ANALYSIS OF MULTINATIONAL COMPANIES
Multinational means involving several countries or individuals or several nationalities. Therefore, a multinational company refers to a company that has offices and/or factories in different countries and a centralized head office where they coordinate global management. Multinational companies can also be referred to as; Multinational Enterprise(MNE), Transnational Enterprise(TNE), Transnational Enterprise(TNC).This essay will discuss: structural organization of multinational companies, how they operate, categories of multinational corporations, the top five multinational companies, their characteristics, reasons why a company would want to become multinational, the models of multinational companies, advantages and disadvantages of multinational companies and both positive and negative impact of multinational companies.
The organizational structure of multinational companies are faced with two opposing forces when designing their organizational structure. They are faced with the need for differentiation that that allows them to be specialized and competitive in their local market. Therefore, the structure adopted has to find balance between the opposing needs and also remain in strategic alignment for the company to thrive. Multinational companies have therefore evolved many structural permutations to suit their business need; subsidiary model, product division, area division, functional structure, matrix structure and transnational network.
Subsidiary model involves owning foreign subsidiaries which are self-contained with their own operations, finance and human resource functions. Thus, the foreign subsidiaries are autonomous allowing them to respond local competitive and develop locally responsive strategies. The major disadvantage of this model decentralization of strategic decisions that make it difficult for a unified approach to counter global attack.
Product division organizational structure is developed on the basis of its own portfolio. Each product has its own division that is responsible for the production, marketing, finance and overall strategy of that particular product globally. This organizational structure allows the multinational company to weed out product divisions that are not successful. The major disadvantage of the divisional structure is the lack of integral networks that may increase duplication of efforts across countries.
Area divisional structural organization is divisional in nature, and the divisions are based in geographical areas. Each geographical region is responsible for all the products sold in the region. Therefore, all functional units namely finances, operations and human resource are under the geographical region responsibility. This structure allows the company to evaluate the most profitable. However, communication problems, internal conflicts and duplication costs remain an issue.
Functional structure in this model is determined by functions such as finance, operations, marketing and human resource. For example, all production personnel globally for a company work under the parameters set production department. The advantage of using this structure is that there’s greater specialization within departments and more standardized across the global network. The disadvantages include lack of inter-department communication and networking that contributes to more rigidity within the organization
Matrix structure is an overlap functional and divisional structure. The structure is characterized by dual reporting relationship in which employees report to both functional managers and divisional managers. Work projects involve cross-functional teams from multiple functions such as finance, operations and marketing. The members of teams would report both to the project manager as well as their immediate supervisors in finance, operations and marketing. The advantage is that there’s more cross-functional communication that facilitates innovation and the decisions are more localized. However, there can be more confusion and power plays because of the dual line of command.
Lastly, transnational network which is as a result of evolution of matrix. Emphasis is more on horizontal communication. Information is now shared centrally using new technology such as “Enterprise Resource Planning(ERP)”systems. This structure is focused on establishing knowledge pools and information networks that allow global integration as local responsiveness.
Multinational companies derive a quarter of its revenue from its home country. Multinational advocates say that they create high paying jobs and technologically advanced goods in countries that otherwise would not have access to such opportunities or goods. However, critics of these enterprises believe that corporations have undue political influence over government, exploit developing nations and create job losses in their own country.
Multinational companies are categorized into four. One of them is the decentralized corporation with a strong presence in its home country. Another is the global centralized corporation that acquires cost advantage where cheap resources are available. There’s also a global company that builds from the parents research and development and lastly a transnational enterprise that uses all the three categories.
There are subtle differences between the different kinds of multinational corporations. For instance, a transnational which may have home in at least two nations and spread out its operation in many countries for a high level of local response. Nestle S.A is an example an example of a transnational corporation that that executes business and operational decisions in and outside headquarters. Meanwhile, multinational enterprise controls and manages plants in at least two countries. It’ll take part in foreign investment, as the company invests directly in the home country to stake ownership claims, thereby avoiding transactional costs. Apple Inc. is a great example of multinational enterprise as it tries to maximize cost advantage through foreign investments in international plants.
