2.2

MULTINATIONAL
CORPORATIONS
7/19/2019
MS 251: International Business
Environment
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Course Outline
• Introduction to multinational corporations
• Advantages of MNCs
• Criticism of MNCs
• Political & legal impact of multinational
corporations
• Strategies for dealing with multinationals
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Learning Objectives
• To define multinational corporations
• To understand the advantages and disadvantages
of MNCs
• To understand political & legal impact of
multinational corporations
• To understand various strategies for dealing with
multinationals
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OVERVIEW
 What is MNC?
 History and Evolution of MNC
 MNC Structure.
 Organization of MNC.
 SWOT Analysis of MNC.
 Reasons for establishment of MNC.
 Advantage and Disadvantage of MNC
 Criticism of MNC.
 MNCs in India.
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WHAT IS A MULTINATIONAL
CORPORATION???
 It is a corporation that:
And/or
Manages
production
In more than
one country
Delivers
services
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WHAT IS A MULTINATIONAL
CORPORATION? (CONTINUED)
 According to Franklin Root (1994), an MNC is a
parent company that:
engages in foreign production through its affiliates
located in several countries,
exercises direct control over the policies of its
affiliates,
implements business strategies in production,
marketing, finance and staffing that transcend
national boundaries.
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EXAMPLES OF MNCS:
 Ford
 IBM
 British Petroleum
 Mc Donald’s
 Phillips
The largest MNCs:
Wal-Mart Stores
Exxon Mobil
Royal Dutch Shell
These companies have
turnovers in excess of
the GNPs of some
countries.
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HOW IS A COMPANY CLASSIFIED AS
AN MNC?
Subsidiaries
in foreign
countries
High
proportion of
assets in or/
and
revenues
from global
operations;
Operations in a
number of
countries
Stakeholders
are from
different
countries
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HISTORY AND EVOLUTION OF MNCS:
 These corporations originated early in the 20th century
and expanded after World War II.
 A multinational corporation developed new products in
its native country and manufactured them abroad.
 Almost all the earliest and largest multinational firms
were either American, Japanese, or West European.
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 During the last three decades, many smaller
corporations have also become multinational.
 Such enterprises maintain that they create
employment, create wealth, and improve technology in
countries.
HISTORY AND EVOLUTION OF MNCS:
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SWOT Analysis of MNCs:
Strengths
•Low Cost
•Well Developed Infrastructure
Weakness
• Location is often very distant
• Lack of Transportation facilities
• Relative Inflexibility
Opportunities
• Leverage Government
• Attract new industries
Threats
• Govt. restrictions
• Quotas
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REASONS FOR THE
ESTABLISHMENT OF MNCS
 To increase market share.
 To secure cheaper premises and labour.
 Employment and Health & Safety Legislations in other
countries may be more relaxed.
 To avoid or minimize the amount of tax to be paid.
 To take advantage of government grants available.
 To save on costs of transporting goods to the market place.
 To develop an international brand
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Advantages
T
o the Home
Country
T
o the Host
Country
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ADVANTAGES OF MNCS TO THE
HOST COUNTRY:
 Transfer of technology, capital and entrepreneurship.
 Increase in the investment level and thus, the income and
employment in the host country.
 Greater availability of products for local consumers.
 Increase in exports and decrease in imports.
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ADVANTAGES OF MNCS TO THE
HOME COUNTRY:
 Acquisition of raw materials from abroad.
 Technology and management expertise acquired from
competing in global markets.
 Export of components and finished goods for assembly or
distribution in foreign markets.
 Inflow of income from overseas profits, royalties and
management contracts.
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DISADVANTAGES OF MNCS:
 Trade restrictions imposed at the government-level
 Limited quantities (quotas) of imports.
 Effective management of a globally dispersed organization.
 Slow down in the growth of employment in home countries.
 Destroy competition and acquire monopoly.
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WORLD’S TOP MNCS:
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FORTUNE GLOBAL 500 LIST 2018:
TOP 10
RANK COMPANY COUNTRY FIELD
1 Wal-Mart Stores United States Retail
2 State Grid China Power
3 Sinopec China Petroleum
4 China National Petroleum China Petroleum
5 Royal Dutch Shell Netherlands Petroleum
6 Toyota Motor Japan Automobiles
7 Volkswagen Germany Automobiles
8 BP United Kingdom Petroleum
9 Exxon Mobil United States Petroleum
10 Berkshire Hathaway United States Financials
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CRITICISM OF MNCS:
Creation of false needs in consumers.
Interference and dominance in the internal affairs of
sovereign nations.
Invasive advertising and corporate lobbying.
