Multinational corporations

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 first multinational corporation in the world and the first company to issue stock. It was also arguably the world's first megacorporation, 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.

Market imperfections
It may seem strange that a corporation can decide to do business in a different country, where it does not know the laws, local customs or business practices. Why is it not more efficient to combine assets of value overseas with local factors of production at lower costs by renting or selling them to local investors?

One reason is that the use of the market for coordinating the behaviour of agents located in different countries is less efficient than coordinating them by a multinational enterprise as an institution. The additional costs caused by the entrance in foreign markets are of less interest for the local enterprise. According to Hymer, Kindleberger and Caves, the existence of MNCs is reasoned by structural market imperfections for final products. In Hymer's example, there are considered two firms as monopolists in their own market and isolated from competition by transportation costs and other tariff and non-tariff barriers. If these costs decrease, both are forced to competition; which will reduce their profits. The firms can maximize their joint income by a merger or acquisition, which will lower the competition in the shared market. Due to the transformation of two separated companies into one MNc the pecuniary externalities are going to be internalized. However, this does not mean that there is an improvement for the society.

This could also be the case if there are few substitutes or limited licenses in a foreign market. The consolidation is often established by acquisition, merger or the vertical integration of the potential licensee into overseas manufacturing. This makes it easy for the MNE to enforce price discrimination schemes in various countries. Therefore Hymer considered the emergence of multinational firms as "an (negative) instrument for restraining competition between firms of different nations".

Market imperfections had been considered by Hymer as structural and caused by the deviations from perfect competition in the final product markets. Further reasons are originated from the control of proprietary technology and distribution systems, scale economies, privileged access to inputs and product differentiation. In the absence of these factors, market are fully efficient. The transaction costs theories of MNEs had been developed simultaneously and independently by McManus (1972), Buckley & Casson (1976) Brown (1976) and Hennart (1977, 1982). All these authors claimed that market imperfections are inherent conditions in markets and MNEs are institutions that try to bypass these imperfections. The imperfections in markets are natural as the neoclassical assumptions like full knowledge and enforcement do not exist in real markets.

Tax competition
Multinational corporations have played an important role in globalization. Countries and sometimes subnational regions must compete against one another for the establishment of MNC facilities, and the subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts sometimes offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labor standards enforcement. This process of becoming more attractive to foreign investment can be characterized as a race to the bottom, a push towards greater autonomy for corporate bodies, or both.

However, some scholars for instance the Columbia economist Jagdish Bhagwati, have argued that multinationals are engaged in a 'race to the top.' While multinationals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of lax environmental regulation or poor labour standards. As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to tailor production processes in all of their operations in conformity to those jurisdictions where they operate (which will almost always include one or more of the US, Japan or EU) that has the most rigorous standards. As for labor costs, while MNCs clearly pay workers in, e.g. Vietnam, much less than they would in the US (though it is worth noting that higher American productivity—linked to technology—means that any comparison is tricky, since in America the same company would probably hire far fewer people and automate whatever process they performed in Vietnam with manual labour), it is also the case that they tend to pay a premium of between 10% and 100% on local labor rates. Finally, depending on the nature of the MNC, investment in any country reflects a desire for a long-term return. Costs associated with establishing plant, training workers, etc., can be very high; once established in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as, e.g., expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of unnecessary 'licenses,' etc. Thus, both the negotiating power of MNCs and the supposed 'race to the bottom' may be overstated, while the substantial benefits that MNCs bring (tax revenues aside) are often understated.

Market withdrawal
Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal. For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force MNCs to make their intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil, which have viable indigenous market competitors.

Lobbying
Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations. There is no unified multinational perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries. For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones. Multinational corporations such as Wal-mart and McDonald's benefit from government zoning laws, to create barriers to entry.

Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly.

Patents
Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefits from software patents. The pharmaceutical companies lobby international agreements to enforce patent laws on others.

Culture
Culture is the set of values and beliefs shared by a group. This includes groups as small as social groups, and as large as a whole country. Since multinational companies operate in more than one country, they are exposed to many different cultures. Each culture has its own beliefs and values. To be successful in these foreign countries, multinational companies must have a global mindset, and be able to recognize and adapt to the differences.