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According to the Fortune Global 500 list, the top five multinational corporations in the world as at 2019 based on revenue collection are Walmart, Sinopec Group, Royal Dutch Shell, China National Petroleum and the State Grid.
Walmart is the world’s largest multinational company by revenue and also the largest private employer with 2.2 million employees. Walmart investment outside the US have seen mixed results. Its operations in Canada, the United Kingdom, South America and China are highly successful whereas ventures failed in Germany and South Korea. The total amount of revenue collected by Walmart as per 2019 was $514 billion.
Sinopec Group is the second largest multinational corporation which collected a total of $415 billion .It’s also known as China Petroleum& Chemical Corporation. It’s a Chinese oil and gas enterprise based in Beijing China. It also produces biofuels such as biodiesel and green jet fuel vegetable oil. Sinopec Group is the largest oil refining, gas and petroleum and petrochemical conglomerate, with its headquarters in Chaoyang District, Beijing. More businesses include production and sale of petrochemicals, chemical fibers, chemical fertilizers, and other chemical products; storage and pipeline transportation of crude oil and natural gas; import, export and import/export agency business of crude oil, natural gas, refining oil products, petrochemicals and other chemicals.
Royal Dutch Shell Private Limited Company(PLC) commonly known as shell is the world’s third largest multinational corporation with a total revenue of $397 Billion as per 2019 data. Shell is a British oil and gas company with its headquarters in the Netherlands and incorporated in the United Kingdom. Shell is vertically integrated and is active in every area of oil and gas industry, including exploration and production, refining, transport, distribution and marketing, petrochemicals, power generation and trading. It has renewable energy activities including biofuels, wind, energy kite systems and hydrogen. It operates in more than 70 countries producing around 3.7 million barrels of oil and has 44,000 service stations worldwide.
China National Petroleum Company is a major national oil and gas corporation of China PR and one of the largest integrated energy groups in the world. It’s headquarters are located in Deng-Cheng District, Beijing. The Fortune Global 500 data shows that the revenue collected as per 2019 was $393.03 Billion. The company was restructured in November 5th,1999, it injected Petro-China most of the assets and liabilities of the CNPC relating to its hydrocarbon exploration and production, refining and marketing, chemicals and natural gas businesses. China National Petroleum Company and Petro-China develop overseas assets through joint venture, the CNPC Exploration and Development Company(CNODC) which is 50% owned by Petro-China. China National Petroleum Company also has a Memorandum of Understanding with UOP LLC, under-which the two companies will collaborate on a range of biofuels technologies and projects in China.
State Grind is the fifth largest multinational corporation with a total of $387 Billion of revenue collection according to Fortune Global 500. The company is a state owned electricity utility monopoly in China and its also the largest utility company in the world.
There are certain features a company has to meet for it to be called a multinational corporation. They include very high assets and turnover, network of branches, control, continuous growth, sophisticated technology, right skills and forceful marketing and advertising.
For a multinational company to achieve this feature of very high assets and turnover, it must have large amounts of assets, both physically and financially. The company targets are so high that they are also able to make substantial profits.
Multinational companies keep production and marketing operations in different countries, therefore, they have a network of branches. The business oversees more than one office that functions through several branches and subsidiaries.
Management of the office is controlled by one head office from the home country where all operations are carried out.
Multinational companies have another feature of continuous growth. Even as they operate in other countries, they strive to grow their economic size by constantly upgrading and even doing mergers and acquisition.
When a company goes global they adopt sophisticated technology. They need to make sure that their investment will grow substantially. To achieve substantial growth, they need to make use of capital intensive technology especially in production and marketing.
Multinational national companies employ only people with right skills. This is to mean that they employ the best managers who are capable of handling large amounts of money, using advanced technology, managing workers and running a vast entity.
Forceful marketing and advertising is another feature of multinational companies. This is a survival strategy where they use a lot of money in marketing and advertisements globally. Its of great significance since its through this they are able to sell the products and brand.
