MNCS AND INTERNATIONAL

BUSINESS Chapter 2

Multinational Corporation - MNCs

• In order to outline the features of MNCs we must first understand their conceptual definitions. In India, the Foreign Exchange Regulation Act, 1973 (FERA) provides a specific definition of multinational corporation:

• "A corporation incorporated in a foreign country or territory shall be deemed to be multinational corporation if such corporation' (a) is a subsidiary or a branch or has place of business in two or more countries or territories, (b) carries on business or otherwise operations in two or more countries or territories.“

• According to Prof. John H. Dunning, "A multinational enterprise is one which undertakes foreign direct investment, i.e., which owns or controls income gathering assets in more than one country; and in so do ing produces goods or services outside its country of origin, i.e., engages in international production."

Features of Multinational Corporation - MNCs • Worldwide presence: • Multinational companies extend their operation in several

countries. They establish parent office in one country and extend branches, subsidiary and affiliation to other countries.

Name Industry Area servedHeadquarters

Toshiba Corporation

Electronics >60 countries Amsterdam, Netherlands

PricewaterhouseCoopers

Professional services

>157 countries

London, United Kingdom

Renault Automotive >118 countries

Maranello, Italy

Infosys IT services, IT consulting

>30 countries Bangalore, India

Features of Multinational Corporation - MNCs • Revenue source: • A company that derives more than a quarter of its revenue from

operations outside of its home country is considered a multinational corporation. They exercise a great degree of economic dominance.

Combined revenues of KPMG member firms by region (U.S. $ billion)

KPMG regions 2012 2013Americas 7.45 7.88Asia Pacific 4.07 3.90Europe, Middle East, Africa

11.51 11.64

Total 23.03 23.42

Features of Multinational Corporation - MNCs • Adaptive strategy: • A company that derives more than a quarter of its revenue from

operations outside of its home country is considered a multinational corporation. They exercise a great degree of economic dominance.

• Centralized decision making• Multinational companies as discussed have a base corporation or factory

(Headquarters-HQ) in their home country and subsidiaries or branches in several countries. All the decisions are taken by HQ and other branches of the company just obey the orders.

• Financially giant: • Very large multinationals have budgets that exceed those of many small

countries. The average MNC has billions of US dollars as its total sales value which is often equivalent to or more than the national income of one, two or three large developing countries. In fact, it has been said that such companies form a ‘billion dollar club’.

Features of Multinational Corporation - MNCs • Nestle’s turnover bigger than GDP of developing Countries• The physical assets of Nestlé exceeds CHF 120.44 billion (amount in

Swiss franc). Nestlé's brands have annual sales of over 1 billion Swiss francs (about $1.1 billion). Nestlé’s operations are so huge that sometimes their sales turnover exceeds the GDP of developing Countries.

• Oligopolistic in character: • Oligopoly means a market form in which a market or industry is

dominated by few large firms. MNCs are large size and the fact that occupy dominating position in the market as a result of use of modern technologies, management skill, product differentiation, brand name and enormous advertising. Further they merge with big business houses, take over smaller firms and give rise to monopoly.

International

Multinational

GlobalTransnatio

nal

Stages of Internationalization

Stages of Internationalization1. International Company• International company is an enterprise which exists in one country

but sells products in more than one country.

2. Multinational Corporation (MNC)• A Multinational Corporation (MNC) is an enterprise operating in

several countries but managed from one country.

3. Global Company• A global firm pursues a unified strategy to coordinate various

international operations.

4. Transnational company• A TNC corporations essentially shed their home nation identity and

act as stateless organizations, in other words they do not identify itself with one national home like an MNC.

Characteristics of different organizational models

Difference

International Multinational

Meaning

International company is an enterprise which exists in one country but sells products in more than one country.

A Multinational Corporation (MNC) is an enterprise operating in several countries but managed from one country.

Development and

diffusion of knowledge

Knowledge developed at the center and transferred to the overseas units.

Knowledge developed and retained within each unit.

Roles of overseas

operations

Adapting and leveraging parent company strategies.

Sensing and exploiting local opportunities.

Configuration of

assets and capabilitie

s

Sources core competencies centralized and others decentralized.

Decentralized and nationally self-sufficient.

Difference Global Transnational

Meaning

A global firm pursues a unified strategy to coordinate various international operations.

A TNC corporations essentially shed their home nation identity and act as stateless organizations, in other words they do not identify itself with one national home like an MNC.

Development and

diffusion of knowledge

Knowledge developed and retained at the center.

Knowledge developed jointly and shared worldwide.

