsidiaries is partially or wholly centralized to the parent company. The question here arises, under whose jurisdiction does the subsidiary operate. Is it the home country or the country in which the subsidiary is functional?

According to international law, all subsidiaries are regulated by the country’s laws into which it is incorporated. Generally, the parent company is contained in the home country, so it follows the regulations laid down by the home country’s government regarding the conduct of MNCs. However, the country in which the subsidiary is located can influence its business conduct. 

Many countries have laid down laws regarding the operations of MNCs in their country. MNCs have to abide by such rules and cannot ignore them. 

Which of the Following Statements about Multinational Corporations is True?

  • An MNC subsidiary is entirely managed by its parent company.
  • A business that buys or sells goods in the international market can also be termed an MNC.
  • A Multinational Corporation must own assets and investments in two or more countries and have an operational business.

After reading this article, one will be able to identify the false statements from the above three. The first two statements are false about the MNC, and it is only the third statement that is true. It will get more evident as you continue reading the article. 

What are the Skills Required for MNC Companies?

Since Multinational Corporation is dynamic, it requires a workforce that is also dynamic and can keep up with the ever-changing environment of the business. Also, an MNC’s operations are influenced by many risks due to global exposure. These may include political, environmental, and economic risks. So, working at an MNC provides a person with a skill set to cope with such threats.

Apart from the skills required to work in a particular department in a corporation, people must have special skills that are a prerequisite to working in a dynamic environment. Some of these are:

  • Effective communication skills.
  • The ability to adapt to changes and handle risks.
  • Able to work with a team and have good collaborative skills.
  • Able to manage time with the tasks at hand.
  • Excellent interpersonal and problem-solving skills.

All these skills will help a person to be able to work more efficiently in an MNC.

What are the Types of Multinational Companies?

Multinational companies can be divided into four major categories. These are — Centralized, Decentralized, International, and Transnational. The difference between these categories is not very vast. 

  • In Centralized Corporation, the decisions about the management of subsidiaries are in the hands of the management team at the headquarters. The headquarters is generally the parent company in the home country, where the high-level officials, like the CEO and the board of directors, are.
  • Contrary to Centralized Corporation, a Decentralized Corporation enjoys decentralized decision-making power free from the influence of the central management structure in business operations.
  • An International Company’s operations follow the technology and strategies of the Research and Development department set in the headquarters. Such departments are kept separate from the ones working for the domestic operations.
  • A Transnational Company is a Multinational Company that aims to find a middle ground where it can cater to the needs of the domestic market and has an efficient management control system. It is more of a hybrid of the above three types of MNCs, where the parent company has a limited say in managing its transnational enterprise. 

What are the Top 10 MNC Companies?

Many renowned magazines and institutions create lists of the Top Multinational Companies. These lists can be based on different criteria, like market capitalization, sales, profit, etc. According to Forbes magazine, the following is the list of Top 10 Multinational Performers in 2021.

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  1. ICBC
  2. JP Morgan Chase
  3. Berkshire Hathaway
  4. China Construction Bank
  5. Saudi Aramco
  6. Apple
  7. Bank Of America
  8. Ping An Insurance Group
  9. Agricultural Bank of China
  10. Amazon

These companies lead the Forbes Global 2000 report, released in 2021.

In What Ways is an MNC Different From other Companies?

A Multinational Corporation has a broader scope as it has a global presence, which other categories of companies may not have. While a typical company may focus on the domestic market, where it is serviceable, an MNC’s approach is expanded to foreign markets. The transactions made by an MNC are in foreign exchange; a domestic company’s transactions are generally in domestic currency only.

An MNC is a much more significant concept than any other type of company, like domestic companies. The above are some of the considerable differences between the two. There are other distinguishing features as well. An MNC manufactures goods and services at subsidiaries based in different countries, while a domestic company has manufacturing units set up only in the home country.

Another difference is that a domestic company may have fewer functional departments than an MNC because the latter is operational much larger than the former and requires more strategic departments and a workforce. Even if a company sells goods or services in countries other than its home country, it cannot be termed multinational. 

What are the Advantages and Disadvantages of Multinationals?

Multinational Corporations can help a company give their business a global presence and expand it to a much larger scale. It expedited customer reach, production, sales, and hence profit. However, it also exposes businesses to many risks due to different countries’ political, economic, and social influences.

A company becomes multinational and approaches countries where the production costs of the goods and services are cheaper than its home country. This could be due to cheap labor, raw materials, advanced technology, and more. It may also get better quality raw materials and a more skilled workforce in other countries. Some countries offer MNCs unique benefits, like tax rebates, as they bring job opportunities and investment to that country.

However, some countries have very rigid regulations regarding the operations of MNCs. Such corporations bring competition to the already existing industries in the host country. This causes monopoly threats to domestic companies, and tiny and local businesses. Also, these corporations use resources of the host country, which can also cause a threat to the environment. 

What Challenges Do Multinational Companies Face in Developing Countries?

As beneficial as it can be for MNCs to operate their business in developing countries, it can be equally challenging. As much as they are open to foreign direct investment, developing countries also impose restrictions on the entry and operations of such corporations. Like investment restrictions, restricted access to specific industries, high import taxes, etc. 

Many countries, like India, have reserved specific industries for domestic companies only, which has restricted corporations from entering such markets. If not entirely prohibited, governments have set a bar to the level of investment that international companies can make.

Generally, in developing countries, the purchasing power of the citizens is less. Therefore, MNCs cannot meet the sales target, even if the product is cheap and increased. Another challenge they may face is the infrastructure, which is generally poor in developing countries. Due to a mediocre transportation system, distribution costs may also add to unnecessary expenses. 

Daniel Smith

Daniel Smith

Daniel Smith is an experienced economist and financial analyst from Utah. He has been in finance for nearly two decades, having worked as a senior analyst for Wells Fargo Bank for 19 years. After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management. At Nimblefreelancer.com, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification. Read more on Daniel Smith's biography page. Contact Daniel: daniel@nimblefreelancer.com

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