Analyzing The Dynamics of Multinational Companies

International trade has been in existence for centuries. Over the years, there has been steady growth in international trade. Market globalization evidence the growth of a global business. A good inter-nations relation is one of the significant factors that have facilitated globalization. Multinational corporations are the most considerable agencies of globalization. The terms multinational companies refer to companies that have facilities in other one or more countries apart from their home country. Mostly the headquarters of these companies are located in the respective home country. They may also have other sub-head offices in the countries they conduct their activities. A company can be considered as a multinational company only if it derives at least a quarter of its profit from foreign countries. There are approximately eighty-two thousand multinational corporations around the world. Many theories on origin and development, settings and classification of multinational corporations have developed. This paper aims to analyze multinational companies.

Multinational companies engage in the production of goods and services in both the country of their origin and foreign countries. Firms become multinational companies when one enterprise, parent company, has an investment worth more than ten per cent of another company, subsidiary company located in a different country from the parent company. The investment is known as foreign direct investment (FDI). Multinational companies may produce similar products in all its branches or may provide diversified products depending on the reasons and strategies used in their internationalization. Internationalization is the process by which firms increase involvement in transfer of products, services or resources outside their home country and their participation in transnational trade. Foreign direct investment is a crucial means to internationalisation. It is one of the fastest-growing economic activities in the globe.

The study of international trade is much intricate and complex. Therefore, it is crucial to classify multinational organizations into different types. There are two main reasons why classification is essential; categorizing reduces the complexity of multinational organizational into a distinctive and manageable number of characteristics. Therefore, it is easy to understand the formation and functioning of a multinational company. The second reason for classification is to find the best terms in definition of multinational companies. Different statements are used to define multinationals. Although they are used as synonyms, there are subtle and significant differences in their meanings. Therefore, there is need to distinguish different types of multinational organizations and define specific terms that should be used to refer different types of multinational companies. Classification of multinationals is commonly based on the management mindset, performance and structural formation of the organizations.

Based on the managerial mindset, multinational companies are categorized in four typologies; ethnocentric, polycentric, regiocentric, and geocentric MNCs. Ethnocentric multinationals are also known as home-country oriented MNCs. They home-oriented multinational companies have a centralized form of management. The headquarters make all the business decisions. The human resource of both the parent company and subsidiary companies is recruited from the firm’s home country. Ethnocentric MNCs have better coordination between the parent and affiliate companies thereby infusing company’s culture and other practices in the host country. There is also effective communication and transfer of technical knowledge. Firms under ethnocentric MNCs typology exploit their human resources effectively. Conversely, ethnocentric MNCs may lack host government’s support, which may lead to poor performance.

The other managerial mindset typology is Polycentric MNCs. They are also known as host-country oriented MNCs. In polycentric organizations, subsidiary companies are treated as an independent company. The management policies are adapted to meet the settings of the parent company. The human resources are employed from the host country and have the mandate to formulate strategies and guidelines with the interest of the affiliate company. The headquarters are left to scrutinize the operations of their subsidiaries. Unlike ethnocentric, the polycentric lack proper coordination between the parent company and subsidiary company. However, Polycentric MNCs have a better productivity power due to the employees’ understanding of the host country market and culture. The companies get government support from the host country which leads to higher chances of success.

The other managerial mindset typology of multinational companies is regiocentric MNCs. Regiocentric multinationals have a decentralized form of management. The management of subsidiaries is independent from headquarters. The management of subsidiary companies may display poor coordination with the managers in the head offices. The employees are recruited from different countries which are within geographical region of the subsidiary business. The states where the human resources are hired must closely resemble the culture of host country. Unlike in ethnocentric organizations, regiocentric MNCs utilize a relatively vast pool of managers. Therefore, companies can achieve higher profits than companies in ethnocentric typology. In contrast, the managers in subsidiaries may neglect business’ global objectives, which may have impact on the whole enterprise.

The geocentric or world-oriented MNC is the last typology based on management. In this type of multinational companies, the management is centralized in the headquarters. The subsidiaries companies are under full control of headquarter as it is in ethnocentric multinational companies. Conversely, the human resource is recruited across the borders irrespective of nationality. The multinationals under this category can exploit maximum profit from both the affiliate companies and the parent company as they employ internationally and experienced workforce with global business skills. The companies, however, incur high costs while recruiting staff and relocating them. They also have to hire recruiting agencies to find and examine the most suitable employees for global business, therefore, incurring extra hiring costs.

