What Are Multinational Corporations (MNCs)? (With FAQs)
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Business leaders often search for new ways to generate more revenue and reach a wide range of customers. An effective way a company can achieve this goal is by becoming a multinational corporation. If you make strategic decisions for a company, you can benefit from learning what multinational corporations are and understanding whether operating in another country is desirable. In this article, we define multinational corporations (MNCs), explain how they work, outline their types and benefits, and discuss how to decide whether a company can become a multinational corporation.
What are multinational corporations (MNCs)?
Multinational corporations (MNCs) are organizations that conduct their businesses in multiple countries. As corporations, these organizations are legal entities with owners, called shareholders. Multinational corporations typically have assets or facilities in at least one other location. Other words to describe these organizations include multinational enterprises, transnational corporate organizations, or international corporations.
How does a multinational corporation work?
A multinational corporation's structure and operations may vary depending on the industry, company size, and business offerings. While some authorities define multinational corporations as companies with a foreign division, others limit the definition to organizations that produce at least a quarter of their revenue in a different country. Regardless, the primary activity of these corporations is to make direct investments in another country by operating part of a business there. For example, a company may establish a manufacturing facility in another continent to increase its customer base.
Multinational corporations typically have a manager or executive overseeing activities in a new location. It's important they maintain actual business operations in other countries, even if they export products abroad.
Types of multinational corporations
Here are the most common types of multinational corporations:
These corporations have multiple offices, facilities, and assets in host countries but maintain a presence in their home country. While a host country refers to other countries where a company invests, a home country is where a company initially operated its business. Decentralized corporations operate without a central headquarters. Each location has its management structure, enabling companies to develop quickly. For example, suppose a corporation manufactures toys. It may have managers and executives that offer guidance and offer regulations applicable in each geographic area.
While business leaders in decentralized corporations often operate independently, they typically develop strategies that positively impact the overall company.
Global centralized corporation
These corporations have a central office in their home countries, typically where the chief executive officer (CEO) and other business leaders reside. A global corporation's management handles both domestic and international operations. For example, suppose a multinational corporation produces flour. It may explore ways to purchase more wheat grains from farmers in the home country and those abroad. Managers and business leaders in the host countries typically seek approval from the central office before making strategic business decisions.
For example, if a manager on a continent identifies a cost-effective approach to manufacturing, it typically discusses it with executives at the central location before implementation.
Corporations that want to separate domestic operations from international activities may create international divisions. These divisions oversee all operations in foreign countries. For example, suppose a car manufacturer establishes facilities in Asia, Africa, and North America. If its host country is in North America, it may create an international division to conduct business on other continents.
Establishing international divisions can help corporations reach a wider audience and make decisions that appeal to different cultures. It can also offer more independence to decision-makers, such as executives. Successfully creating one typically requires managers and business executives to maintain a unified brand identity.
Transnational enterprises include a parent company and an organization it owns, called a subsidiary company. This corporate structure enables the subsidiary to access the parent company's resources. For example, technical professionals may use the parent company's research and development results, even if they're in different countries. The parent company typically oversees the translational enterprise and makes decisions impacting the entire brand. While transnational enterprises typically have centralized leadership, the operational structure may vary among corporations. For example, a translational enterprise may not consider any country its corporate home.
Advantages of multinational corporations
Organizations that become multinational corporations may receive various benefits, including:
Increased customer base: Because multinational corporations operate in several locations, they can reach more customers and market to more prospects. Establishing facilities in multiple countries can also increase access to customer feedback and help decision-makers understand product or service needs better.
Reduced legal obligations: By investing in and hiring talent from a country, a multinational corporation may have reduced tariffs, which are taxes for importing or exporting goods. Establishing facilities in other locations can also lead to globalization, which is the economic integration between countries that enables easy and fair trade.
Increased innovation: With more professionals producing goods, delivering services, and researching technologies, multinational corporations can develop innovative ideas to remain competitive in their industries. Investing in research and development can also help these organizations identify innovative approaches.
Improved market share: Due to increased production and improved customer base, a multinational corporation can control more aspects of the economic market in their industry.
Increased productivity: Multinational corporations spend less on exportation and transportation by establishing facilities or having assets abroad. They can also source materials locally, saving time and ensuring productivity.
Increased revenue: Multinational corporations may generate more revenue with increased market shares. Revenue is the total income generated by selling products or delivering services.
How to decide whether to become a multinational corporation
Follow these steps to determine whether becoming a multinational corporation is the right choice for the company where you work:
1. Research foreign countries
Before recommending business expansions, learn about the potential new locations. Read about the tax structure, regulations, political climate, and living costs. It's also important to understand the country's culture and receptiveness to foreign investors. By researching foreign countries, you can make a more informed decision about which countries a company can operate its business.
Read more: Research Skills: Definition and Examples
2. Consider competitors
List the company's foreign competitors and identify why customers desire their product or service. You also want to research domestic competitors. A domestic competitor is an organization that offers similar business offerings in another organization's home country. For example, suppose you feel a company can expand its car-manufacturing operations to North America. Aside from examining the market potential of the new location, it's also important to research current competitors in the home country.
Doing this can help you determine whether opportunities for increased market share exist. It can also help you understand how to receive the benefits of expansion without affecting domestic business operations.
3. Network with business leaders
Connect with executives and managers who oversee multinational corporations on social media and professional networking platforms. You can also schedule an informational interview. These interviews offer an opportunity to learn more about a multinational corporation's structures. You can ask relevant questions to prepare for the expected expansion changes.
4. Review the company's finances
Analyze profit margins and predicted revenues to justify the reason for becoming a multinational company. You can also research the cost of establishing a new facility and create an estimated budget. Reviewing the company's finances typically requires you to collaborate with accounting and finance professionals and receive authorization.
5. Develop a strategic business plan
Collaborate with executive leaders and company stakeholders to create an expansion plan. Consider the required resources, marketing strategies, and potential risks involved in expanding a business. A strategic business plan can offer direction on how to start a multinational corporation.
FAQs about multinational corporations
Here are common questions about multinational corporations to help you gain more insights into how these organizations work:
What is the difference between a multinational corporation and a franchise?
While a multinational corporation operates its business in multiple countries, a franchise network may have different locations within a country. Franchisees own a franchise, and they typically pay royalties for using an established brand's name. Shareholders are typically professionals who own corporations.
What is the typical payment system in multinational corporations?
While the payment structure typically depends on the corporation, most MNCs pay employees in the country's currency. They often ensure pay equity across locations, which means equal pay for an equal value of work. Evaluate the salary for roles that may interest you in multinational corporations before accepting an offer.
Can employees in multinational corporations work remotely?
As an employee in a multinational corporation, you may work remotely. Many organizations offer this flexible work arrangement as an additional benefit. Consider multinational corporations that encourage remote work to achieve a healthy work-life balance.
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