Multinational corporation

Multinational corporation

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A multi national corporation (MNC) or enterprise (MNE), is a corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...

 or an enterprise that manages production
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...

 or delivers services in more than one country. It can also be referred to as an international corporation. The International Labour Organization
International Labour Organization
The International Labour Organization is a specialized agency of the United Nations that deals with labour issues pertaining to international labour standards. Its headquarters are in Geneva, Switzerland. Its secretariat — the people who are employed by it throughout the world — is known as the...

 (ILO) has defined an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries.

Some multi national corporations are very big, with budgets that exceed some nations' GDPs
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....

. Multinational corporations can have a powerful influence in local economies, and even the world economy
World economy
The world economy, or global economy, generally refers to the economy, which is based on economies of all of the world's countries, national economies. Also global economy can be seen as the economy of global society and national economies – as economies of local societies, making the global one....

, and play an important role in international relations
International relations
International relations is the study of relationships between countries, including the roles of states, inter-governmental organizations , international nongovernmental organizations , non-governmental organizations and multinational corporations...

 and globalization
Globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...

.

Market imperfections


It may seem strange that a corporation can decide to do business in a different country, where it does not know the laws, local customs or business practices. Why is it not more efficient to combine assets of value overseas with local factors of production at lower costs by renting or selling them to local investors?

One reason is that the use of the market for coordinating the behaviour of agents located in different countries is less efficient than coordinating them by a multinational enterprise as an institution. The additional costs caused by the entrance in foreign markets are of less interest for the local enterprise. According to Hymer, Kindleberger and Caves, the existence of MNCs is reasoned by structural market imperfections for final products. In Hymer's example, there are considered two firms as monopolists in their own market and isolated from competition by transportation costs and other tariff and non-tariff barriers. If these costs decrease, both are forced to competition; which will reduce their profits. The firms can maximize their joint income by a merger or acquisition, which will lower the competition in the shared market. Due to the transformation of two separated companies into one MNc the pecuniary externalities are going to be internalized. However, this does not mean that there is an improvement for the society.

This could also be the case if there are few substitutes or limited licenses in a foreign market. The consolidation is often established by acquisition, merger or the vertical integration of the potential licensee into overseas manufacturing. This makes it easy for the MNE to enforce price discrimination schemes in various countries. Therefore Hymer considered the emergence of multinational firms as "an (negative) instrument for restraining competition between firms of different nations".

Market imperfections had been considered by Hymer as structural and caused by the deviations from perfect competition in the final product markets. Further reasons are originated from the control of proprietary technology and distribution systems, scale economies, privileged access to inputs and product differentiation. In the absence of these factors, market are fully efficient. The transaction costs theories of MNEs had been developed simultaneously and independently by McManus (1972), Buckley & Casson (1976) Brown (1976) and Hennart (1977, 1982). All these authors claimed that market imperfections are inherent conditions in markets and MNEs are institutions that try to bypass these imperfections. The imperfections in markets are natural as the neoclassical
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

 assumptions like full knowledge and enforcement do not exist in real markets.

Tax competition


Multinational corporations are important factors in processes of globalization
Globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...

. National and local governments often compete against one another to attract MNC facilities, with the expectation of increased tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 revenue, employment, and economic activity. To compete, political entities may offer MNCs incentive
Incentive
In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...

s such as tax breaks, pledges of governmental assistance or subsidized infrastructure, or lax environmental
Environmental law
Environmental law is a complex and interlocking body of treaties, conventions, statutes, regulations, and common law that operates to regulate the interaction of humanity and the natural environment, toward the purpose of reducing the impacts of human activity...

 and labor regulations. These ways of attracting foreign investment may be criticized as a race to the bottom
Race to the bottom
A race to the bottom is a socio-economic concept that is argued to occur between countries as an outcome of regulatory competition, progressive taxation policies and social welfare spending...

, a push towards greater autonomy for corporations
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...

, or both.

On the other hand, economist Jagdish Bhagwati
Jagdish Bhagwati
Jagdish Natwarlal Bhagwati is an Indian-American economist and professor of economics and law at Columbia University. He is well known for his research in international trade and for his advocacy of free trade....

 has argued that in countries with comparatively low labor costs and weak environmental and social protection, multinationals actually bring about a 'race to the top.' While multinationals will certainly see a low tax burden or low labor costs as an element of comparative advantage, Bhagwati disputes the existence of evidence suggesting that MNCs deliberately avail themselves of lax environmental regulation or poor labor standards. As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to adapt production processes in many of their operations to conform to the standards of the most rigorous jurisdiction in which they operate (this tends to be either the USA, Japan, or the EU). As for labor costs, while MNCs clearly pay workers in developing countries far below levels in countries where labor productivity is high (and accordingly, will adopt more labor-intensive production processes), they also tend to pay a premium over local labor rates of 10 to 100 percent. Finally, depending on the nature of the MNC, investment in any country reflects a desire for a medium- to long-term return, as establishing plant, training workers, etc., can be costly. Once established in a jurisdiction, therefore, MNCs are potentially vulnerable to arbitrary government intervention such as expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of licenses, etc. Thus, both the negotiating power of MNCs and the 'race to the bottom' critique may be overstated, while understating the benefits (besides tax revenue) of MNCs becoming established in a jurisdiction.