Based on performance, multinational companies are categorized into four groups; multi-domestic, international, transnational, and global MNCs. Multi-domestic MNCs are multinational companies that employ a localized marketing strategy. They maximize local consumer responsiveness by customizing and tailoring products and marketing strategies to meet different national conditions. The companies seek to understand the culture of the concerned country to exploit its domestic market. Firms under this typology have a decentralized form of management. They allow managers of affiliate companies to make independent decisions. The companies may receive host government’s support and encounters minimum resistance from the citizens during period of nationalism as they identify them as their own company. The greatest challenge of this typology is the high cost the companies incur in researching the specific needs and interests of different markets. Additionally, the budget for formulating and designing marketing strategies for different markets is relatively high.

International MNCs is the second typology by which multinational companies are categorized. International MNCs are firms that join with other firms, with similar objectives, in foreign countries to work together. Companies in this typology import raw materials and export products finished products to their subsidiaries. They do not have production facilities in host countries. The management is decentralized, that is, the management and the headquarters remain in their origin country. Businesses, therefore, have streamlined decision making. The international MNCs have a diversified market. Thus they enjoy a constant flow of income. Besides, firms under this typology do not incur the extra cost of building offices and establishing production machinery and workforces in foreign countries. However, they are easily affected by nationalism and misunderstanding of international marketing strategies.

Transnational MNC is another typology of multinational companies based on company’s functionality. Transnational MNCs are companies that own production facilities in foreign countries. They assume foreign direct investments. They have the headquarter in the state of the parent company. The headquarters is the hub of a network of interdependent subsidiary companies. The affiliate companies may produce variant brands in different countries. They, however, should maintain the overall company identity and business’s global objectives. Due to their decentralized organization structure, firms under this typology enjoy reduced cost of manufacturing and other functions since they distribute production facilities in areas where workforce, raw materials, and other assets are readily available. Transnational MNCs, however, display poor coordination between the affiliate companies and parent company. Besides, political situations, language barriers, and cultural differences are also other challenges faced by multinational companies in this typology.

Global MNCs is the last type of multinationals companies categorized based on company performance. They have a centralized form of management. They own corporate facilities in a dozen countries which are under one headquarter, usually found in the parent country. Global MNCs considers the world as one large market. They operate with absolute constancy; that is, they produce similar products in all their subsidiary companies or do relative branding to suit the local taste. They also use similar marketing strategies in all host countries. The companies enjoy benefits of economies of scale due to high volume of production, therefore, reducing unit costs.. Communication and management coordination costs are the main challenges faced by global MNCs. There is a need for consultation by human resources in different countries on all issues such as tax and other legal issues, communication barriers, and cultural activities among others, that affect global market.

Based on the multinational company’s structural formation, MNCs are categorized in two main typologies, horizontally, vertically integrated firms. Horizontally integrated companies are firms that manage production establishments located in different countries to produce in the same level of production. When an independent company manufacturing a particular product merges with firms providing in a similar degree of manufacturing but from different countries, the companies form a horizontally integrated MNC. The purpose of horizontal integration is to minimize competition, increase productivity, access new markets, achieve economies of scale, or increase the size of the company. The consolidation occurs in three primary forms, acquisition, merger and hostile takeover. Acquisition occurs when one company purchases another independent company. A merger is the consolidation of two separate companies. A hostile takeover is a forceful acquisition of an independent company. Horizontal integration can lead to oligopoly or monopoly, which is allowed by different countries’ governments.

Vertically integrated firms are organizations that merge to produce different varieties of products. Vertical integration occurs when a firm manufacturing a specific product joins with another company from a different country, producing a different product to work together. One company, therefore, imports goods processed by a company from a foreign country and vice versa. For example, a company in country A imports products produced by a company in country B and trades the two commodities, that is, their initial product and the imported products, in country A, and vice versa. Firms merge vertically for various reasons. First, different companies merge to strengthen their supply chain therefore, getting full control of the industries’ value. Second, merging helps to reduce the cost of production. Since different companies under the same multinational company produce various products, the cost of production of the two products is minimized. Lastly, companies merge vertically to gain access to new markets. Therefore vertically integrated multinational companies achieve maximum profits from their products.

