Analyzing Multinational Corporations

Transnational trade has been around for ages. Over time, global trade has seen a steady rise. Globalization is a clear sign of this growth in global business. Good relations between countries have played a big role in making globalization happen. Multinational corporations (MNCs) are the main players in globalization. These are companies with operations in one or more countries besides their home country. Usually, their headquarters are in their home country, but they might also have smaller offices in the countries they operate in. A company is considered multinational if at least a quarter of its profit comes from foreign countries. There are about 82,000 multinational corporations worldwide. Many theories about their origins, development, and classification exist. This essay aims to analyze these multinational companies.

Multinational companies make goods and offer services both in their home country and abroad. A firm becomes multinational when its parent company has more than 10% investment in another company in a different country, known as a subsidiary (Costa et al. 2015, P381-400). This investment is called foreign direct investment (FDI). MNCs might produce the same products in all branches or offer different products, depending on their reasons and strategies for going international. Internationalization is the process by which firms get more involved in transferring products, services, or resources outside their home country and participating in transnational trade. FDI is a key way to internationalize and is one of the fastest-growing economic activities globally.

Classification of MNCs

Studying transnational trade is complex. So, it’s important to classify MNCs into different types. There are two main reasons for classification; it reduces the complexity of multinational organizations into a manageable number of characteristics, making it easier to understand them. Secondly, it helps define the best terms for multinational companies. Different terms are used to describe MNCs, and while they might seem similar, they have subtle differences. Hence, we need to distinguish different types of MNCs and specify the terms used to refer to them. Classification is often based on management mindset, performance, and structural formation.

Management Mindset

Based on management mindset, MNCs are categorized into four types: ethnocentric, polycentric, regiocentric, and geocentric (Cox, Zeenobiyah & Chris 2014. P1-22).

• Ethnocentric MNCs are home-country oriented. They have centralized management where the headquarters make all decisions. Both parent and subsidiary company staff are hired from the home country (Cox, Zeenobiyah & Chris 2014, P1-22). These MNCs have better coordination between parent and subsidiary companies, promoting the company's culture in the host country. However, they may lack the host government’s support, affecting performance.
• Polycentric MNCs are host-country oriented. Subsidiaries are treated as independent companies with management policies adapted to the parent company's settings. Local employees formulate strategies and guidelines for the affiliate company (Fatehi, Kamal & Fariborz 2014, P321-333). The headquarters oversee operations but don’t micromanage. Unlike ethnocentric MNCs, polycentric ones lack proper coordination between the parent and subsidiary companies. However, they benefit from better productivity due to employees’ understanding of the local market and culture (Fatehi, Kamal & Fariborz 2014, P321-333). They also get host government support, increasing their chances of success.
• Regiocentric MNCs have decentralized management (Cox, Zeenobiyah & Chris 2014, P1-22). The management of subsidiaries operates independently from the headquarters. Employees are hired from countries within the same geographical region as the subsidiary. This type utilizes a broader pool of managers, unlike ethnocentric MNCs (Fatehi, Kamal & Fariborz 2014, P321-333), leading to higher profits. However, managers may neglect global objectives, impacting the entire enterprise.
• Geocentric MNCs, or world-oriented companies, have centralized management like ethnocentric ones, but they recruit staff internationally (Cox, Zeenobiyah & Chris 2014, P1-22). They maximize profits by employing experienced global business professionals (Fatehi & Ghadar 2014, P1-22). However, they incur high recruitment and relocation costs and need to hire agencies to find suitable employees, adding extra costs.

Performance

Based on performance, MNCs are categorized into multi-domestic, international, transnational, and global (Swoboda, Stefan & Dirk 2014, P319-336).

• Multi-domestic MNCs use localized marketing strategies, tailoring products to fit different national conditions (Irina 2014, P74-77). They have decentralized management, allowing affiliate managers to make independent decisions. They may get host government support and face minimal resistance during nationalism periods. However, they incur high costs researching market needs and designing marketing strategies.
• International MNCs join with foreign firms to work together, importing raw materials and exporting finished products to subsidiaries (Swoboda, Stefan & Dirk 2014, P319-336). They don’t have production facilities in host countries and have decentralized management. They enjoy a diversified market and constant income flow without the cost of building offices abroad. However, they are susceptible to nationalism and international marketing misunderstandings.
• Transnational MNCs own production facilities in foreign countries and make foreign direct investments. They have a decentralized structure, reducing manufacturing costs by distributing production where resources are available (Swoboda, Stefan & Dirk 2014, P319-336). They face challenges like poor coordination, political situations, language barriers, and cultural differences.
• Global MNCs have centralized management and own facilities in multiple countries under one headquarters. They see the world as one big market, producing similar products or branding them slightly to fit local tastes (Irina 2014, P74-77). They benefit from economies of scale but face high communication and coordination costs.

Structural Formation

Structurally, MNCs are categorized into horizontally and vertically integrated firms (Swoboda, Stefan & Dirk 2014, P319-336).

• Horizontally integrated firms manage production in different countries at the same production level, aiming to minimize competition and increase productivity. They can consolidate through acquisition, merger, or hostile takeover, potentially leading to oligopoly or monopoly.
• Vertically integrated firms produce different products and merge with companies in other countries. They strengthen their supply chain, reduce production costs, and gain market access (Swoboda, Stefan & Dirk 2014, P319-336). For example, a company in country A might import products from country B and sell both in country A, and vice versa, maximizing profits.

Drivers of Internationalization

Various internationalization drivers push companies to expand abroad. These include market conditions, production costs, and competitive situations. Push factors, or home-country drivers, influence companies to invest abroad, while pull factors, or host-country drivers, attract them to specific countries (Benito 2015, P15-24). These factors suggest where to expand based on motives like market seeking, resource seeking, efficiency seeking, and strategic asset seeking (Pananond 2015, P77-86).

• Market-seeking firms invest abroad to tap into foreign markets, believing direct presence is essential for promoting and exploiting new markets (Benito 2015, P15-24).
• Resource-seeking firms look for cheap raw materials and labor to minimize production costs and maximize profits (Ibrahim, Omer & Sufian 2015, P936-946).
• Efficiency seekers aim to benefit from economies of scale and utilize factor endowments in developing countries to compete globally (Benito 2015, P15-24).
• Strategic asset seekers look for non-marketable assets like employee skills and technology to strengthen their competitive position (Ibrahim, Omer & Sufian 2015, P936-946).

In conclusion, firms internationalize to strengthen their competitive environment, protect their value, and increase profits.