MGT of multinational corporations 5 PDF

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MANAGEMENT OF MULTINATIONAL ORGANISATIONS Definitions: Corporation: A succession of persons or body of persons authorized by law to act as one person or having rights and liabilities distinct from the individuals forming the corporation. The artificial personality may be created by royal charter, statue, or common law. The most important type is the registered company formed under the companies act. (A) A multinational corporation (MNC) or enterprise (MNE), is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation . The International Labour Organization (ILO) has defined an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries. The Dutch East India Company was the second multinational corporation in the world (the first, the British East India Company, was founded two years earlier) and the first company to issue stock, and it was the largest of the early multinational companies. It was also arguably the world's first mega corporation, possessing quasi-governmental powers, including the ability to wage war, negotiate treaties, coin money, and establish colonies. Some multinational corporations are very big, with budgets that exceed some nations' GDPs. Multinational corporations can have a powerful influence in local economies, and even the world economy, and play an important role in international relations and globalization. (B) A corporation that has its 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 co-ordinate global management. Very large multinationals have budgets that exceed those of many small countries. Sometimes referred to as a "transnational corporation" Nearly all major multinationals are American, Japanese or Western European, such as Nike, CocaCola, Wal-Mart, AOL, Toshiba, Honda and BMW, and so on. Advocates of multinationals say they create jobs and wealth and improve technology in countries that are in need of such development. On the other hand, critics say multinationals can have undue political influence over governments, can exploit developing nations as well as create job losses in their own home countries. (C) A corporation that has production operations in more than one country for various reasons, including securing supplies of raw material, utilizing cheap labour sources, servicing local markets, and bypassing protectionist barriers. Multinational may be seen as an efficient form of organization, making effective use of the world resources and transferring technology between countries. On the other hand, some have excessive power, and are beyond the control of governments (especially weak governments), and are able to exploit host companies, especially in the third world, where they are able to operate with low safety levels and inadequate control of pollution.

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(D) Any corporation registered and operating in more than one country at a time, usually with its headquarters in a single country. A firm's advantages in establishing itself multinationally include both vertical and horizontal economies of scale (reductions in cost that result from an expanded level of output). Critics usually regard the multinational corporation as destructive of local economies abroad and as prone to monopolistic practices. It is also a corporation that has production facilities or other fixed assets in at least one foreign country and makes its major management decisions in a global context. In marketing, production, research and development, and labour relations, its decisions must be made in terms of host-country customs and traditions. In finance, many of its problems have no domestic counterpart—the payment of dividends in another currency, for example, or the need to shelter working capital from the risk of devaluation, or the choices between owning and licensing. Economic and legal questions must be dealt with in drastically different ways. In addition to foreign exchange risks and the special business risks of operating in unfamiliar environments, there is the specter of political risk—the risk that sovereign governments may interfere with operations or terminate them altogether.

Categories: There are four categories of multinational corporations: (1) a multinational, decentralized corporation with strong home country presence, (2) a global, centralized corporation that acquires cost advantage through centralized production wherever cheaper resources are available, (3) an international company that builds on the parent corporation's technology (4) a transnational enterprise that combines the previous three approaches. According to UN data, some 35,000 companies have direct investment in foreign countries, and the largest 100 of them control about 40 percent of world trade. TYPES OF MULTINATIONAL CORPORATIONS & FOREIGN DIRECT INVESTMENT (FDI) A firm is considered a multinational corporation (MNC) if it owns, in part or in whole, a subsidiary in a second country. High profile MNCs have many subsidiaries. There are different types of MNCs. Some are vertically integrated. The subsidiary provides inputs to the parent which produces a final good. Oil companies are good examples of vertically integrated MNCs. Oil exploration and production are accomplished abroad where the subsidiary exports crude petroleum to the parent corporation which then refines the crude into gasoline. Another example is the Maquiladora program. The US parent corporation exports components to an assembly Maquiladora subsidiary which in turn re-exports the assembled good back to the parent corporation. Other MNCs are horizontally integrated, meaning that the subsidiary produces a similar good to that of the parent. The soft drink industry is an example of horizontally integrated MNCs. The subsidiary is a bottling company which produces pretty much the same product as the parent. Foreign direct investment (FDI) or the means by which an MNC obtains or expands a subsidiary can take a variety of forms. FDI can be by merger or acquisition of an existing firm, by participating in the construction of a new firm, or by expanding existing subsidiaries. This category has the following 6 subcategories, out of 6 totals. 

International information technology consulting firms - An international information technology consulting firm is an information technology consulting firm with offices or projects outside of the country where its head office resides.

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International management consulting firms - An international management consulting firm is a management consulting firm with offices or projects outside of the country where its head office resides.

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International marketing research companies - IBOPE Zogby International, OnePoll, SIS International Research, Skopos market insight, Technology Sales Leads, Visiongain.

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Multinational food companies - Food is defined in this category and its sub-categories as "any substance that can be consumed, including liquid drinks", as per the Wikipedia article food.