Different internationalization drivers influence the decision by company owners and shareholders to venture internationally. Internationalization drivers are factors that trigger companies' expansion. They include market conditions, production costs, and competitive business situations. There are two main types of these factors; pull factors and push factors. The push factors are also known as home-country drivers. They are factors that influence companies to invest in foreign countries. The pull factors are element that attracts firms to invest in a specific country. They are also known as host-country drivers. The push factors reveal the disadvantages a company experience by operating in the home country only while the pull factors show advantages of venturing abroad. The internationalization drivers mainly suggest the location or the direction of expansion. The locality is also determined by motives behind internationalization.

There are four main categories of motives; market seeking, resource seeking, efficiency-seeking, and strategic asset seeking. Market seeking focuses on the demand aspect. Firms invest remotely intending to supply goods and services to profit from foreign markets. Markets in different countries motivate business owners and shareholders of specific firms in deciding to expand their business abroad. They, therefore, concede the importance of venturing in those countries. Market seekers believe that direct presence in countries where their products are marketable is essential to the firm. They believe that foreign investment enables them promote and exploit new markets, therefore, generating more revenue. Besides, establishing production facilities in foreign countries leads to effective competition between the host country’s firms and the multinational company. A saturated market and high competition in the home country are some of the main reasons for market seeking motive.

The next motive that leads to foreign direct investment is resource seeking. Resources are the core essential to the survival of companies that supply goods. Workforces are also resources in the production industry. Firms tend to seek cheap raw materials and unskilled labour to minimize production costs and maximize profit. However the labor force should exist in large number and be motivated. Resource seekers pursuing labor force as a resource are often manufacturing companies with high actual labor costs. The main reasons why companies invest in foreign countries due to resources are, the quantity wanted can be acquired at lowered comparative cost, or the supply does not exist at all in home country. The availability of raw materials in the prospective host country reduces the cost of these materials. The companies, therefore, invest in these countries to cut the shipping cost.

Efficiency seeking is the other motive for foreign direct investment. The main aims of firms seeking efficiency in foreign countries are; to exploit benefit of economies of scale and scope and take advantage of differences in the availability of factors endowment, culture, institutional arrangement, and economic systems in different countries. Through foreign investment and expansion, firms get access to inexpensive labour and inputs; therefore, increased efficiency in their performance. Efficiency seekers often utilize factor endowment in developing countries. The factors enable these firms to compete effectively in international market. The efficiency seekers pursue to reduce production and delivery cost of their products to their customers by establishing physical presence in foreign countries. They also benefit from government incentives and avoid trade barriers as local companies.

Strategic asset seeking is the last motive that leads to MNC’s internationalization. Strategic assets are non-marketable assets, that is, assets that are not exchangeable through market operations. The employees’ skills and knowledge and vital supplies among others are examples of assets that strategic asset seekers follow in foreign countries to utilize for self-gain. Technology is also a strategic asset that asset seeker searches in the target countries. Firms achieve strategic asset seeking motive through acquisition of foreign companies. The asset seekers may also try to form alliances with other firms to exploit the knowledge of other companies. The high market competition in company’s country of origin triggers the motive. The resources are, therefore, essential in strengthening the company to sustain competitive position. The strategic asset seekers are often from less developed countries targeting companies in developed countries with high technological advancement.

In conclusion, the underlying rationales for the internationalization of firms are to strengthen and sustain competitive environment, protect their value and increase profit. Firm’s internationalization motives and strategies depend on unique advantages and resources in the prospective host country that gives it competitive benefits and increased revenue. Different internationalization drivers, push factor and pull factors, and reasons for expansion determines company’s targeted firm-specific advantages. Both the push and pull factors determine companies’ internationalization motives. The company’s development is not limited to only the internationalization factors and incentives. There are other factors such as government policies and political factors that affect the way of integration. Some multinational companies, especially developing countries’ MNCs, consider government regulations and incentives of the host country government as essential determinants of MNCs' internationalization.

The firm-specific advantages possessed by different types of multinational companies are similar but differ in proportionality in terms of operations and profit generation. For example, multinational companies that produce different varieties of products may generate higher profit than those that manufacture similar commodities in all their branches. Additionally, firms in multi-domestic typology of multinational companies, that have a decentralized form of management are regarded as local firms therefore, they benefit from the privilege to operate freely in the host countries without barriers and restrictions from the respective governments and citizens, thus, these firms may generate more revenue than firms in ethnocentric type of multinational companies, with centralized form of management. The management, however, does not have a significant impact on the performance of multinational companies. Since the primary duties of managers are to ensure smooth coordination between the parent company and the affiliate companies. 

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.