Companies always look for new ways to increase their revenue and extend market influence. One way they can do so is by becoming a multinational company. What are multinational companies and how do they work? What sets them apart from other types of companies? Are there any threats that they present to the world? By the end of this explanation, you will be able to answer all of these questions.
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Companies always look for new ways to increase their revenue and extend market influence. One way they can do so is by becoming a multinational company. What are multinational companies and how do they work? What sets them apart from other types of companies? Are there any threats that they present to the world? By the end of this explanation, you will be able to answer all of these questions.
Multinational company meaning
When a company expands into a global market, it is classified as a multinational company or corporation (MNC).
A multinational company (MNC) is defined as a firm operating in two or more countries. The country where the multinational company headquarters are located is called the home country. Countries that allow a multinational company to set up its operations are called host countries.
MNCs have a significant impact on each economy in which they operate. They create jobs, pay taxes, and contribute to the social welfare of the host country. The number of MNCs has been on the rise as a result of globalisation - the trend towards economic and cultural integration across the world.
Nowadays, we can find multinational firms in all kinds of industries, including retail, automobile, technology, fashion, food, and beverages.
Amazon, Toyota, Google, Apple, Zara, Starbucks, McDonald’s, etc. are examples of the world's most well-known multinational corporations.
Types of multinational companies
There are four types of multinational companies: decentralised multinational corporations, global centralised corporations, international companies, and transnational enterprises:
Fig. 1 - Types of multinational companies
Decentralised multinational corporations
Decentralised multinational corporations have a strong presence in their home country. The term 'decentralisation' means there is no centralised office. Each office can operate separately from the headquarter. Decentralised multinational corporations allow for rapid expansion, as new entities can be set up quickly throughout the nation.
McDonald’s is a decentralised multinational corporation. Although the fast-food king has a presence in over 100 countries, it has the largest operations in its home country, the United States, with around 18,322 stores (2021). Each McDonald's store runs on its own and can adapt the menu and marketing strategies to attract regional customers. As a result, there is a variety of menu options in different McDonald's locations. The franchising business model also allows new restaurants to be set up quickly in any part of the world at no cost to the main office.
Global centralised corporations
Global centralised corporations have a central administrative office in the home country. They may outsource production to developing countries to save time and production costs while making use of local resources.
Outsourcing is the practice of hiring a third party to create goods or services for the company.
For example, Apple is a global centralised corporation that outsources the production of iPhone components to countries like China, Mongolia, Korea, and Taiwan.
International companies
International companies utilise the resources of the parent company to develop new products or features that will help them gain a competitive edge in local markets.
Each Coca-Cola branch can develop its own product design and marketing campaigns to attract local customers.
Transnational enterprises
Transnational enterprises have a decentralised organisational structure with branches in several countries. The parent company has little control over the foreign branches.
Nestle is an example of a transnational enterprise with a decentralised organisational structure. Although the headquarters are responsible for making major decisions, each subordinate enjoys a high level of independence over its daily operations. Its long history from a small village operation to a world food manufacturing leader has also demonstrated Nestle's great capacity to adapt to changing business environments without losing its core values.
Features of multinational companies
Below are the main features of multinational companies:
Large volume of sales: with customers around the world, MNCs generate a large sum of revenue each year. For example, Amazon's international sales reached $127.79 billion in 2021.3 Coca Cola’s net operating revenues amounted to $33.01 billion in 2020.4 McDonald’s global revenue was $23.2 billion in 2021.5
Unity of control: multinational companies often have their headquarters in the home country to manage overall business activities across the globe. Each international branch, while operating separately, must follow the general framework of the parent company.
Economic power: Multinational companies have significant economic power due to their enormous size and turnover. They grow their power by setting up subsidiaries or acquiring businesses in foreign countries.
Aggressive marketing: Multinational companies spend a lot of money on advertising in both the home and foreign markets. This allows them access to a large variety of products and services while raising global awareness.
High-quality product: Multinational companies enjoy a worldwide reputation. To keep the reputation intact, MNCs need to maintain a superior quality of their products and services.
Challenges of multinational companies
Multinational companies' special characteristics create a set of challenges that they have to face to succeed. Here are some examples:
Cultural differences: This refers to difficulties in localisation of not only products and marketing strategy but also the corporate culture.