Roles of overseas

operations

Implementing parent company strategies

Differentiated contributions by national units to integrated worldwide operations.

Configuration of assets

and capabilities

Centralized and globally scaled

Dispersed. Interdependent and specialized.

Types of MNCs Types of MultinationalsBased on Investment

Associates

Subsidiaries

Branches

Based on Management orientationEthnocentric

Policentric

Regiocentric

Geocentric

Based on nature of businessService 

Manufacturing 

Trading 

TypeStrategy used

to in Host country market

Description Advantages Disadvantages

Ethnocentric firms

Home replication

Emphasizes the duplication of home

country based competencies in foreign

countries.

Leverages home country-based advantages.Relatively easy to implement

Lacks local responsiveness.May result in foreign customer alienation.

Polycentric firms

Localization

Focused on increasing profitability by

customizing the company’s goods or services so that the

goods provide a favorable match to tastes and

preferences in different national markets.

Maximizes local responsiveness

High costs due to duplication of efforts in multiple countries.Too much local autonomy

Regiocentric firms

Global standardization

A model that focuses on development and

distribution of standardized products worldwide in order to reap the maximum

benefits from low-cost advantages.

Leverages low-cost advantages.

Lacks local responsivenessToo much centralized control

Geocentric firms

Transnational

A charter to be responsible for one MNC function throughout the

world.

Cost efficient while being locally responsiveEngages in global learning and diffusion ofinnovations

Organizationally complexDifficult to implement

Merits and Demerits of MNCs to Host country

Advantages

• Generates employment

• Access to research and development

• Generates tax revenue

• Earns foreign exchange

• Promotes international cooperation

• Stimulates overall economic growth

• Bring much needed investment into the country

Disadvantages

• Transfer technology which is outdated

• Do not operate within the national autonomy (interfere in the political affairs)

• Kill the domestic industry by monopolizing

• Create Artificial Demand

• Impose their culture on host countries

• Ignore social responsibility and interested in marketing of profits at any cost

• Use natural resources of the home country indiscriminately

Merits and Demerits of MNCs to Home country

Advantages

• Create employment opportunities to

• Enables maintain favorable balance of payment

• Home country's balance of payments benefits from the inward flow of foreign earning

• MNCs learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country

Disadvantages

• Causes in equilibrium in BOP at home by transfer the capital to various host countries

• In drive to earn more in host countries, neglects home countries industrial development

• Hire labor of the foreign country resulting loss of employment at home

• Possibility of losing competitive advantage

ORGANISATIONAL STRUCTURES

OF MNCS

Two or more people working together to achieve something (that often cannot be accomplished alone)

vision?

values?

mission?

Through a social unit of people, systematically structured and managed to meet a need or to pursue collective goals on a continuing basis.

Concept & Meaning

Organizational Structure

Organizational structure determines the manner and extent to which roles, power, and responsibilities are delegated, controlled, and coordinated, and how information flows between levels of management.

Meaning & Concept

Need and importance of building organizational structure for MNCs• Flow of communication:

• Departmentalization:

• Delegation:

• Evaluating Performance:

• Achieving Goals:

Organizational Structures for International Operations

Strategic

Business Unit Struct

ure

Matrix structure

Geographica

l structure

Product

structure

Functional

structure

Functional Structure• A functional structures divides management of the firm’s international

operations into specific areas of specialization or departments, consisting of employees and specific activities.

• In functional organizations, the organization is divided into various departments such as production, finance, marketing, R&D, engineering and human resources.

• Each department will have its own department head and he will be responsible for the performance of his section.

Board of Directors

CEOHuman

Resource

Finance

Marketing R & D

Operations

functional organizational structure

Advantages

• Effective communication and co-ordination

• Benefits of Specialization

• Quick Decision Making

• Enhances Efficiency

• Establishes Chain of command

Disadvantages

• Lack of coordination

•  Conflict

• Organizational objectives may be neglected

• Difficult to measure performance

Product Structure• In product form of organizational structure

management of international operations is organized by major product line.

• An organization that chooses a product structure first divides its overall product line into product groups or categories.

• Each product group focuses on satisfying the needs of a particular customer group and is managed by its own team of managers.

• Companies with multiple product lines can benefit from a product-style organizational structure as product line has its own internal departments and operates like a mini-business.

CEOProducttProduct A

HR

R&D

Marketing

Finance

Operations

Product BHR

R&D

Marketing

Finance

Operations

Product CHR

R&D

Marketing

Finance

Operations

Product organizational structure

Advantages

• Performance of each product group is easy to monitor and evaluate.

