Multinational Corporation: Definition, How It

Works, Four Types

By
JAMES CHEN

Investopedia / Jessica Olah

What Is a Multinational Corporation?

A multinational corporation (MNC) is a company that has business operations
in at least one country other than its home country. By some definitions, it
also generates at least 25% of its revenue outside of its home country.

Generally, a multinational company has offices, factories, or other facilities in

different countries around the world as well as a centralized headquarters
which coordinates global management.

Multinational companies can also be known as international, stateless, or

transnational corporate organizations or enterprises. Some may have
budgets that exceed those of small countries.

KEY TAKEAWAYS

 Multinational corporations conduct business in two or more countries.

 Some consider a multinational company to be one that generates 25%
or more of its revenue outside the home country.
 An MNC can have a positive economic effect on the countries in which
it operates.
 Some believe outsourcing U.S. manufacturing to a foreign country has a
negative effect on the U.S. economy.
 Investing in a multinational corporation is a way to add international
exposure to a portfolio.
Multinational Corporations

How a Multinational Corporation Works

A multinational corporation is an enterprise whose business activities occur in
at least two countries. Some may consider any company with a foreign
branch to be a multinational corporation. Others may limit the definition to
only those companies that derive at least a quarter of their revenue outside of
their home country.

Multinational companies can make direct investments in foreign countries.

Many are based in developed nations. 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 multinational corporations exert

undue political influence over governments, exploit developing nations, and
create job losses in their own home countries.

The history of the multinational company is linked with the history of

colonialism. Many of the first multinational companies were commissioned at
the behest of European monarchs to conduct international expeditions.

Some of the colonies not held by Spain or Portugal existed under the
administration of some of the world's earliest multinational companies. One of
the first was The East India Company, established in 1600. This British
multinational enterprise took part in international trade and exploration, and
operated trading posts in India.1 Other early examples of multinational
companies include the Swedish Africa Company, founded in 1649, and the
Hudson's Bay Company, founded in 1670.23

Characteristics of a Multinational Corporation

Some of the characteristics common to various types of multinational
corporations include:

 A worldwide business presence

 Typically, large and powerful organizations
 Business conducted in various languages
 A complicated business model and structure
 Direct investments in foreign countries
  Jobs created in foreign countries, potentially with higher wages than
found locally
 Seeks improved efficiencies, lower production costs, larger market
share
 Has substantial expenses associated with navigating rules and
regulations of foreign countries
 Pays taxes in countries in which it operates
 Reports financial information according to International Financial Reporting
Standards (IFRS)
 Sometimes accused of negative economic and/or environmental
impacts in foreign markets
 Sometimes accused of negative economic impacts in home country
due to outsourcing jobs

U.S. multinational corporations employed 43.9 million workers throughout the

world in 2019.4

4 Types of Multinational Corporations

Multinational corporations can be viewed as four main organizational types.

A Decentralized Corporation

A decentralized corporation maintains a presence in its home country and

has autonomous offices and other facilities in locations around the world. This
type of multinational company has the capability to achieve more, faster
because it's decentralized. Each office manages the local business itself,
making its own decisions.

A Centralized Global Corporation

A centralized global corporation has a central headquarters in the home

country. Executive officers and management located there oversee the global
offices and operations as well as domestic operations. They, rather than
managers at local offices in foreign countries, make the key business
decisions. The offices typically must report to and obtain approval from
headquarters personnel for major activities.

An International Division Within a Corporation

An international division is that part of the multinational corporation that has

been made responsible for all international operations. This structure
facilitates business decision-making and general activities in local, foreign
markets. However, operating independently can pose problems when overall
corporate consensus and action is required. Maintaining and presenting the
carefully nurtured, enterprise-wide brand image established by the
multinational may also be a challenge.

A Transnational Corporation

A transnational corporation involves a parent-subsidiary structure whereby

the parent company oversees the operations of subsidiaries in foreign
countries as well as in the home country. Subsidiaries can make use of the
parent's assets, such as research and development data. Subsidiaries may
be different brands, as well. The parent usually maintains a management role
directing the operations of its subsidiaries, domestic and foreign.

Examples of multinational corporations include IBM, Berkshire Hathaway,

Apple, Microsoft, Amazon, and Walmart. Nestlé S.A. is an example of a
transnational corporation that executes business and operational decisions in
and outside of its headquarters. One of its subsidiaries is Nespresso.5

Advantages and Disadvantages of Multinational

Corporations
International operations present a variety of advantages and disadvantages
to multinational companies, consumers, and a workforce.

Advantages

Developing an international presence can open up new markets and sales

opportunities unavailable or not feasible when operating just domestically.
For example, a presence in a foreign country such as India can allow a
corporation to meet widespread Indian demand for particular products without
the transaction costs associated with long-distance shipping.

Corporations can establish operations in markets where their capital can be

used most efficiently and wages have less impact on the bottom line than
they did in the home country.

By producing the same quality of goods at lower costs, multinational

companies can reduce prices and increase the purchasing power of
consumers worldwide.
Multinational companies can also take advantage of lower tax rates available
in countries eager for their direct investments and the jobs that they'll create.
Note, however, that the European Union has a plan to implement a minimum
tax of 15% on corporate profits, to become effective in 2023.6

Other benefits include a direct financial investment in foreign countries and

job growth in their local economies.

Disadvantages

A trade-off of globalization—the price of lower prices—is that domestic jobs

move overseas. This can increase unemployment in the home country and
make it difficult for longtime employees in outsourced industries to find new
jobs.

Those opposed to multinational corporations point to the potential they may

have to develop a monopoly (for certain products). This can drive up prices for
consumers, stifle competition, and inhibit innovation.

Multinational corporations are also said to have a detrimental effect on the

environment because their operations may encourage land development and
the depletion of local and natural resources.

Multinational companies may also cause the downfall of small, local

businesses. Activists have also claimed that multinational companies breach
ethical standards. They accuse them of evading laws to advance their
business agendas.7

What Makes a Corporation Multinational?

A multinational corporation is one that has business offices and operations in
two or more countries in the world. These companies are often managed
from a central office headquartered in the home country. Simply exporting
goods for sale abroad does not make a business a multinational company.

Why Would a Business Want to Become a Multinational

Company?
Usually, the primary goal of a business is to increase profits and growth. If it
can grow a global customer base and increase its market share abroad, it
may believe that opening offices in foreign countries is worth the expense
and effort. Companies may also see a benefit in certain tax structures or
regulatory regimes found abroad.

What Are Some Risks That Multinational Corporations

Face?
Multinational corporations are exposed to risks related to the different
countries and regions in which they operate. These can include regulatory or
legal risks, political instability, crime and violence, cultural sensitivities, as
well as fluctuations in currency exchange rates. People in the home country
may also resent the outsourcing of jobs.