Different political and legislative environments: MNCs have to adapt to different regulations affecting their products
Long supply chains: Coordinating transportation from one country to another can be very complex and time-consuming.
Managing geopolitical and economic risks: This refers to the political and economic stability of the host countries.
Competition in the global market: It can be more challenging to compete with other global companies.
Currency fluctuations: MNCs are affected by changes in exchange rates of multiple currencies.
Examples of multinational companies strategies
There are two primary strategies for firms to provide their products and services on a global scale: standardisation and adaptation:
Standardisation means offering the same products and services with little variation in order to save costs and achieve economies of scale (with more output, the cost per unit decreases).
Adaptation is the opposite strategy, in which firms adapt their product offerings to match the tastes and preferences of the local customers. This way, the products and services have a higher chance of acceptance.
In most multinational firms, there is a combination of standardisation and adaptation strategies. We will examine this further in a couple of examples below:
Fast food multinational company
McDonald’s is a multinational company with more than 39,000 restaurants located in 119 markets. It is one of the world's most prestigious fast-food chains with a brand value of $129.32 billion in 2020. McDonald's also ranked 9th in the leading global firms, along with companies such as Apple, Facebook, and Amazon.8
McDonald's worldwide success can be put down to the mixed strategy of standardisation and adaptation. On the one hand, the company adopts a standardised menu of McChicken, Filet-O-Fish, and McNugget in different markets across the globe, along with the same logo, brand colour, and packaging. On other hand, it is adaptive to the local markets. Each restaurant can adjust the menu items to suit the needs and preferences of customers in the host countries.
McDonald's diverse menus around the world:
In the UK, menu items include British breakfast staples such as bacon roll and cheese bacon flatbread.
European restaurants exclusively serve beer, pastries, potato wedges, and pork sandwiches.
McDonald's in Indonesia replaces pork with fish dishes, as the majority of the population are Muslim.
In Japan, there are unique items such as Chicken Tatsuta, Idaho Budger, and a Teriyaki Burger.
Coffee multinational company
Fig. 2 - Starbucks multinational company
Starbucks is a US-based multinational coffee chain. It serves coffee along with multiple beverages and snacks to middle- and high-class customers. As of today, the company has over 33,833 stores with a customer base of more than 100 million customers.13
Like McDonald’s, Starbucks’ international strategy is a mixture of standardisation and adaptation. While the company has a clear expectation of how the brand image should be perceived by the customers, it allows each franchise the freedom to design its own store, menu items, and marketing campaign to attract regional audiences.
Threats of multinational companies
While the existence of multinational companies brings many benefits to local economies, such as providing more jobs and contributing to tax and social welfare, many critics believe they are doing more harm than good. Here are some challenges facing the host countries in which multinational companies operate:
Fig. 3 - Threats of multinational companies
Monopoly power
With the huge market share and turnover, multinational companies can easily obtain a leading position in the market. While many MNCs commit to healthy competition, some may abuse their monopoly power to drive smaller firms out of business or prevent new ones from entering. In some cases, the presence of multinational companies also poses a challenge for other businesses to operate.
In the search engine market, Google is the leading company with over 90.08% market share. Although there are several other search engines, none of them can compete with Google's popularity. There is also little chance for another search engine to enter since it would take years for the new business to effectively manage the way Google does. While Google doesn't present any direct threat to online users, its dominant position forces companies to pay more money for ads to improve their ranking on the search pages.
Independence loss
Multinational companies yield significant market power, which allows them to manipulate the laws and regulations of the host countries. For example, some governments of developing countries may refuse to raise the minimum wage for fear that the higher labour cost will make the multinational company switch to other cheaper economies.
The Indian production hub Karnataka produces clothes for international brands such as Puma, Nike, and Zara. More than 400,000 workers are paid below minimum wage, as the government fears the increase in wages will drive multinational companies away. Since MNCs aim to minimise production costs through outsourcing, they will opt for the cheapest option available, regardless of whether workers in these countries receive sufficient wages or not.
Resource exploitation
Another disadvantage of MNCs outsourcing is the exploitation of local resources. These include not only natural but also capital and labour resources.