• Reward system can be linked more closely to the performance of each product group.

• Easier to pinpoint problems in the overall organization and hold specific divisions.

• Divisional structure lets each product line excel, better serves customer niches and can cater to geographic and cultural differences.

Disadvantages

• Interdivisional rivalries and poor communication and coordination among units may result.

• Maintaining an appropriate balance of power between the central authority and the divisions is often difficult.

• Functional duplication across the organization such as duplicate financial, R&D, marketing and operation departments and of course duplication in levels of management.

• Efficient product divisions reduces the need for duplicate skills and resources.

Geographical Structure• In geographic form of organizational structure all branches of a

company spread across the globe are organized according to their respective geographic area or region to best satisfy the needs of customers within different regions.

• Businesses that are structured in this manner utilize a system where a regional manager oversees all operations within their region.

• This manager is responsible for the regional unit, but still has to report back to the head office.

Head Quarters

CEO

North America

Functional departments

Latin

America

Functional departments

EuropeFunctional departments

Middle Eas

t

Functional departments

Asia

pacific

Functional departments

South

east

Asia

Functional departments

Subcontinent

region

Functional

departments

AfricaFunctional departments

Geographic organizational structure

Advantages

• Geographic organizational structure allows for each business unit or office to operate as its own entity based on where it's located.

• Bringing together employees from different functional specialties allows a geographical division to respond more quickly and efficiently to the division's needs.

• Improved communications and coordination among the subsidiaries within each geographic region.

• This structure lets each region excel, better serves customer niches and can cater to geographic and cultural differences.

• Each location will have its own internal structure and management layers, allowing them to run as an independent operation.

Disadvantages

• Limited communications, coordination and knowledge sharing with other geographic units and with headquarters.

• Different divisions might have to compete with one another for resources from the parent company.

• Geographical divisions duplicate both activities and infrastructure. There may be several functional departments.

• This uses resources while sacrificing economies of scale. Increases financial budgets as the number of employees at the location are huge.

• Geographic area managers’ lack of global orientation for developing and managing products.

Matrix Structure• A matrix organizational structure is one of the most

complicated reporting structures a company can implement.

• The matrix structure blends the product and divisional structures, gaining the advantages of both.

• It also leverages the benefits of global strategy and local responsiveness. Large multinational corporations that use a matrix structure most commonly combine product groups with geographic units. • Product managers have global responsibility for the

development, manufacturing, and distribution of their own product or service line,• while managers of geographic regions have responsibility for

the success of the business in their regions.

Matrix organizational structure

Advantages

• Teams benefit from the functional expertise of members, while the functional hierarchy exerts a measure of control and accountability for business activities.

• Resources can be used efficiently, since experts and equipment can be shared across projects. Rather than duplicating functions as would be done in a simple product department structure, resources are shared as needed.

• It is hybrid type of organizational structure which can easily adjust with changing environment at business world.

• Employees from various functional areas work under the spirit of team and make the project successful. Team effort is made.

Disadvantages

• Everyone has two bosses with possible conflicting interests and loyalties, further functional power struggles can erupt.

• Failure to communicate and extend support across department lines is common in such situations. This often slows decision making because problems must be referred up the hierarchy for resolution.

• The operation of functional organization is too complicated. Workers are supervised by a number of bosses. This results overlapping of authority and thus creates confusion in the organization.

• Matrix organizational structure involves huge overhead cost. Employees are specialist and they are given high remuneration and facilities and amount is given to project workers in many cases as incentives.

 Strategic Business Unit Structure • A strategic business unit (SBU) is a separate, specialized subsystem in

the company, which acts as an independent company.

• For the first time SBU concept has been applied by the U.S. Company General Electric.

• SBUs are small businesses with a high functional and decision-making autonomy.

• An SBU may be a business unit within a larger corporation or it may be a business unto itself or a branch.

• Such units may or may not need to work closely with companies, from which they have been separated.

• Each SBU usually includes following organizational units:• Production and operations• Human Resources• Research and Development• Finance• Marketing for a homogeneous product groups.

Strategic Business Unit Structure

• The SBU-form structure consists of a corporate office and operating divisions, each operating division representing a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business unit strategy to division managers.

• Each division represents a distinct, self-contained business with its own functional hierarchy.

SBU organizational structure

Advantages

• It enables corporate officers to more accurately monitor the performance of each business, which simplified the problem of control.

• It facilitates comparisons between divisions, which improved the resource allocation process.

• It stimulates managers of poorly performing divisions to look for ways of improving performance.