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 patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....

ed drugs to local competitors
Competition (economics)
Competition in economics is a term that encompasses the notion of individuals and firms striving for a greater share of a market to sell or buy goods and services...

 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 MNCs to make their intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...

 public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 and Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...

, which have viable indigenous market competitors.

Lobbying


Multinational corporate lobbying
Lobbying
Lobbying is the act of attempting to influence decisions made by officials in the government, most often legislators or members of regulatory agencies. Lobbying is done by various people or groups, from private-sector individuals or corporations, fellow legislators or government officials, or...

 is directed at a range of issues of interest to businesses, from tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....

 structures to environmental regulations. There is no unified MNC 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. Corporations lobby tariffs to restrict competition of foreign industries. For every tariff category that one multinational wants to have reduced, there is 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.
Multinational corporations such as Wal-mart
Wal-Mart
Wal-Mart Stores, Inc. , branded as Walmart since 2008 and Wal-Mart before then, is an American public multinational corporation that runs chains of large discount department stores and warehouse stores. The company is the world's 18th largest public corporation, according to the Forbes Global 2000...

 and McDonald's
McDonald's
McDonald's Corporation is the world's largest chain of hamburger fast food restaurants, serving around 64 million customers daily in 119 countries. Headquartered in the United States, the company began in 1940 as a barbecue restaurant operated by the eponymous Richard and Maurice McDonald; in 1948...

 benefit from government zoning
Zoning
Zoning is a device of land use planning used by local governments in most developed countries. The word is derived from the practice of designating permitted uses of land based on mapped zones which separate one set of land uses from another...

 laws, to create barriers to entry
Barriers to entry
In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies...

.

Many industries such as General Electric
General Electric
General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...

 and Boeing
Boeing
The Boeing Company is an American multinational aerospace and defense corporation, founded in 1916 by William E. Boeing in Seattle, Washington. Boeing has expanded over the years, merging with McDonnell Douglas in 1997. Boeing Corporate headquarters has been in Chicago, Illinois since 2001...

 lobby the government to receive subsidies to preserve their monopoly.

Patents


Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas
Adidas
Adidas AG is a German sports apparel manufacturer and parent company of the Adidas Group, which consists of the Reebok sportswear company, TaylorMade-Adidas golf company , and Rockport...

 holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft
Microsoft
Microsoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...

 benefits from software patents. The pharmaceutical companies lobby international agreements to enforce patent laws on others.

Culture


Culture is the set of values and beliefs shared by a group. This includes groups as small as social groups, and as large as a whole country. Since multinational companies operate in more than one country, they are exposed to many different cultures. Each culture has its own beliefs and values. To be successful in these foreign countries, multinational companies must have a global mindset, and be able to recognize and adapt to the differences.

Different methods of communication across different cultures


Communication is the process of conveying messages. ‘’Successful communication in the international business environment requires not only an understanding of language, but also the nonverbal aspects of communication that are part of any community’’ (Ferraro, pg 73). Different countries are going to have different ways of communicating. If certain executives of a company want to do business with people from different countries, they need to understand how to communicate clearly with them, without mistakenly doing something wrong. The most obvious way of communicating with different people is with words, and therefore, some executives learn how to speak the language spoken in the foreign country. This act can show that the executive is truly dedicated to the work, and that he is willing to do anything to complete the deal.
Greeting rituals are sometimes overlooked, but they shouldn’t be because they are more important in some parts of the world than others. ‘’In Japan, failure to show respect by exchanging business cards can get negotiations off to a very bad start’’(Schneider and Barsoux, pg 26) . ‘’While in France, greetings are highly personal and individual…as workers expect to be greeted individually’’(Schneider and Barsoux, pg 26)
Another form of communicating is through hand gestures. Often goes unnoticed, hand gestures are as important as words themselves because they too have meaning behind them. ‘’ Cultures located in southern Europe and the Middle East employ a wide variety of gestures frequently with purposefulness’’(Ferraro, pg 79). Some hand gestures have different meanings in different countries. ‘’For example, the hand gesture where the index finger and thumb touch and create a ‘zero’ can mean different things in different places. In the US and UK, it means ok. In Russia it means zero. In Japan it refers to money. While in Brazil, it is viewed as an insult.’’lllll
Time is another communication system. ‘’ In western cultures, people like to get to the point of the matter in business meetings and conversations. However, in other countries like Saudi Arabia and Russia, it is customary to converse first about unrelated matters before starting the business discussions for which the meeting was arranged. Barging straight into the business issue, without informal small talk at the beginning, may make them very uncomfortable and may ruin the negotiations.’’(Miroshnik pg 12)