Multinational brands like Zara and H&M employ multiple workers in developing countries to produce fast fashion clothes and accessories. While these companies help provide jobs for people in these economies, they risk the well-being of these workers by making them work long hours with barely enough wages. Under public pressure, a lot of efforts have been exerted to improve garment workers' working conditions, though this is far from removing the injustice that they endure.
Advanced technology
The technology used by multinational companies may be too advanced for the host country. Without sufficient training, local staff may find it difficult to operate the new machine or system. In other cases, new technology may replace local jobs.
The introduction of app-based car-hailing services such as Uber and Grab has put many traditional taxi drivers out of jobs. Granted, there are opportunities for more tech-savvy young drivers to earn more income. Older drivers may struggle to get used to the new technology and suffer a loss of income as more people book car services from an app.
Multinational companies make up a large part of the business scenery, and their popularity will only grow with the trend towards globalisation. While MNCs bring many benefits to the host country such as job creation and tax contribution, there are also threats to the state's independence and local resources. Maximising the positive outcomes that multinational companies offer, while limiting their negative consequences, is a major challenge for many economies today.
What is a multinational company? - Key takeaways
A multinational company is a large and influential firm that operates in more than one country.
Multinational companies exist across all sectors, including automobiles, retail, food, soft drinks, coffee, technology, etc.
Some examples of multinational companies are Coca-Cola, Unilever, Pepsi, Starbucks, McDonald’s, BMW, Suzuki, Samsung, etc.
There are four types of multinational companies: decentralised multinational corporations, global centralised corporations, international companies, and transnational enterprises.
Multinational companies' common characteristics include large size, unity of control, significant economic power, aggressive advertising, and high-quality products.
Multinational companies face similar challenges: cultural differences, different political and legislative environments, long supply chains, managing geopolitical and economic risks, competition in the global market, and currency fluctuations.
Multinational companies may abuse their monopoly power, bend the rules and regulations, exploit the host country's resources, and introduce new technology that replaces local jobs.
Sources:
1. Multinational Corporations, Espace Mondial Atlas, 2018.
2. The four types of multinational business (And the financial benefits of each), MKSH, n.d.
3. Don Davis, Amazon’s North America revenue ticks up 18.4% in 2021, Digital Commerce 360, 2022.
4. M. Ridder, Coca-Cola Company's net operating revenues worldwide 2007-2020, Statista, 2022.
5. Julie Creswell, McDonald’s, now with higher prices, topped $23 billion in revenue in 2021, New York Times, 2022.
6. Benjamin Kabin, Apple's iPhone: Designed in California But Manufactured Fast All Around the World (Infographic), Entrepreneur Europe, 2013.
7. Siddharth Sai, Multinational Corporations (MNCs): Meaning, Features and Advantages | Business, Your Article Library, n.d.
8. S. Lock, The number of McDonald's restaurants worldwide 2005-2020, Statista, 2021.
9. Bernadine Racoma, McDonald’s International Strategy: Adapting Around the World, Day Translations Blog, 2019.
10. Aida Cisse, 10 Awesome McDonalds Food You Can Only Get In The UK, The Travel, 2019.
11. George Young, 20 Menu Items Only Found In European McDonald's, The Travel, 2018.
12. Miraclewatage, 50 McDonald's Menu Items Only in Japan, Tsunagu Japan, 2021.
13. Starbucks stores: U.S. and international, Statista, 2021.
References
Fig. 2 - Photo by DuoNguyen (https://unsplash.com/photos/WAh1ULDd8Qo) by DuoNguyen (https://unsplash.com/@duonguyen?utm_source=unsplash&utm_medium=referral&utm_content=creditCopyText) is licensed by (https://unsplash.com/license)
Frequently Asked Questions about Multinational Company
A multinational company (MNC) is defined as a firm operating in two or more countries.
Most known examples of multinational companies are Apple, Toyota, McDonald's, Zara, or Google.
The four main types of multinational companies are:
Decentralised corporation
Global centralised corporation
International company
Transnational company
Characteristics of multinational companies are:
large size and big volume of sales
unity of control
significant economic power
constant growth
aggressive marketing and advertising
high-quality products
Multinational companies face the following challenges:
cultural differences,
different political and legislative environments,
long supply chains,
managing geopolitical and economic risks,
competition in the global market,
currency fluctuations.
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