Different methods of communication across different cultures
Communication is the process of conveying messages. ‘’Successful communication in the international business environment requires not only an understanding of language, but also the nonverbal aspects of communication that are part of any community’’ (Ferraro, pg 73). Different countries are going to have different ways of communicating. If certain executives of a company want to do business with people from different countries, they need to understand how to communicate clearly with them, without mistakenly doing something wrong. The most obvious way of communicating with different people is with words, and therefore, some executives learn how to speak the language spoken in the foreign country. This act can show that the executive is truly dedicated to the work, and that he is willing to do anything to complete the deal. Greeting rituals are sometimes overlooked, but they shouldn’t be because they are more important in some parts of the world than others. ‘’In Japan, failure to show respect by exchanging business cards can get negotiations off to a very bad start’’(Schneider and Barsoux, pg 26). ‘’While in France, greetings are highly personal and individual…as workers expect to be greeted individually’’(Schneider and Barsoux, pg 26) Another form of communicating is through hand gestures. Often goes unnoticed, hand gestures are as important as words themselves because they too have meaning behind them. ‘’ Cultures located in southern Europe and the Middle East employ a wide variety of gestures frequently with purposefulness’’(Ferraro, pg 79). Some hand gestures have different meanings in different countries. ‘’For example, the hand gesture where the index finger and thumb touch and create a ‘zero’ can mean different things in different places. In the US and UK, it means ok. In Russia it means zero. In Japan it refers to money. While in Brazil, it is viewed as an insult.’’ Time is another communication system. ‘’ In western cultures, people like to get to the point of the matter in business meetings and conversations. However, in other countries like Saudi Arabia and Russia, it is customary to converse first about unrelated matters before starting the business discussions for which the meeting was arranged. Barging straight into the business issue, without informal small talk at the beginning, may make them very uncomfortable and may ruin the negotiations.’’(Miroshnik pg 12)

Seven Methods of managing across cultures
(1) Hierarchy:  "This refers to the way people view how much they defer to people in authority, whether they feel entitled to express themselves and how empowered they feel to take the initiative on matters before them. For example, Canada believes in egalitarianism, while nations like India, Japan, China, Germany, Mexico are highly hierarchical." (Schachter, pg b15)

(2) Group focus:  “This refers to whether people consider that accomplishment and responsibility are achieved through individual or group effort, and whether they tend to identify themselves as individuals or members of a group. Canadians are individualists while Brazilians, Chinese, Mexicans and Japanese are group-focused.”(Schachter, pg b15)

(3) Relationships:  “This is about whether trust and relationships are viewed as a prerequisite for working with someone. Canadians focus primarily on the transaction, rushing to deal, while the Chinese, Italians, and Spaniards, for example, focus on nurturing relationships first.”(Schachter, pg b15)

(4) Communication styles:  “This covers matters like verbal and non-verbal expression, how directly or indirectly people speak, and whether brevity or detail is valued in communication. Israel, Denmark, Germany and Sweden use a direct style, while indirect communication styles are the norm in China, United Arab Emirates, and Japan (Schachter, pg b15)”

(5) Time orientation:  “This refers to the degree to which people believe adhere to schedules United States, Germany, Denmark and Switzerland follow schedules while countries like Saudi Arabia, Spain, Thailand, and the United Arab Emirates are unconcerned about schedules and deadlines.” (Schachter, pg b15)

(6) Change tolerance:  “How people are comfortable with change, risk-taking and innovation. Along with Australians, Canadians are the most tolerant of change, while Saudi Arabia, Indonesia, Mexico and Russia are change-averse.” (Schachter, pg b15)

(7) Motivation: work/life balance:  “This characteristic examines whether people work to live or live to work. Canadians are driven by work and the status it provides – although not as much as people in China, Japan, and the U.S. – while in Norway, Saudi Arabia, United Arab Emirates, India and Mexico, family-work balance is treasured.” (Schachter, pg b15)

Advertisement in different countries
Another way for multinational companies to prove that they understand the specific market is through advertisement. Advertising products in different countries requires the companies to use specific methods of advertisement that is allowed by the tradition and culture of the country. For example, in western countries, sex appeal is used a lot in advertising many different products. It is used to grab attention of customers and is used to boost sales. This strategy however won’t be successful in countries that are very religious like most Arabic countries where the dominant religion is Islam. In those countries people, especially girls, are mostly covered and so won’t be wearing very revealing clothes. Therefore, ads that use sex appeal, like girls in bikinis for example, won’t be used. One company that used proper advertisement was Procter and Gamble. Companies adjust advertisements to the nationality of their clients. The Japanese prefers to buy shampoo which uses Japanese girls in its advertisements. Russian housewives prefer washing powder that uses Russian housewives instead of American housewives in its advertisements.(Miroshnik, pg 8)