Seven Methods of managing across cultures


(1) Hierarchy:
"This refers to the way people view how much they defer to people in authority, whether they feel entitled to express themselves and how empowered they feel to take the initiative on matters before them. For example, Canada believes in egalitarianism, while nations like India, Japan, China, Germany, Mexico are highly hierarchical." (Schachter, pg b15)

(2) Group focus:
“This refers to whether people consider that accomplishment and responsibility are achieved through individual or group effort, and whether they tend to identify themselves as individuals or members of a group. Canadians are individualists while Brazilians, Chinese, Mexicans and Japanese are group-focused.”(Schachter, pg b15)

(3) Relationships:
“This is about whether trust and relationships are viewed as a prerequisite for working with someone. Canadians focus primarily on the transaction, rushing to deal, while the Chinese, Italians, and Spaniards, for example, focus on nurturing relationships first.”(Schachter, pg b15)

(4) Communication styles:
“This covers matters like verbal and non-verbal expression, how directly or indirectly people speak, and whether brevity or detail is valued in communication. Israel, Denmark, Germany and Sweden use a direct style, while indirect communication styles are the norm in China, United Arab Emirates, and Japan (Schachter, pg b15)”

(5) Time orientation:
“This refers to the degree to which people believe adhere to schedules.
United States, Germany, Denmark and Switzerland follow schedules while countries like Saudi Arabia, Spain, Thailand, and the United Arab Emirates are unconcerned about schedules and deadlines.” (Schachter, pg b15)

(6) Change tolerance:
“How people are comfortable with change, risk-taking and innovation. Along with Australians, Canadians are the most tolerant of change, while Saudi Arabia, Indonesia, Mexico and Russia are change-averse.” (Schachter, pg b15)

(7) Motivation: work/life balance:
“This characteristic examines whether people work to live or live to work. Canadians are driven by work and the status it provides – although not as much as people in China, Japan, and the U.S. – while in Norway, Saudi Arabia, United Arab Emirates, India and Mexico, family-work balance is treasured.” (Schachter, pg b15)

Advertisement in different countries


Another way for multinational companies to prove that they understand the specific market is through advertisement. Advertising products in different countries requires the companies to use specific methods of advertisement that is allowed by the tradition and culture of the country. For example, in western countries, sex appeal is used a lot in advertising many different products. It is used to grab attention of customers and is used to boost sales. This strategy however won’t be successful in countries that are very religious like most Arabic countries where the dominant religion is Islam. In those countries people, especially girls, are mostly covered and so won’t be wearing very revealing clothes. Therefore, ads that use sex appeal, like girls in bikinis for example, won’t be used. One company that used proper advertisement was Procter and Gamble. Companies adjust advertisements to the nationality of their clients. The Japanese prefers to buy shampoo which uses Japanese girls in its advertisements. Russian housewives prefer washing powder that uses Russian housewives instead of American housewives in its advertisements.(Miroshnik, pg 8)

Companies that adapted to foreign market successfully


Just because a large company is very successful in one country, it doesn’t mean that it will be successful in another country, especially if that country has a completely different culture. McDonalds is one of the largest companies in the world. However, it has adapted to the different cultures to make sure it is successful. In France, ‘McDonald's added tablecloths and candles to improve the ambience at some eateries and introduced waiter service at certain outlets because they found that most Europeans prefer leisurely rather than fast food dining’ (Stern, pg A07). In addition to space, McDonald’s has changed its menus from one country to another, offering food that locals usually eat: in France, a burger has mustard and ciabatta rolls instead of regular buns. In Japan, fried egg burgers were offered.

Companies that failed to adapt to foreign culture


In many occasions, a lot of the larger companies think that because they are a large corporation, they can succeed anywhere without changing anything. This tactic proved wrong, as many companies have failed and were forced to shutdown foreign branches. The biggest example was “When Wal-Mart expanded in Germany in 1997, it hoped that Germans, like Americans, would scoop up its low-priced items. By July 2006, Wal-Mart had closed its German operations and absorbed $1 billion in losses. This was because they didn’t adjust to the German culture where people preferred frequently specialty stores, not one-stop shops (Stern pg A07)” . Another example is Daimler AG, “it failed in its acquisition of Chrysler because its disciplined, buttoned-down executives could never meld with their more freewheeling American counterparts.” (Schachter, pg b15) .

