Multinational Corporations: Concept, Stages and Forms, Reasons for Growth, and Criticism

What are Multinational Corporations?

A multinational corporation can be defined as a globally integrated production system, wherein a parent corporation based in a specific country exercises ownership and control. This parent corporation is predominantly managed by individuals who are nationals of the country where it is domiciled. The multinational corporation consists of several affiliated firms that are connected through shared functions and operate on a global scale, even in diverse environments.

One distinguishing feature of multinational corporations is their broad ownership structure and the implementation of a unified management strategy across their global operations. These corporations play a significant role in shaping the world’s output and international trade. Notably, a substantial number of top companies listed in Fortune Magazine are multinational corporations, underscoring their immense influence on the global economy.

Stages and Forms of Multinational Corporations

International business transactions can take place through various stages and forms, as given below:

1. Licensing: This arrangement involves a contractual agreement between a host country firm and a foreign company, granting the host firm the rights to produce and sell products under a license provided by the foreign company. The agreement may also include the transfer of technical expertise for a fixed fee or ongoing royalties. For instance, companies in India often manufacture and distribute products under licensed brand names from American and English companies.
2. Management Contract: In this type of contract, a company operating in a foreign country agrees to provide managerial talent to firms in less developed nations. This allows for the exchange of managerial expertise, with Indian companies, for example, offering their managerial skills to businesses in the Middle East and Africa.
3. Turnkey Projects: This system involves a company offering comprehensive services to a foreign company, starting from the initial stages of a project and continuing until it becomes operational. These services include design, construction, operation, and personnel training, providing a complete package to the client.
4. Joint Venture: This form characterizes collaboration between a domestic company and a foreign firm or government. Companies can establish business operations by forming a joint venture, leveraging the foreign firm’s manufacturing capabilities and management expertise. Profits and risks are shared between the partners. An illustration of a joint venture is the partnership between Maruti Udyog and Suzuki Company of Japan.
5. Foreign Subsidiaries: Wholly owned branches of a parent company that operates in different host countries fall under this category. While the parent company’s headquarters are located in the home country, the subsidiaries conduct day-to-day operations in a relatively independent manner. Policies are typically set by the headquarters, but local managers are appointed to act as contacts and liaisons with the subsidiaries. These subsidiaries are regarded as integral parts of the parent company.
6. Global Company: This stage represents the final phase where overseas operations are fully integrated, encompassing not only sales but also production and other essential functions. This stage marks the emergence of international management as a separate field of study, focusing on the management challenges specific to multinational corporations.
   

Reasons for the Growth of Multinationals

The growth of multinational corporations can be attributed to several key factors, which are outlined below:

1. Corporate Structure: The establishment of multinational corporations as separate legal entities allows for effective control over subsidiaries located in different nations.
2. Global Business Strategies: Advances in transportation and communication have paved the way for multinational corporations to formulate and execute global business strategies, expanding their reach across borders.
3. Concentration of Capital: Developed countries, such as the United States, have witnessed the accumulation of significant capital funds, providing multinational corporations with ample financial resources to support their expansion efforts.
4. Market Expansion: As markets in developed countries mature, multinational corporations seek opportunities in developing countries, where growing markets offer potential for further growth and profitability.
5. Regional Markets and Free Trade Agreements: The emergence of regional markets, like the European Common Market, along with the establishment of free trade agreements between nations, has facilitated the growth and operations of multinational corporations on a global scale.
6. Competitive Advantage: Multinational corporations from developed countries venture into international markets to capitalize on reduced competition and the potential for higher profit margins.
7. Cost Efficiency: Seeking lower labor costs, multinational corporations establish operations in developing countries abundant in labor resources, enabling them to carry out labor-intensive operations more economically.
8. Access to Natural Resources: Multinational corporations pursue international operations to gain access to untapped natural resources and other valuable assets present in countries with unexplored wealth.
9. Expanded Market and Capital Access: Operating as multinational corporation grants access to a broader customer base and provides enhanced opportunities to tap into organized capital markets for funding growth initiatives.
10. International Management Development: The availability of recruitment, formal training, and development programs tailored for international operations empowers multinational corporations to build a skilled workforce capable of effectively managing global business challenges.
11. Advanced Accounting Techniques: Multinational corporations leverage sophisticated accounting practices to ensure effective control, comparison, and analysis of their operations across different locations.
12. Cost Optimization: By strategically shifting production and procurement to low-cost areas in line with the principles of comparative advantage, multinational corporations optimize their cost structures and enhance overall competitiveness.
13. Influence and Power: The significant scale and impact of multinational corporations afford them considerable influence over governments and economies of smaller countries, enabling them to shape policies and economic landscapes.

Criticism of Multinational Corporations

Critics have raised several concerns regarding multinational corporations, including the following:

1. Neglect of Underdeveloped Areas: Multinationals are often accused of prioritizing their interests and disregarding the industrialization and development of backward regions in host countries. This selective focus may hinder the growth of underdeveloped areas and limit the export market potential of local units. Such misalignment of priorities creates tensions between multinational corporations and the host nations.
2. Monopoly Power and Excessive Profits: Multinational corporations, particularly in industries requiring substantial investments and technical expertise, have faced criticism for their perceived monopoly power. This concentration of market control can lead to excessive profits and potentially stifle the growth of local industries.
3. Limited Development of Local Talent: Critics argue that multinationals often favor hiring individuals from their home countries for key managerial and technical positions. This practice may limit opportunities for local talent to receive training and development, hindering their professional growth. Additionally, concerns arise regarding the potential exploitation of the host country’s labor force through low wages and inadequate benefits.
4. Limited Technology Transfer: Multinationals have faced scrutiny for maintaining research and development facilities primarily in their home countries, resulting in limited sharing of advanced technology with host nations. In some instances, outdated technology may be introduced instead. This situation can create a technological dependency of host countries on more advanced nations.
5. Inflationary Impact: Critics argue that certain multinational corporations, through their control over key sectors and manipulation of interdependent prices, can contribute to inflationary trends. Increases in the prices of their products can have a cascading effect on the overall price levels within an economy.
6. Diversion of Profits and Foreign Exchange Outflow: Concerns have been raised regarding the repatriation of all profits generated by multinational corporations to the parent company, limiting investment in local markets and resulting in a significant outflow of foreign exchange resources.
7. Ethical Concerns and Political Influence: Instances of political corruption and bribery involving multinational corporations have been reported, leading to accusations of undermining democracy and influencing government policies in host countries. Such actions raise ethical concerns and can have far-reaching consequences.
8. Acquisition of Existing Firms: Multinationals have been criticized for entering markets primarily through the acquisition of existing local firms rather than making new productive investments. This practice may limit opportunities for local entrepreneurs and potentially impede broader economic growth.