9/12/2020 Multinational Corporation (MNC) Definition

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Multinational Corporation (MNC)

By JAMES CHEN | Reviewed By GORDON SCOTT | Updated Feb 25, 2020

What Is a Multinational Corporation (MNC)?

A multinational corporation (MNC) has facilities and other assets in at least one country
other than its home country. A multinational company generally has offices and/or factories
in different countries and a centralized head office where they coordinate global
management. These companies, also known as international, stateless, or transnational
corporate organizations tend to have budgets that exceed those of many small countries. 

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Multinational Corporations

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KEY TAKEAWAYS
Multinational corporations participate in business in two or more countries.
MNC can have a positive economic effect on the country where the business is
taking place.
Many believe manufacturing outside of the U.S. has a negative effect on the
economy with fewer job opportunities.
Transnational business is considered diversifying the investment.

How a Multinational Corporation (MNC) Works

A multinational corporation, or multinational enterprise, is an international corporation that
derives at least a quarter of its revenues outside its home country. Many multinational
enterprises are based in developed nations. Multinational advocates say they create high-
paying jobs and technologically advanced goods in countries that otherwise would not have
access to such opportunities or goods. However, critics of these enterprises believe these
corporations have undue political influence over governments, exploit developing nations,
and create job losses in their own home countries.

The history of the multinational is linked with the history of colonialism. Many of the first
multinationals were commissioned at the behest of European monarchs in order to conduct
expeditions. Many of the colonies not held by Spain or Portugal were under the
administration of some of the world's earliest multinationals. One of the first arose in 1600:
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The East India Company, founded by the British. It was headquartered in London, and took
part in international trade and exploration, with trading posts in India. [1] Other examples
include the Swedish Africa Company, founded in 1649, [2] and the Hudson's Bay Company,
which was incorporated in the 17th century. [3]  

Important: A large majority of high revenue companies in the U.S. are

multinational.

Types of Multinationals
There are four categories of multinationals that exist. They include:

A decentralized corporation with a strong presence in its home country.

A global, centralized corporation that acquires cost advantage where cheap resources are
available.
A global company that builds on the parent corporation’s R&D.
A transnational enterprise that uses all three categories.

There are subtle differences between the different kinds of multinational corporations. For
instance, a transnational—which is one type of multinational—may have its home in at least
two nations and spread out its operations in many countries for a high level of local
response. Nestlé S.A. is an example of a transnational corporation that executes business
and operational decisions in and outside of its headquarters. [4]  

Meanwhile, a multinational enterprise controls and manages plants in at least two countries.
This type of multinational will take part in foreign investment, as the company invests
directly in host country plants in order to stake an ownership claim, thereby avoiding
transaction costs. Apple Inc. is a great example of a multinational enterprise, as it tries to
maximize cost advantages through foreign investments in international plants. 

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According to the Fortune Global 500 List, the top five multinational corporations in the world
as of 2019 based on consolidated revenue were Walmart ($514 billion), Sinopec Group ($415
billion), Royal Dutch Shell ($397 billion), China National Petroleum ($393 billion), State Grid
($387 billion). [5]

Advantages and Disadvantages of Multinationals

There are a number of advantages to establishing international operations. Having a
presence in a foreign country such as India allows a corporation to meet Indian demand for
its product without the transaction costs associated with long-distance shipping. 

Corporations tend to establish operations in markets where their capital is most efficient or
wages are lowest. By producing the same quality of goods at lower costs, multinationals
reduce prices and increase the purchasing power of consumers worldwide. Establishing
operations in many different countries, a multinational is able to take advantage of tax
variations by putting in its business officially in a nation where the tax rate is low—even if its
operations are conducted elsewhere. The other benefits include spurring job growth in the
local economies, potential increases in the company's tax revenues, and increased variety of
goods.

A trade-off of globalization—the price of lower prices, as it were—is that domestic jobs are
susceptible to moving overseas. This suggests that it’s important for an economy to have a
mobile or flexible labor force so that fluctuations in economic temperament aren't the cause
of long-term unemployment. In this respect, education and the cultivation of new skills that
correspond to emerging technologies are integral to maintaining a flexible, adaptable
workforce. 

Those opposed to multinationals say they are ways for corporations to develop a monopoly
(for certain products), driving up prices for consumers, stifling competition, and inhibiting
innovation. They are also said to have a detrimental effect on the environment because their
operations may encourage land development and the depletion of local (natural) resources. 

The introduction of multinationals into a host country's economy may also lead to the
downfall of smaller, local businesses. Activists have also claimed that multinationals breach
ethical standards, accusing them of evading ethical laws and leveraging their business
agenda with capital. 

ARTICLE SOURCES

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In a green-field investment, a parent company creates a new operation in a foreign country from the
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company whose equity serves as the underlying asset. more

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