Transnational Corporations


A Transnational Corporation (TNC) differs from a traditional MNC in that it does not identify itself with one national home. Whilst traditional MNCs are national companies with foreign subsidiaries, TNCs spread out their operations in many countries sustaining high levels of local responsiveness. An example of a TNC is Nestlé who employ senior executives from many countries and try to make decisions from a global perspective rather than from one centralised headquarters. However, the terms TNC and MNC are often used interchangeably.
A study of Dutch multi-national corporations showed that foreign expansions best unfold sequentionally, consistent with the notions of organizational learning. Firms ought to diversify first into culturally (and less so geographically) nearby countries before they venture farther away. They do so more successfully if they also follow a learning process by mode ( e.g, greenfield based expansion versus acquisitions or equity joint ventures) or by level of ownership.

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 are 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 and Amazon make it easier for the micro-multinationals to reach potential customers in other countries.

Service sector micro-multinationals, like Facebook
Facebook
Facebook is a social networking service and website launched in February 2004, operated and privately owned by Facebook, Inc. , Facebook has more than 800 million active users. Users must register before using the site, after which they may create a personal profile, add other users as...

, 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.

Low cost SaaS (Software As A Service) suites make it easier for these companies to operate without a physical office.

Hal Varian
Hal Varian
Hal Ronald Varian is an economist specializing in microeconomics and information economics. He is the Chief Economist at Google and he holds the title of emeritus professor at the University of California, Berkeley where he was founding dean of the School of Information...

, Chief Economist at Google and a professor of information economics at U.C. Berkeley
University of California, Berkeley
The University of California, Berkeley , is a teaching and research university established in 1868 and located in Berkeley, California, USA...

, said in April 2010, "Immigration today, thanks to the Web, means something very different than it used to mean. There's no longer a brain drain but brain circulation. People now doing startups understand what opportunities are available to them around the world and work to harness it from a distance rather than move people from one place to another."

Criticism of multinationals


The rapid rise of multinational corporations has been a topic of concern among intellectual
Intellectual
An intellectual is a person who uses intelligence and critical or analytical reasoning in either a professional or a personal capacity.- Terminology and endeavours :"Intellectual" can denote four types of persons:...

s, activists and laymen who have seen it as a threat of such basic civil rights
Civil rights
Civil and political rights are a class of rights that protect individuals' freedom from unwarranted infringement by governments and private organizations, and ensure one's ability to participate in the civil and political life of the state without discrimination or repression.Civil rights include...

 as privacy
Privacy
Privacy is the ability of an individual or group to seclude themselves or information about themselves and thereby reveal themselves selectively...

. They have pointed out that multinationals create false needs in consumers
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...

 and have had a long history of interference in the policies of sovereign
Sovereign
A sovereign is the supreme lawmaking authority within its jurisdiction.Sovereign may also refer to:*Monarch, the sovereign of a monarchy*Sovereign Bank, banking institution in the United States*Sovereign...

 nation states. Evidence supporting this belief includes invasive advertising (such as billboards, television ads, adware
Adware
Adware, or advertising-supported software, is any software package which automatically plays, displays, or downloads advertisements to a computer. These advertisements can be in the form of a pop-up. They may also be in the user interface of the software or on a screen presented to the user during...

, spam
Spam (electronic)
Spam is the use of electronic messaging systems to send unsolicited bulk messages indiscriminately...

, telemarketing
Telemarketing
Telemarketing is a method of direct marketing in which a salesperson solicits prospective customers to buy products or services, either over the phone or through a subsequent face to face or Web conferencing appointment scheduled during the call.Telemarketing can also include recorded sales pitches...

, child-targeted advertising, guerrilla marketing
Guerrilla marketing
Guerrilla warfare is about waging small intermittent attacks on different territories of the opponent with the aim of harassing and demoralising the opponent and eventually securing permanent footholds....

), massive corporate campaign contributions in democratic elections, and endless global news stories about corporate corruption (Martha Stewart
Martha Stewart
Martha Stewart is an American business magnate, author, magazine publisher, and television personality. As founder of Martha Stewart Living Omnimedia, she has gained success through a variety of business ventures, encompassing publishing, broadcasting, and merchandising...

 and Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...

, for example). Anti-corporate protesters suggest that corporations answer only to shareholders, giving human rights
Human rights
Human rights are "commonly understood as inalienable fundamental rights to which a person is inherently entitled simply because she or he is a human being." Human rights are thus conceived as universal and egalitarian . These rights may exist as natural rights or as legal rights, in both national...

 and other issues almost no consideration.
Films and books critical of multinationals include Surplus: Terrorized into Being Consumers, The Corporation, The Shock Doctrine
The Shock Doctrine
The Shock Doctrine: The Rise of Disaster Capitalism is a 2007 book by Canadian author Naomi Klein, and is the basis of a 2009 documentary by the same name....

, Downsize This, Zeitgeist: The Movie and others.

External links