Creation of monopolies inthe market and elimination
of local competitors.
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CRITICISM OF MNCS:
Depletion of resources due to the continuous use by
these corporations.
Centralization of R&D operations in their home
country.
Low consideration for human rights and welfare.
The problem of Dumping.
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MNCS IN INDIA:
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MNCs in India have a long history and tradition:
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WHAT INDIA OFFERS???
 One billion plus population.
 India is ranked as the 7th largest economy ($2.85 Trillion)
 250-300 million middle class.
 Gross Domestic Product (GDP) is growing at over 7-9 %,
making it one of the fastest growing economies in the world.
 Opportunities for U.S. exporters with the right products or
services.
 Easier access to capital.
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INDIAN COMPANIES IN FORTUNE GLOBAL 500 LIST 2018:
COUNTRY
RANK
COMPANY GLOBAL 500
RANK
CITY REVENUE
($ billions)
1 Indian Oil Corp (IOC) 137 New Delhi 65.9
2 Reliance
Industries Ltd (RIL)
148 Mumbai 62.3
3 Oil & Natural Gas
Corporation (ONGC)
197 Dehradun 51.2
4 State Bank of India 216 Mumbai 47.5
5 Tata Motors 232 Mumbai 45.8
4 Bharat Petroleum Corp Ltd
(BPCL)
314 Mumbai 36.8
5 Rajesh Exports 405 Bengaluru 29.1
8 Tata Steel 370 Mumbai 26,065
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KEY ADVANTAGES OF EXISTENCE OF
MNCS IN INDIA
 Work culture for employees.
 Training and Learning.
 Technology – especially concept of working with better technologies.
 Safety
, Health and Environmental Learning.
 Excellent training grounds for many entrepreneurs.
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KEY CHALLENGES THAT INDIAN
MNCS FACE:
 Domestic market like India vis-a-vis International expansion.
 Language.
 Culture.
 Autonomy to local managers .
 Styles of doing business.
 Handling of potential liabilities related to Labor, IPR etc.
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Political Risk
• Political Risk refers to the impact of political
decisions or events on the business climate in a
country such that a multinational’s profitability and
feasibility of its global operations are negatively
affected.
• Examples:
– Russia’s politically motivated jailing of Mikhail
Khodorkovsky, the business tycoon
– The Ukraine’s recent disputed elections, resulting in
presidential uncertainties
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Political Risk
• Why should a multinational company be
concerned about political risk?
– Such risk can have a serious impact on its
profitability.
– The world is dependent on energy coming from
locations with high political risk.
– The world is so interconnected, political
uncertainties in one country can have worldwide
impact.
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Political Risk Assessment
• Some of the factors that influence political risk in
a society:
– Changes in the government
– A sudden shift in governmental policies or ideology
– Social volatility
– The passage of new laws
– Leadership changes and the potential for related
unrest
– The level of corruption
– All factors that may politically stabilize or destabilize a
country
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• To assess these factors, ask:
– How durable and resilient is the political system?
– How peaceful have governmental transitions been
in the past?
– What roles do other nongovernmental
organizations play in the country’s political
stability?
– Are there internal factors that could result in
social unrest or civil war?
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• To assess these factors, ask (cont’d):
– What is the level of corruption?
– How reliable is the rule of law?
– What is the likelihood that the country can be hit
by natural disasters?
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Political Risk in
Selected Countries
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Managerial Implications:
Political Risk
• To manage political risk, consider:
– Insurance from private or government agencies if
available and affordable, for
• Political risk
• Political violence
• Foreign currency inconvertibility
• Expropriation
• Interference with business operations
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Managerial Implications:
Political Risk
• To manage political risk, consider (cont’d):
– Rely on local partners to mitigate political risks.
• Example: Japan’s Sumito Chemical entered into joint
venture with Saudi Arabia’s Aramco to build a major
petrochemical plant in Saudi Arabia.
– Take a high involvement strategy by developing a
network of government, business and public
partners to help face local political risks.
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Multinational Strategies: Dealing with
the Global-Local Dilemma
• The Global-Local Dilemma: MNCs face:
– pressures to respond to the unique needs of the markets in
each country or region (a local responsiveness solution)
– efficiency pressures that encourage them to de-emphasize
local differences, and conduct business similarly throughout
the world (a global integration solution)
• These conflicting demands represent the Global-local dilemma
– to which should the MNC respond?
• The MNC’s choice forms its basic strategic orientation.
