We explain what a multinational corporation is, and discuss its advantages and disadvantages. In addition, we explore the differences with a transnational corporation, and more.
What is a multinational corporation?
An organization is a productive entity in which two or more people engage in business activities for profit-making purposes. In the case of a multinational corporation, it is a type of business entity that is incorporated in the territory of a given country and is authorized to operate in foreign markets. In addition to national legislations, multinational corporations must obey the laws of each country where they operate.
Multinational companies emerged with globalization, which is the process of interaction and interdependence among nations, a consequence of the implementation of new technologies, such as the Internet and the development of telecommunications. The scope of globalization encompasses economic, political, social and technological matters.
Frequently asked questions
What does it mean for a company to be multinational?
Being a multinational corporation means having headquarters in its home country, and spreading out operations with at least two subsidiaries in different countries around the world.
Why can a corporation become multinational?
Because globalization and technological advancements have made it possible to operate in the global marketplace, through digital capital flow and innovations in logistics.
What is the difference between multinational and transnational?
While multinational corporations centralize the control and administration of branches and subsidiaries at company's headquarters, transnational corporations may decentralize certain work processes, factory locations, or trade.
- See also: Manufacturing industry
Differences between multinational and transnational corporations
A multinational corporation is set up in its home country and spreads out its operations to foreign countries, but keeps headquarters as the center for taking strategic decisions and managing foreign subsidiaries.
- For example: A bank centralizing the creation of communication and corporate advertising materials at headquarters which are then sent to subsidiaries abroad.
On the other hand, a transnational corporation is also set up in its home country and spreads out operations with subsidiaries in foreign countries, but decentralizes its administration and production process. Foreign subsidiaries must adapt to the conditions and legislation of each foreign country.
- For example: A mobile phone company manufacturing mobile devices in several foreign locations due to low labor costs. This is the case, for instance, with batteries produced in factories in India and motherboards manufactured in China, where the final assembly of certain electronic devices is also done. Despite logistics costs, it can be profitable for a company to decentralize production.
Examples of multinational corporations
- Femsa (Fomento Económico Mexicano SA). It is a Mexican beverage company for stores and restaurants.
- Compañía Nacional de Chocolates SA. It is a Colombian chocolate and snacks company.
- Google Inc. is an American information technology company.
- Pfizer. It is an American pharmaceutical company.
- Visa Inc. It is an American financial services company.
Examples of transnational companies
- Ikea. It is a Swedish furniture and home furnishings stores chain.
- General Motors Company. It is an American automotive manufacturing company.
- Nestlé S.A. It is a Swiss food and drink company.
- Walmart Company. It is an American supermarket chain.
- Zara-Inditex. It is a Spanish clothing and fashion company.
Advantages of multinational corporations
Among the main advantages of multinational corporations are:
- They are sources of employment in the countries where they operate.
- They generate high revenues and profits.
- They gain international brand recognition, ability to influence audiences, and bargaining power in the stock exchange market.
Disadvantages of multinational corporations
Among the main disadvantages of multinational corporations are:
- They often promote labor exploitation by outsourcing to third parties through cheap labor, with the sole objective of increasing profits.
- They often deplete natural resources and degrade the environment through the effects of mass production and poor waste management.
- They may displace small local businesses that cannot compete with the prices of large corporations, and eventually homogenize a large portion of the market.
Importance of multinational corporations
At present, it is estimated that multinational corporations account for two-thirds of global trade, which is translated into power and influence on the part of business groups. A big number of multinationals intervene in a country’s decision-making over economic issues, as well as in government negotiations and social conflicts. Examples include oil and mining companies.
The development of multinational corporations is possible due to globalization and the exponential growth of the media, free trade, digital capital flow and innovations in logistics. The growth and evolution of multinationals goes hand in hand with technological advances, political decisions, and the laws of each region.
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- Torres Reina, D. (2011). Globalización, empresas multinacionales e historia. Pensamiento & Gestión. Redalyc.
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