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Multinational health care companies - International SOS: International SOS provides integrated medical, clinical, and security services to organisations with international operations. Services include planning and preventative programs, in-country expertise, and emergency response.

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Multinational joint-venture companies - Abrams & Chronicle Books, Alcatel Mobile Phones, CKX, Inc., Concert Communications Services, Fuji Xerox, Fujitsu Siemens Computers, ICICI Prudential, MMK-Atakaş Metallurgy, Motiva Enterprises, PruHealth, Sony Ericsson, Star Health and Allied Insur.

Motives for Direct Foreign Investment (FDI) Foreign direct investment occurs whenever a firm locates a factory abroad or purchases more than ten percent of an existing domestic firm. As with any investment, FDI reflects the firm’s decision to spend resources today in the expectation that these resources will generate future profits sufficient to compensate the firm for these expenditures. In the jargon of economics, the present discounted value of the future stream of revenues will be greater than the present discounted value of costs. The underlying factors which may have dictated these flows of revenues and costs are demand and cost factors. The main decision for FDI is whether it is more profitable to set up production in one form or another with a foreign subsidiary or to increase production at home and expand exports of the good. The advantages to setting up a subsidiary fall into two categories, demand factors and cost factors. Demand Factors: On the demand side, by having a foreign subsidiary, the firm will be capable of monitoring the foreign market more closely and, consequently, respond to changes in a more timely manner. This is especially true if the foreign market is large and growing rapidly. A second consideration on the MNCs, demand side is more direct. If foreign competition is eroding the firm’s market share, then simply by buying the competitor maintains the firm’s market power. Cost Factors: The impetus for the creation of a foreign subsidiary may be lower costs of production. The most obvious is mineral extraction. The presence of large deposits of natural resources in foreign countries where the cost of extraction is considerably less than continued domestic exploration and extraction will lead to large amounts of FDI. There is a real danger in this type of FDI. Many examples abound of expropriation of these types of subsidiaries, for example, oil MNCs in Mexico and Libya, and bauxite MNCs in Jamaica. Firms may relocate production to take advantage of lower labour costs. But as already discussed, the attraction to lower labor costs must also take labour productivity into consideration. If foreign labour productivity is sufficiently low so as to offset the gains from lower wages, then FDI will not be profitable. Examples of FDI responding to labour costs include China, SE Asia, and the Mexican Maquiladora program. Probably the most significant motivation for FDI is the avoidance of trade restrictions. Recall the firm's choice is to either produce at home and export or to produce abroad. If the 3

firm's exports face high barriers to trade, then FDI leading to production within the foreign country circumvents these barriers. Examples of this are close to home. Much of the Japanese automotive transplants were as a result of growing US protectionism against Japanese imports. Trade diversion occurring in Mexico also represents this type of FDI. Another factor which may encourage FDI is the idea of risk diversification. If the good produced is highly sensitive to income changes, i.e., highly income elastic, then it would make sense to have access to many different markets. The major national economies grow at different rates. While one part of the world is in recession, other areas may be expanding. For example the US is showing strong growth while Japan and Europe are coming out of recession. If a company only serviced the European market, it would be suffering from the slow pace of the European economy. However, if they also had production facilities in the US servicing the US market, then their losses in Europe are offset by the performance of their US subsidiary. The recent mega-megers in the automobile industry are examples of firms diversifying their markets. The merits and demerits to the host country are listed as follows: Merits A. Leads to greater output B. Increased wages C. Increased employment D. Increased exports E. Increased tax revenues exploiting the poor F. Provision of new and better technology G. Better managerial and technical skills H. Increased domestic investment

Demerits A. Displacement of domestic firms B. Inappropriate technology and investment C. Loss of sovereignty D. Benefits only the "elites" mostly E. Underemployment F. Diversion of profits made. G. May pull out to other country.

Approaches to venturing into international Marketplace If a company wants to venture into the international marketplace, it can use several different methods. In each case, the levels of risk and control move together. The four most common approaches include the following: 

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Exporting. The selling of an organization's products to a foreign broker or agent is known as exporting. The organization has virtually no control over how products are marketed after the foreign broker or agent purchases them. Because the investment is relatively small, exporting is a low-risk method of entering foreign markets. The only real danger here is what the foreign agent might do with the products to hurt the organization's or product's image. Licensure agreement. This approach allows a foreign firm to either manufacture or sell products, or the right to place a brand name or symbols on products. Disney World, for example, has licensure agreements with many foreign firms. This approach provides more control than an export sale, as a firm can require that certain specifications be met, yet it is still not the manufacturer in the foreign market. Multinational approach. With this approach, a firm is willing to make substantial commitment to a foreign market. Normally, products or services are modified to meet the foreign market demands, and in many cases, substantial fixed investments are made in plants and equipment. The most common ways to become a multinational firm are to form joint ventures or global strategic partnerships, or to establish wholly-owned subsidiaries. 4

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Joint ventures occur when a company forms a partnership with a foreign firm to develop new products or to give each other access to local markets. Normally, the roles and responsibilities of each organization are clearly spelled out in the joint-venture agreement. This approach increases both control and risk.