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Multinational Strategies: Dealing with
the Global-Local Dilemma
• Four broad multinational strategies offer
solutions to the Global-Local dilemma:
- Multidomestic
- Transnational
- International
- Regional
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Multidomestic Strategy
• Multidomestic Strategy: The MNC attempts to offer
products or services that attract customers by closely
satisfying their cultural needs and expectations
• Emphasizes local-responsiveness issues
- Example: different packages, colors
- Costs more to produce, so must charge higher prices to
recoup costs
- In many respects, a form of differentiation strategy
- Not limited to large multinationals
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Transnational Strategy
• A Transnational Strategy adopts two priorities:
- Seeking location advantages:
- Disperse value chain activities where the MNC can
do it best or cheapest, as required.
- Gaining economic efficiencies from operating
worldwide:
- Global platform: a country where a firm can best
perform some of its value-chain activities, thus
gaining a comparative advantage
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International Strategy
– International Strategy: the MNC sells products and uses
similar marketing techniques worldwide.
– This is a compromise approach to global-local dilemma.
- Adaptation to local culture is minor, if it exists at all.
- Upstream and support activities remain concentrated at
the MNC’s home country, unlike transnational
companies.
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Regional Strategy
• Regional Strategy: the MNC manages raw-material
sourcing, production, marketing, and support
activities within a particular region.
- This is another compromise strategy which attempts to
balance between all of the others.
- A Regional Strategy tries to gain economic advantages
from its regional network.
- The relative uniformity of Regional trading blocs may
lead to advantages from local adaptation.
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A Brief Summary & Caveat
• All of the foregoing strategies are general
descriptions, and companies seldom adopt them in
pure form.
• Companies with more than one business may use a
different multinational strategy for each unit, and
single-business firms may alter strategies to adjust for
product differences.
• Governmental regulations, the cost of switching
strategies, and other factors may prevent full
implementation of any given strategy.
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Multinational Strategy Content
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Multinational Strategies, and
Pressures for Globalization or
Local Responsiveness
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The Integration-Responsiveness Framework

Resolving the Global-Local Dilemma:
Formulating a Multinational Strategy
• Selection of a strategy depends on the degree of
globalization in the MNC’s industry.
• Globalization drivers are conditions in an industry
that favor transnational or international strategies.
• Four categories of Global Drivers:
– Global Markets
– Costs
– Governments
– Competition
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The Balancing Act of Multinational
Strategy Formulation
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Globalization Drivers
• Global Markets:
– Are there common customer needs?
– Are there global customers?
– Can you transfer marketing?
• Costs:
– Are there global economies of scale?
– Are there cheaper sources of low-cost raw materials?
– Are there cheaper sources of highly skilled labor?
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Globalization Drivers
• Governments:
– Do the targeted countries have favorable trade
policies?
– Do the target countries have regulations that restrict
operations?
• The Competition:
– What strategies do your competitors use?
– What is the volume of imports and exports in the
industry?
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Transnational or International: Which
Way for the Global Company?
• Select a transnational over an international strategy
when:
– Benefits of dispersing activities worldwide offset the
costs of coordinating a more complex organization
• Select an international strategy over a transnational
when:
– Cost savings of centralization offset the lower costs of
higher quality raw materials/labor from worldwide
locations
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Entry-Mode Strategies:
The Content Options
• Entry-Mode Strategies are options for entering
foreign markets and countries:
- Exporting
- Licensing
- International Strategic Alliances
- Foreign Direct Investment
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Exporting
• Exporting is the easiest way to sell a product in
international market
• A passive exporter is a company that treats and fills
overseas orders like domestic orders.
• At the other extreme, MNCs can put extensive
resources into exporting.
• After moving beyond passive exporting, two
strategies:
– Indirect
– Direct
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Export Strategies
• Indirect exporting: intermediaries or go-between
firms provide knowledge and contacts overseas.
• The most common intermediaries:
- Export Management Company (EMC)
• Specialize in products, countries, or regions
• Provide ready-made access to markets
• Have networks of foreign distributors
- Export Trading Company (ETC)
• Takes title to product before exporting
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Export Strategies
• Direct exporting: The MNC takes on duties of
intermediaries and make direct contact with
customers in the foreign market.
– More aggressive exporting strategy
– Requires more contact with foreign companies
– Uses foreign sales representatives, distributors, or
retailers
– May require own branch offices in foreign countries
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Licensing
• Licensing: A contractual agreement between a
domestic licensor and a foreign licensee
• Licensor has valuable patent, know-how, or
trademark
• Foreign licensee pays royalties for use
• Provides easiest, least risky, and most low cost way
to go international
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Contents of a Licensing Agreement
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Special Licensing Agreements
• International franchising: The franchisor
grants the use of a whole business operation
to the franchisee.