• SBU supports cooperation between the departments of the company which has a similar range of activities.

Disadvantages

• May cause of internal tension due to difficult access to internal and external sources of funding.

• May be the cause of the unclear situation with regard to the management activities.

• As the number, size, and diversity of divisions in an organization increase, controlling and evaluating divisional operations become increasingly difficult for strategists.

• The span of control becomes too large at top levels of the firm. For example, in a large conglomerate organization composed of 90 divisions, the chief executive officer could have difficulty even remembering the first names of divisional presidents.

Meaning and Concept Globalization

•Globalization is a process of interaction and integration among the people, companies and governments of different nations through the global network of trade and commerce.

•Globalization implies the opening of national and regional economies to other markets around the globe for interlacing of economic and cultural activity.

•According to The World Bank "Globalization is growing integration of economies and societies around the world"

Features of Globalization

• Multi-dimensional Process• Politically• Economically• Culturally• Technologically• Ecologically

• Open Markets

• Interconnectedness

• Disseminates from developed countries

Open Market and Closed MarketSouth Korea North Korea

The South Korea is considered to have a relatively open market

North Korea is considered to have a relatively closed market.

South Korea has transformed from a largely rural and poverty-stricken country into one of the world’s most dynamic economies and a leading exporter of cars and electronic goods. South Korean economy is heavily dependent on international trade and considered as one of the fastest-growing developed countries. Globalization has been a huge factor in South Korea's growth and economic success.

North Korea is a nation with an almost entirely government-planned, state-owned economy. North Korea's isolation policy makes international trade highly restricted. North Korea has always been recognized as a “secretive” nation that chooses to isolate itself from the rest of the world. This isolation has severely hindered its economic growth.

Dissemination of globalization from developed countries

Case-in Point: 2.2

From where did we get?  

What?From whom &

where?Description

ATM HSBC, UK

HSBC- The Hong Kong and Shanghai Banking Corporation was the first bank to introduce the ATM concept in India way back in 1987. Now, most of the banks have their ATM outlets in India. HSBC is a British multinational banking and financial services company headquartered in London, United Kingdom. It is one of the world's largest banks.

Mobile phone service

Telstra, Australia

The first mobile cellular phone was launched in India on 31 July 1995 by Modi Telstra's MobileNet service in Calcutta. The company, was a joint venture between India's Modi Group and Australian telecom giant Telstra. Telstra which was one of the first foreign telecom firms to enter the Indian market in 1993 in a joint venture with the Modis, sold out in 2000. In fact, in 1999, by Modi's MobileNet group changed the name of its cellular service to Spice Telecom after a joint venture between ModiCorp and Hongkong-based regional telecom company Distacom. In 2008 one of the biggest deals in the Indian telecom sector took place, Aditya Birla group's Idea Cellular acquired BK Modi's Spice Communications.

Drivers of globalization/Factors contributing to growth of international business

•Advancement in ICT•Development in transportation system•Liberalization & adoption of free markets•Emergence of World Trade Organization•Integration of world financial markets•Competitive drivers

Essential Conditions for Globalization

•Essential Conditions for Globalization•Elimination of trade barriers•Adequate infrastructure•Government Support•Resources availability•Competitiveness

Disadvantages of Globalization/International Business

• Destroys domestic industry

• Loss of national sovereignty

• Rapid spread of financial crises

• Effect on the Natural Environment

• Un-employment and Offshoring of jobs

•  Inequality and poverty

• Exploitation of natural resources

• Reduction in demand of domestic goods & services

• Cut-throat Competition

Socio-cultural implication of globalization•Change in food habits:

•Dressing style:

•Family System:

•Movies:

•Language & Lifestyle:

•Pornography:

Cable television and foreign movies became widely available for the first time and have acted as a catalyst in bulldozing the cultural boundaries.

Indian youths leaving education in mid-way and joining MNC's. Hollywood movies, obscene movies, foreign channels like MTV are

penetrating in youth’s minds in the name of liberalization. Society has become more open compared to its earlier

conservative look due to exposure to other cultures through DTH or cable network.

Dating, celebration of valentine day has resulted in rising number violence against girls.

People are less worried for government jobs as MNC's and private or public sector are offering more lucrative jobs.

In place of old cinema halls, multiplex theatre is coming up. Old restaurants are now replaced by Mc. Donald’s. Fast food and

Chinese dishes have replaced juice corners and Parathas. There is deterioration in social values as evident from less

respect for ladies and older people. There is deterioration in social values as evident from less

respect for ladies and older people.

Consequences of Globalization on Indian Culture