Business leaders and executive team members often look for new ways to increase revenue and reach more customers. One way companies accomplish this is by becoming multinational corporations. If you're interested in working in a leadership position for a multinational corporation or if your company operates internationally, it can be helpful to learn more about these types of organizations.
In this article, we discuss what a multinational corporation is, how it works and explore the advantages and disadvantages of this business structure.
What is a multinational corporation?
A multinational corporation (MNC) is an organization that has assets or facilities in multiple countries. To be considered a multinational corporation, an organization must have at least one business location in a country other than its home country. While they typically have a main office in one location, these organizations may have offices, factories and other locations worldwide. Multinational corporations are known under different names, including:
- Multinational enterprises
- Transnational enterprises
- Transnational corporations
- International corporations
- Stateless corporations
How a multinational corporation works
The structure and operations of multinational corporations may vary depending on their industry, the size of their organization and the goods or services they produce. To become a multinational corporation, the primary requirement is to directly invest in another country by operating part of your business there. Here are some common characteristics of typical MNCs:
- Foreign investment: Multinational organizations invest directly in other countries through subsidiaries and facilities.
- Diverse operations: Multinational organizations often engage in a broad array of business activities spanning various industries and sectors.
- Large number of assets: Multinational organizations often have a large number of assets. These include tangible assets, like employees, as well as financial assets.
- Large-scale operations: Multinational organizations are typically large companies with substantial financial resources and significant market influence.
4 types of multinational corporations
Here are some of the most common types of corporate structures of multinational corporations:
1. Decentralized corporation
Decentralized corporations can have multiple offices, facilities and assets in foreign countries, but they often maintain a strong presence in their home country. Usually, decentralized corporations do not have a central headquarters. Each country in which they operate may have its own management structure. This allows the corporation to expand rapidly while complying with the regulations in each geographic area.
2. Global centralized corporation
A centralized global corporation typically has its head office in its home country, where the chief executive officer and other senior leaders reside. The management team in the home country usually makes decisions for both domestic and international operations while overseeing all global operations. These corporations often seek opportunities to increase revenue by purchasing inexpensive resources and materials from foreign countries.
3. International division
Corporations may separate their domestic operations from their international operations by creating an international division. This new division oversees all of the corporation's operations in foreign countries. While this structure can help companies expand their reach and make decisions that resonate with diverse cultures, maintaining a unified brand image can also be difficult.
4. Transnational enterprise
A transnational enterprise often operates within a parent-subsidiary relationship, enabling it to utilize the resources of the parent corporation, including its research and development team, even if they are located in different countries. The parent company generally supervises the transnational enterprise and makes decisions on its behalf. Although they usually adhere to a centralized leadership structure, this may differ from one corporation to another.
Advantages of multinational corporations
Organizations that become multinational corporations may experience several advantages, including a faster growth rate. They can also have a positive effect on the international economies in which they conduct business by creating more jobs. The benefits of being a multinational corporation include:
- Proximity to international markets
- Increased market share
- Lower production and labor costs
- Decrease of taxes
- Reduced shipping and transaction costs
- Access to a larger talent pool
- Expanded product variety
- Increased revenue margins
- Growth of customer base
- Improved efficiency
Many business owners want to diversify their portfolios by expanding their companies into new markets. Multinational corporations often have a positive impact on the countries where they operate. It's important to consider how their business operations may affect the politics, resources and economies of these countries.
Disadvantages of multinational corporations
While organizations may benefit from becoming multinational corporations in various ways, some common challenges are important to be aware of so the company can mitigate risks. Here are some potential challenges of operating as a multinational corporation:
- Increased legal burden: When operating in multiple countries, it's important to invest in a skilled legal team familiar with each country's requirements to mitigate legal risks.
- Increased tax requirements: When a multinational company operates in various countries and jurisdictions, it may encounter different rules and tax laws that it must navigate.
- Currency rate fluctuations: When operating in other countries, a multinational corporation will often need to transact business in multiple currencies and is at risk of losses due to exchange rate fluctuations.
- Political instability: Multinational corporations frequently establish operations in underdeveloped countries, where they may encounter political instability or unrest.
- Decreased innovation: In many cases, groundbreaking advancements emerge from small, flexible companies rather than from large, established corporations that already hold a significant market share.
Tips for deciding whether to become a multinational corporation
Here are some tips that can help you decide whether becoming a multinational corporation is the right choice for your organization:
- Research other countries. Before you expand your business, research other countries thoroughly. Learn about their tax structure, regulations, cost of living and political environment.
- Consider your competitors. Make a list of competitors who operate in the same region. Then, analyze opportunities to increase your market share by expanding your operations.
- Network with business leaders. Contact other business leaders in your network who oversee multinational corporations to see if they have any advice. Ask questions about their experience to help you prepare.
- Review your finances. Analyze your profit margins and forecasted revenue to determine whether you have the resources necessary to open another location in another country. You can also research the costs of opening a new branch or facility to create a budget.
- Develop a strategic plan. Collaborate with other executive leaders and key stakeholders in your company to develop a strategic business plan. Outline what resources you would need to expand your operations, your revenue streams, how you can market your services and the potential risks to help you visualize what steps your company needs to take to become an MNC.