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. Such companies have offices and/or factories in different countries and usually have a centralized head office where they coordinate global management. Very large multinationals have budgets that exceed those of many small countries. Multinational corporations are sometimes referred to as transnational, international or stateless corporations.

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Multinational Corporations

BREAKING DOWN Multinational Corporation - MNC

Generally speaking, multinational corporations derive at least a quarter of their revenues outside their home country. Many multinationals are based in developed nations. Advocates of multinationals say they create high-paying jobs and technologically advanced goods in countries that otherwise would not have access to such opportunities or goods. On the other hand, critics say multinationals have undue political influence over governments, exploit developing nations, and create job losses in their own home countries.

The Rise of the Multinational Corporation

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 1660: 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. Other examples include the Swedish Africa Company, founded in 1649, and the Hudson's Bay Company, which was incorporated in the 17th century. 

Categories 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

Differences Between Types of Multinationals

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

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. 

Largest Multinationals

According to the Fortune Global 500 List, the 10 largest multinational corporations in the world as of mid-2018 consolidated revenue were Walmart ($500.34 billion), State Grid ($348.90 billion), Sinopec Group ($326.95 billion), China National Petroleum ($326.01 billion), Royal Dutch Shell ($311.87 billion), Toyota Motor ($265.17 billion), Volkswagen ($260.03 billion), BP ($244.58 billion), ExxonMobil ($244.36 billion), and Berkshire Hathaway ($242.14 billion).

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. Studies indicate that for each year between 2003 and 2015, imports were responsible for job displacements of 136,000 workers. This data underscores how important it is 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. According to Bureau of Labor Statistics projections, a few of the fastest-growing industries in the United States are home health care services, outpatient care centers, medical and diagnostic laboratories, and information services; together, these industries are replacing many of the American jobs that were displaced by overseas manufacturing.

Those opposed to multinationals say they are a way for the 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.