What is a Multinational Company (MNC)?

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Definition:

A multinational company (aka a multinational corporation) is one that has business operations in more than one country.

🤔 Understanding multinational companies

Multinational companies (MNCs) — or multinational corporations — run their business operations in multiple countries. These companies often have headquarters in one country and then assets and facilities in at least one other country. Most often, they’ll place their central office in a developed nation such as the United States but might produce their goods elsewhere. These companies contribute to the economy of more than one country and create jobs for those countries’ citizens. Multinational companies represent some of the largest firms in the world. This type of business model sometimes garners some criticism for their treatment of employees in developing nations and for moving jobs overseas.

Example

Imagine that a national clothing company is expanding its operations. Currently, the company locates its headquarters in the United States, where it also manufactures all of its clothes. Because of the potential for increased profit margins, the company builds a factory overseas, where it will hire workers to produce the clothing and ship to customers from there. Because of its presence in multiple countries, the clothing company becomes a multinational company.

Takeaway

A multinational company is like a family with a vacation home in another country…

Let’s say an American family has a vacation home in Canada. Their primary residence is still their home-base — It’s where they spend most of their time and keep their valuables. But they visit their vacation home as well, where they contribute to the local economy by visiting the shops and restaurants. Similarly, a multinational company has its home base in one country where the executives work and where they make the big decisions, but have a second home in another country (or multiple other countries) as well.

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What makes a company a multinational company?

A multinational company (aka a multinational corporation or transnational corporation) is one that has a presence in more than one country. In most cases, these companies have a home country, which is where the headquarters are. Then they also have business operations in other countries, which are called host countries. It’s not enough that a company sells its products in another country — The business must have a physical presence in more than one country to be multinational.

One of the primary characteristics of a multinational company is that they tend to be very large. These are companies that have enough production to require multiple locations and a substantial number of employees. They typically have a considerable amount of both financial and physical assets.

Another characteristic of these companies is that they often continue to grow, partially through increasing business operations and partly through mergers and acquisitions. For example, Coca Cola is one of the largest multinational corporations, and it owns 21 different brands that each bring in over $1B. Other well-known beverage companies such as Powerade and Dasani are a part of the Coca Cola company.

How does a multinational company work?

Multinational companies have a home-base. They have a headquarters in one country, usually a developed country, where their primary business operations take place.

They also have a physical presence in at least one other country (though it could be more than one). Not only does the company have a presence there, but it derives a portion of its revenues from this host country as well.

There are four primary types of multinational companies:

  1. A decentralized corporation that still maintains a strong presence in its country of origin.
  2. A centralized, global corporation. These companies have a central headquarters where the bulk of business operations happen. However, they move production to other countries for cost savings.
  3. A global company that has a parent company, which is how it acquires its research, development, and technology.
  4. A transnational company that operates as a combination of the three previous categories.

Multinational companies usually have to abide by the regulations of the country in which they are doing business. So the headquarters might be in the United States and would have to follow U.S. regulations. But a factory in a different country would be subject to that country’s laws.

The same goes for taxation. While a host country might not be able to tax the total revenue a company earns, they can generally tax the amount the company made within its borders.

What are the largest multinational companies?

There are many multinational companies that collectively make up a significant portion of the world economy. In fact, the United Nations reports that the 100 largest multinational companies make up about 40% of global trade.

Let’s talk about some of the largest multinational companies that are household names:

  • Walmart is, without a doubt, a name that most people recognize as a multinational company. The company has stores in 27 different countries and e-commerce stores in 10 different countries. They are one of the largest employers in the United States, employing 1.5 million workers. Overall, they employ about 2.2 million people.
  • Coca Cola is a multinational company with operations in roughly 200 countries, and more than 700,000 employees around the world. They are the largest beverage company in the world. The headquarters is in Atlanta, Georgia.
  • Ford Motor Company employs more than 166,000 individuals in more than a dozen countries around the world. Their headquarters are located in Michigan. Ford faced criticism for its multinational business model in 2017 when it announced plans to open a new factory in Mexico. Opponents criticized the company for outsourcing jobs rather than employing Americans in their home state of Michigan.

What are the advantages and disadvantages of multinational companies?

Advantages

There are several advantages to choosing a multinational business model. They can be advantageous to both the company and the host country. First, opening locations in other countries can often reduce costs for companies, and therefore increase profit margins. The cost of labor might be cheaper in countries other than a company’s home base.

While it might seem like lower labor costs only benefit the company, there are more significant advantages. If a company can produce a good for a lower cost, they might also be able to sell it at a lower cost, which reduces the ultimate price for consumers.

Another advantage for the corporation is that it can set up operations in a country where their products are popular. Suppose that a U.S.-based company had a product that was popular in Asia. Rather than pay to ship the product overseas, as well as getting hit with potential tariffs, the company might set up shop in the country so they can more easily sell to their customers there.

The presence of these multinational companies can also be extremely beneficial for the host countries. In some cases where a large corporation establishes a presence in another country, the multinational company is larger than the entire economy of the host country. When the company moves in, the government is able to tax the revenue that the company earns in their country. Those tax dollars can be extremely valuable for a country with a small economy.

This relationship could also bring significant jobs and opportunities to other countries. Not only do the companies create jobs, but the jobs might pay better than local businesses are willing to pay.

Disadvantages

While they certainly have their benefits, multinational companies have also been on the receiving end of plenty of criticism. First, multinational corporations might face criticism in their home country for taking jobs out of the country. The companies could instead have chosen to open an additional location where they already have their operations, and they would have created jobs.

A downside for the host countries of multinational companies can be the environmental impact the company might have. Companies might find it inconvenient to do business in a country like the United States, which has environmental regulations such as the Clean Water Act, which Congress passed in 1972. The law regulates the discharge of pollutants into water. A company might take their business to a country with less strict regulations, which could be damaging to both the environment and the health of the host country.

Multinational companies can also have a negative social impact on the countries in which they choose to do business. Not all countries have substantial human rights and worker protections — This opens the door for companies to treat international workers poorly or pay them low wages.

In addition to the potential for taking advantage of employees, the presence of these multinational corporations can also be problematic for local business owners. If you own a small market in your town and Walmart moves in, it can be hard to compete with the low prices and the number of products available.

Another concern with a multinational business model is that it could lead to corporate involvement in the governments of other countries. When a large corporation moves into a developing country, they might be able to influence the government to push policies more favorable to them. And as these countries come to rely on multinational corporations for jobs and tax dollars, it might be challenging to say no.

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