Companies that adapted to foreign market successfully
Just because a large company is very successful in one country, it doesn’t mean that it will be successful in another country, especially if that country has a completely different culture. McDonalds is one of the largest companies in the world. However, it has adapted to the different cultures to make sure it is successful. In France, ‘McDonald's added tablecloths and candles to improve the ambience at some eateries and introduced waiter service at certain outlets because they found that most Europeans prefer leisurely rather than fast food dining’ (Stern, pg A07). In addition to space, McDonald’s has changed its menus from one country to another, offering food that locals usually eat: in France, a burger has mustard and ciabatta rolls instead of regular buns. In Japan, fried egg burgers were offered. In Saudi Arabia, in accordance with the religious beliefs there, Starbucks has changed its logo and removed the girl from the picture. In addition, Starbucks branches there usually have two sections, one for the females and one for the males. This is the case with most stores since men aren’t allowed to sit with women.

Companies that failed to adapt to foreign culture
In many occasions, a lot of the larger companies think that because they are a large corporation, they can succeed anywhere without changing anything. This tactic proved wrong, as many companies have failed and were forced to shutdown foreign branches. The biggest example was “When Wal-Mart expanded in Germany in 1997, it hoped that Germans, like Americans, would scoop up its low-priced items. By July 2006, Wal-Mart had closed its German operations and absorbed $1 billion in losses. This was because they didn’t adjust to the German culture where people preferred frequently specialty stores, not one-stop shops (Stern pg A07)”. Another example is Daimler AG, “it failed in its acquisition of Chrysler because its disciplined, buttoned-down executives could never meld with their more freewheeling American counterparts.” (Schachter, pg b15).

Transnational Corporations
A Transnational Corporation (TNC) differs from a traditional MNC in that it does not identify itself with one national home. Whilst traditional MNCs are national companies with foreign subsidiaries, TNCs spread out their operations in many countries sustaining high levels of local responsiveness. An example of a TNC is Nestlé who employ senior executives from many countries and try to make decisions from a global perspective rather than from one centralised headquarters. However, the terms TNC and MNC are often used interchangeably. A study of Dutch multi-national corporations showed that foreign expansions best unfold sequentionally, consistent with the notions of organizational learning. Firms ought to diversify first into culturally (and less so geographically) nearby countries before they venture farther away. They do so more successfully if they also follow a learning process by mode ( e.g, greenfield based expansion versus acquisitions or equity joint ventures) or by level of ownership.

Micro-multinationals
Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers. These multinationals start operating in different countries from the very early stages. These companies are being called micro-multinationals. What differentiates micro-multinationals from the large MNCs is the fact that they are small businesses. Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries. Internet tools like Google, Yahoo, MSN, Ebay and Amazon make it easier for the micro-multinationals to reach potential customers in other countries.

Service sector micro-multinationals, like Facebook, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities.

Low cost SaaS (Software As A Service) suites make it easier for these companies to operate without a physical office.

Hal Varian, Chief Economist at Google and a professor of information economics at U.C. Berkeley, said in April 2010, "Immigration today, thanks to the Web, means something very different than it used to mean. There's no longer a brain drain but brain circulation. People now doing startups understand what opportunities are available to them around the world and work to harness it from a distance rather than move people from one place to another."

Criticism of multinationals
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 history of interference in the policies of sovereign nation states. Evidence supporting this belief includes invasive advertising (such as billboards, television ads, adware, spam, telemarketing, child-targeted advertising, guerrilla marketing), massive corporate campaign contributions in democratic elections, and endless global news stories about corporate corruption (Martha Stewart and Enron, for example). Anti-corporate protesters suggest that corporations answer only to shareholders, giving human rights and other issues almost no consideration. Films and books critical of multinationals include Surplus: Terrorized into Being Consumers, The Corporation, The Shock Doctrine, Downsize This, Zeitgeist: The Movie and others.