• Contract manufacturing: This represents
production by a firm following the foreign
company’s specifications.
• Turnkey operation: A multinational company
makes a project fully operational before
turning it over to the foreign owner.
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International Strategic Alliances
• International strategic alliances are
cooperative agreements between firms from
different countries to participate in business
activities.
• Activities may include any value chain activity
from R&D to sales and service.
• One of the dominant entry-mode strategies
for MNCs
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Foreign Direct Investment (FDI)
• In Foreign Direct Investment (FDI), an MNC
owns part of all of a foreign operation.
– International Joint Ventures (IJVs) are a form of
FDI
• FDI reflects the highest stage of
internationalization
• Greenfield investments: using FDI to start a
foreign subsidiary from scratch
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Formulating an
Entry-mode Strategy
• Must take into account several issues:
- Basic functions of each entry-mode strategy
- Strategic considerations re company, strategic
intent, products, and markets
- How best to support company’s multinational
strategy
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Basic Functions of
Entry-mode Strategies: Exporting
• Deciding on an Export Strategy; Managers should
ask:
– Does management need to control foreign sales,
customer credit, and sale of the product to the
customer?
• If yes, choose direct exporting
– Does company have financial and human resources to
create positions to manage export operations?
• If not, use indirect exporting; rely on
intermediaries.
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Basic Functions of
• Does company have resources to design and
execute international promotional activities in
foreign language?
– If not, use foreign intermediaries and indirect
exporting
• Does company have resources to support
extensive international travel or possibly an
expatriate sales
force?
– If so, choose direct exporting.
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Basic Functions of
• Does company have time and expertise to
develop its own overseas contacts and
networks?
- If not, rely on foreign intermediaries or choose
indirect exporting.
• Will time and resources affect domestic
operations?
- If not, choose direct exporting.
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When Should an MNC License?
• The decision to license is based on three
factors:
- Characteristics of the products
• Best products are older or soon-to-be replaced
- Characteristics of the target country
• Situation in target country
- Nature of the licensing company
• Company may lack resources to go international
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Some Disadvantages
of Licensing
• Four major drawbacks:
– The MNC gives up control.
– The firm may create new competitors.
– Licenses often generate only low revenues.
– Opportunity costs: The MNC loses opportunities
to enter the country through other means such as
exporting or FDI.
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Advantages and Disadvantages of
Foreign Direct Investment (FDI)
• All but the most experienced international firms
try other forms of entry before FDI.
• Exporting, licensing or alliances can prepare a
firm for FDI and minimize chances of failure.
• Among advantages, greater control of marketing,
avoids import quotas, better local image of
product.
• Among disadvantages, increased capital
investment, drain on managerial talent, greater
exposure to financial risks.
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Advantages & Disadvantages of FDI
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The Control vs. Risk Tradeoff:
The Need for Control
• A firm going international must ask how
important it is to monitor and control overseas
operations.
• Key areas of concern over control are:
– Product quality in the manufacturing process
– Product price
– Advertising
– Other promotional activities
– Where the product is sold
– After market service
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The Control vs. Risk Tradeoff:
The Need for Control
• Usually, entry-mode choices that increase
control entail greater risk.
– Example: Exporting and licensing are low-risk, but
they surrender control over the product or
service.
• FDI allows firms to maximize control, but also
expose the firm to the greatest financial and
political risks.
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Risk versus Control Tradeoff
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Entry-mode Strategies &
Multinational Strategies
• To determine an entry-mode & multi-national
strategy, ask these questions:
– Which entry-mode strategy best serves the firm’s
objectives for being in the country or region?
– Is the strategic intent to learn the market or to
become immediately profitable?
– What are the company’s resources in finances and
international expertise?
– Are local government regulations favorable or
not?
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• To determine an entry-mode & multi-national
strategy, ask these questions (cont’d):
– What is the geography of the area? Is there a long
distance between markets?
– Are there significant cultural differences between
the firm and the markets?
– What is the firm’s need for control in this
instance?
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Decision Matrix for Formulating
Entry-mode Strategies
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Learning Outcome
• Students are able to define multinational
corporations
• Students are able to understand the
advantages and disadvantages of MNCs
• Students are able to understand political &
legal impact of multinational corporations
• Students are able to understand various
strategies for dealing with multinationals
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Web Links
https://www.youtube.com/watch?v=V8lGeqJt00E
https://www.youtube.com/watch?v=0aUnzSAiqOM
https://www.youtube.com/watch?v=tKr9POlqf44
https://www.youtube.com/watch?v=FCojpFwWuG0
https://www.youtube.com/watch?v=fCRo9DqjyWU
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