Analyzing The Dynamics of Multinational Companies

International trade has been around for centuries. Over time, it has steadily grown. The evidence of this growth is seen in market globalization. Good relationships between nations have played a big role in this. Multinational corporations (MNCs) are major players in globalization. These are companies with facilities in one or more countries besides their home country. Usually, their headquarters are in their home country, but they might also have sub-head offices in other countries where they operate. A company is considered multinational if at least a quarter of its profit comes from abroad. There are about eighty-two thousand MNCs globally. Many theories have been developed about their origin, development, settings, and classification. This paper aims to analyze multinational companies.

Multinational companies produce goods and services both in their home country and in foreign countries. A firm becomes an MNC when a parent company invests more than ten percent in another company, known as a subsidiary, located in a different country. This investment is called foreign direct investment (FDI). MNCs might produce similar products in all their branches or offer different products depending on their strategies. Internationalization is the process by which firms get more involved in transferring products, services, or resources outside their home country and into international trade. FDI is a key means to internationalization and is one of the fastest-growing economic activities globally.

Studying international trade is complex. Thus, it's crucial to classify MNCs into different types. There are two main reasons for this; it reduces the complexity of multinational organizations into a manageable number of characteristics, making it easier to understand how they form and function. The second reason is to find the best terms to define MNCs. Different terms are used to describe them, but they have subtle and significant differences. So, it’s important to distinguish between different types of MNCs and define specific terms for each. The classification of MNCs is commonly based on management mindset, performance, and structural formation.

Based on the managerial mindset, MNCs fall into four types: ethnocentric, polycentric, regiocentric, and geocentric MNCs. Ethnocentric MNCs are also called home-country oriented MNCs. They have centralized management, with headquarters making all business decisions. They recruit human resources from the home country for both parent and subsidiary companies. Ethnocentric MNCs have better coordination, infusing the company's culture and practices into the host country, and ensuring effective communication and transfer of technical knowledge. However, they may lack support from the host government, leading to poor performance.

Polycentric MNCs, or host-country oriented MNCs, treat subsidiary companies as independent. Management policies are adapted to meet the settings of the parent company. They employ human resources from the host country, who then formulate strategies and guidelines for the affiliate company. Headquarters only scrutinize operations. Unlike ethnocentric MNCs, polycentric MNCs lack proper coordination between parent and subsidiary companies. However, they have better productivity because employees understand the host country market and culture. They also receive government support from the host country, leading to higher chances of success.

Regiocentric MNCs have decentralized management. Subsidiaries are managed independently from headquarters. Employees are recruited from different countries within the same geographical region as the subsidiary. This setup allows for higher profits but may lead to poor coordination and neglect of global objectives.

Geocentric MNCs, or world-oriented MNCs, have centralized management like ethnocentric MNCs, but recruit human resources across borders regardless of nationality. They can exploit maximum profit from both affiliate and parent companies by employing experienced international staff. However, they incur high costs for recruiting and relocating staff and hiring agencies to find suitable employees.

Based on performance, MNCs are divided into four groups: multi-domestic, international, transnational, and global MNCs. Multi-domestic MNCs use localized marketing strategies, tailoring products to meet national conditions. They have decentralized management, allowing affiliate managers to make independent decisions. They may receive host government support, but incur high costs for researching market needs and designing marketing strategies.

International MNCs join with similar foreign firms to work together, importing raw materials and exporting finished products. They have decentralized management and enjoy a constant flow of income without incurring extra costs for building offices or establishing production machinery. However, they are easily affected by nationalism and misunderstand international marketing strategies.

Transnational MNCs own production facilities in foreign countries, making foreign direct investments. They have decentralized management and benefit from reduced manufacturing costs by distributing production facilities in areas with available resources. However, they face coordination challenges and political, language, and cultural barriers.

Global MNCs have centralized management and own corporate facilities in multiple countries. They produce similar products or brand them to suit local tastes, using similar marketing strategies globally. They benefit from economies of scale but face high communication and coordination costs.

MNCs are also categorized based on structural formation into horizontally and vertically integrated firms. Horizontally integrated companies manage production establishments in different countries at the same level of production. They aim to minimize competition, increase productivity, and access new markets. Horizontal integration can lead to oligopoly or monopoly, which is allowed by different governments.

Vertically integrated firms merge to produce different products. One company imports goods processed by another from a foreign country and trades both products. This strengthens the supply chain, reduces production costs, and gains access to new markets, maximizing profits.

Internationalization drivers influence decisions to expand internationally. These include market conditions, production costs, and competitive business situations. They are divided into push factors (home-country drivers) and pull factors (host-country drivers). Push factors reveal disadvantages of operating only in the home country, while pull factors show advantages of venturing abroad. These drivers suggest the location and direction of expansion.

There are four main motives for internationalization: market seeking, resource seeking, efficiency-seeking, and strategic asset seeking. Market seeking focuses on supplying goods and services to profit from foreign markets. Resource seeking firms look for cheap raw materials and labor to minimize production costs. Efficiency seekers exploit economies of scale and differences in factor endowment, culture, and economic systems. Strategic asset seekers acquire non-marketable assets like technology and knowledge through acquisitions or alliances.

In conclusion, the evolution of international trade and the rise of multinational corporations have significantly shaped the global business landscape. The intricate nature of international trade and the complexity of multinational organizations necessitate a systematic classification based on management mindset, performance, and structural formation.