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Global strategic partnerships are much larger than a simple joint venture. Two firms join together and make a long-term commitment, in the form of time and investments, to develop products or services that will dominate world markets. This approach does not modify products for a particular market but develops a single product market strategy that can be utilized in all markets in hopes of dominating the worldwide market for that product.

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Wholly-owned subsidiaries occur when a firm purchases either controlling interest or all of a foreign firm. Often, the subsidiary firm is given considerable freedom in terms of how to operate in the foreign market, and heavy use of foreign managers and employees is very common. The owning firm does have the most control, but it also has substantial investment risk.

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Vertically integrated wholly-owned subsidiaries exist where a firm owns not only the foreign manufacturer but the foreign distributors and retailers as well. Again, the main emphasis is on dominating a worldwide product or service area with a single product market strategy. True global products are very difficult to develop, and it is even more difficult to dominate all global markets.

Of these approaches, multinational corporations, defined as organizations operating facilities in one or more countries, are major forces in the movement toward the globalization of businesses. Common characteristics of successful multinational corporations include the following:  

Creation of foreign affiliates Global visions and strategies

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Engagement in manufacturing or in a restricted number of industries

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Location in developed countries

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Adoption of high-skills staffing strategies, cheap labor strategies, or a mixture of both.

Below are some multinational companies. Accenture, Air France-KLM, Alcatel-Lucent, American Express, Apple Inc., BASF, BMW, BP (British Petroleum), Cadbury Schweppes, Caterpillar Inc., Chevron, Cisco Systems, Coca-Cola, Cummins, Danone, Dell, Epson, Ericsson, Etisalat, ExxonMobil, FedEx Express, Ford Motor Company, General Electric, General Motors, Gillette, Google, Halliburton, Heineken, Hewlett Packard, Honda, Huawei, IBM, Infosys, Isuzu , Kenya Airways, KPMG, LG, McDonalds, Mercedes-Benz, Michelin, Microsoft, Mobil, Motorola, MTN, Nestlé, Nike Inc., Nissan , Oracle Corporation, Panasonic Corporation , PepsiCo, Pfizer, Philips, Renault, Shell/Royal Dutch, Samsung, Schlumberger, Siemens, Sony, Toyota, Unilever, Vodafone, and so on.

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CRITICISMS OF MULTINATIONAL COMPANIES

Many religious leaders are increasingly troubled by the growing presence of multinational corporations around the world, especially in poor and developing nations. In truth, such concern is warranted, but only if the allegations against multinational corporations are true. Such allegations include the charge that profit-motivated multinational corporations are engaging in destructive competition and insidious plots to economically and politically manipulate entire economies. Further, multinational corporations are perceived to be methodically eliminating domestic firms in order to exploit their monopoly powers, exporting high-wage jobs to low-wage countries, undermining the world’s environment, augmenting the external debt problems of developing countries, perpetuating world poverty, and exploiting child labour. But are such allegations, in fact, true? Religious leaders should examine the data so that they can draw reasonable conclusions about the impact of multinational corporations. Such an examination reveals that multinational corporations, in fact, have actualized numerous moral goals: the advancement of human rights, the improvement in the world environment, and, most importantly, the reduction of world poverty rates. Critics of multinational corporations often profess to have a higher moral vision and to be pursuing a world with laudable goals of just wages and a clean environment. On the other hand, the extreme left conveniently ignores the socially destructive behaviour of those economies that rely heavily on governmental regulations and state-operated monopolistic enterprises. These economies have incurred extreme rates of poverty, repressed human rights, and excessive environmental damage. For reasons mentioned below, the problem countries have almost no multinational corporations and are concentrated in sub-Saharan Africa, South Asia, North Africa, and the Middle East. Paradoxically, the extreme left is hindering the momentum to decrease world poverty rates and is deaf to the continued suffering of the extreme poor. The left is quick to offer welfare to developing countries but, unfortunately, this hinders poor nations from becoming self-supporting. The extreme right, on the other hand, offers no charity and joins the left in denouncing trade. To be open minded, we must also consider the views of the developing countries, which almost in unison believe that the movement against multinational corporations will not only hinder their economic progress but will also most likely reverse it. As Nobel Peace Prize Laureate and former president of Costa Rica, Oskar Arias, exclaimed at an August 2000 lecture to United Nations delegates and heads of state, “We [the developing countries] don’t want your [the developed countries] handouts; we want the right to sell our products in world markets!” President Arias is referring to a right possessed by all developed countries and purposely denied to almost all developing countries for more than five decades. Criticism of multinationals by Anti-corporate activism The rapid rise of multinational corporations has been a topic of concern among intellectuals, activists and laymen who have seen it as a threat of such basic civil rights as privacy. They have pointed out that multinationals create false needs in consumers and have had a long hist...