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Multinational Corporations Explained
A multinational corporation (MNC) is one that has business operations in two or more countries. These companies are often managed from, and have a central office in, their home country with offices worldwide. There are different types of multinational corporations based on their corporate structure. They often operate as a parent company with separate foreign subsidiaries.
MNCs can have a major impact on the economies of each country in which they operate. They create jobs and add money to the local tax base. Both at home and abroad, these companies often face critics, who perceive that the impact they have on these countries may do more harm than good.
Definition and Examples of Multinational Corporations
To be considered a multinational corporation (MNC), a company must derive at least 25% of its revenue from operations outside of its home country. Many MNCs outsource manufacturing and labor to developing economies, in order to take advantage of lower tax rates or to move products closer to new markets.
Alternative names: multinational firm, multinational enterprise
Note
Some of the largest firms in the world are MNCs. Apple, Costco, and Exxon are all MNCs. One of the largest is Walmart: Its home base is in the U.S., but it does business in 24 countries worldwide.
How Multinational Corporations Work
Aside from having its main headquarters in its home country, an MNC makes a direct investment in a foreign country by setting up operations there. Some MNCs might have a presence in just one other country, while others have subsidiaries all over the world. MNCs aren’t limited to the U.S.
Note
Selling its goods and services in other countries doesn’t make a company an MNC per se. Plenty of domestic corporations export their products without meeting the exact standards, nor do they reach the 25% threshold of revenue from abroad needed to be called MNCs.
Types of Multinational Corporations
Multinational corporations can be grouped into many types based on their different objectives, phases of growth, and management structures.
International Division
An MNC that separates its international operations from its domestic ones may have a designated “international division” that handles all operations in foreign markets. That can allow the managers of those offshoots, who may have better knowledge of international markets, greater autonomy in making choices for their branch. On the other hand, it may also cause issues like lack of cohesion or a loose sense of corporate direction.
Decentralized Corporation
This type of MNC maintains a strong presence in its home country, but it does so without a central headquarters there. Instead, the company has many locations, both at home and abroad, that each have their own management structure. This design allows MNCs to grow at a faster pace, without the bureaucracy that comes along with having to route all of their moves and choices through a central office.
Global Centralized Corporation
A centralized global MNC has a main headquarters in its home country. The CEO and other higher ups in the chain of command tend to live here as well. A global MNC handles domestic and international operations under the same umbrella, both with respect to management structure and decision-making. Offshoots in other countries may need to get prior approval from the home office before making any major moves or decisions.
Transnational Corporation
A transnational MNC is marked by a parent-subsidiary relationship in which the parent company directs the operations of the subsidiary company or companies. Leadership structure tends to be centralized, but not always. It can also take on many less formal shapes as well.
Note
Subsidiaries can be in other countries or in the home country. They may also differ in name or branding from the parent MNC. For instance, Nespresso is a subsidiary of Nestle.
Multinational Corporations vs. Domestic Corporations
While an MNC has a physical presence in two or more countries, domestic corporations have operations in only one country. They may still import supplies or sell their products around the world, but they don’t have corporate offices or management located in countries other than their home base.
| Multinational Corporations | Domestic Corporations |
| Physical presence in many countries | Physical presence in one country |
| More complex business model | Simpler business model |
| Doing business in many languages | Doing business mainly in one language |
| Subject to International Financial Reporting Standards (IFRS) | Subject to Generally Accepted Accounting Principles (GAAP) |
| Can outsource to foreign markets for cheaper labor costs and taxes | Subject to the labor costs and tax rules of their home country |
| Often criticized for outsourcing jobs abroad and for negative impacts on the countries in which they do business | May be praised for keeping jobs in their home country |
What Are the Upsides and Downsides of MNCs?
Pros
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Efficiency
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Job creation
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Tax perks
Cons
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Subject to many accounting laws
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Job losses in home country
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Monopolization
Pros Explained
- Efficiency: Rather than manufacturing a product in one country and shipping it all around the world, MNCs can create products where the market is. They can also access cheaper local materials and labor and avoid the tariffs that may come with shipping internationally.
- Job creation: MNCs create jobs in many countries. They have the benefit of a larger talent pool, and the workers they hire may have access to better pay than local companies can offer.
- Tax perks: MNCs can set up subsidiaries in countries with better tax rates than their home country, and make use of a wider range of tax rates when pricing products.
Cons Explained
- Subject to many tax and accounting laws: MNCs are subject to more accounting and tax standards, as each subsidiary must follow the laws of the country in which it does business.
- Job losses in home country: MNCs often face criticism for taking jobs overseas. They may reduce jobs in their home country in favor of cheaper labor elsewhere.
- Monopolization: By setting up physical locations in other countries, MNCs compete with smaller local businesses and may end up putting many out of business.
What Do MNCs Mean for Individual Investors?
According to the U.S. Securities and Exchange Commission, investing in MNCs is a way for U.S. investors to diversify their investment portfolios and gain international exposure without direct investment in foreign stocks.
In fact, you may not realize that you have international exposure if you invest in certain household name MNCs like Nestle or Coca-Cola.
Key Takeaways
- A multinational corporation (MNC) is a company with business operations in two or more countries that derives at least 25% of its revenue from foreign operations.
- MNCs make a foreign direct investment in another country by establishing branches or foreign subsidiaries.
- MNCs may differ from domestic corporations in both structure and management style.
- MNCs are subject to the laws of the countries in which they operate.
- MNCs often face criticism for the impact they have on the countries they move into and for moving jobs out of their home country.
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