There are reasons why a company would want to go multinational. They include; to lower production cost, proximity to target international market and avoidance of tariffs.
One of the reasons for a company to go international is to access lower production cost. When the companies set up stations in other countries, especially developing economies, they spend less on production costs. Though outsourcing is a way doing this, setting up manufacturing plants in other countries may be even cheaper.
Proximity to target international market is beneficial to the company as it helps reduce transport costs, and it gives the multinational corporation easier access to consumer feedback and information as well as consumer intelligence.
Companies also go international to avoid tariffs and quotas. Tariffs refers to a system of government imposed duties levied on imported or exported goods. Quotas on the hand refer to, a restriction on the import of something to a specific quantity. Therefore, a multinational company produces or manufactures in another country where they sell them with exception from import quota and tariffs. .
Multinational companies have three types of models; centralized model, regional model and multinational model.
Centralized model means that a company puts up an executive headquarter in their home country and then build various manufacturing plants and production facilities in other countries. Its most advantage is being able to avoid tariffs and import quotas. They also take the advantage of lower production costs.
Regional model states that a multinational company keeps in one country that supervises a collection offices that are located in various countries. Unlike centralized models, the regionalized models include subsidiaries and affiliates that all report to the headquarter.
Multinational model states that a parental company operates in the home country and puts up subsidiaries in different countries. The difference is that the subsidiaries and affiliates are more independent in their operations.
Multinational corporations have their advantages. They include efficiency, development, employment and innovation.
Efficiency refers to the quality of producing an effect or the extent to which a resource is used for the intended purpose. Multinational companies are able to reach their target markets more easily because they produce in the same geographical area as the consumers of their products. Also, they can easily access raw materials produced in the country as well as access cheap labor.
Multinational companies also bring about development to a country. Development refers to a process becoming economically more matured or advanced and becoming more industrialized. The companies pay better compared to domestic companies making them more attractive to local labor force. They are also favored in some way by the government because they pay local taxes. These funds are used by the country’s government to better their economies .
Lack of employment is a major problem globally. Multinational companies tend to offer employment wherever they set up, whether their home country or a foreign country where they want to operate also. They hire local workers who are familiar with the culture of the geographical area. Therefore, they are able to give helpful insider feedback on what the locals want. This not only helps the company to thrive and create a good reputation but also creates a good relationship between the consumers and the multinational corporation.
Another advantage is that multinational corporations bring about innovation. Innovation refers to significantly change, as in revolution. Employment of both local and foreign workers brings more knowledge and skills. The company is able to produce more creative products due to the convergence.
Multinational companies also have disadvantages which include; can cause their structure to form monopolistic markets, because of their size they put Small and Medium-sized Enterprises(SMEs) out of business, cause environmental problems, profits go back to the multinational corporation instead of being invested in the country and nothing can stop the multinational company from importing its skilled labor.
Most countries treat the assets of multinational corporation as an independent structure, like a transnational company, instead of looking at the hierarchy of the business for what it tend to be. This disadvantage allows each firm to have more flexibility in how they handle the local market place with their presence. Multinational corporation can therefore use their structure to form monopolistic market.
Small and Medium-sized Enterprises(SMEs) are put out of business due to the popularity and fast growth of multinational corporations. The most critical time for a small business is the first five years of operation. About a third fail in the first twelve months. The size and scale of multinational companies is a key factor contributing to this. Bigger companies can produce larger and bulk orders, which means they can see a per unit price saving when compared to Small and Medium-sized Enterprises(SMEs).
Multinational companies also cause harm to the environment through pollution. Most developing nations do not have the same level of regulation and oversight that the developed world maintain to protect the environment. When these firms decide to do business in the international market, they are subject to local laws- not ones that govern the domestic headquarter. When working to obtain raw materials, smaller and less developed governments often trade an increase in revenue for access to their natural resources. The lower standards create better pricing structures for each customer, but it also creates environmental damage that could have future generations paying the prices of today’s decisions.
Profits obtained from all the activities go back to the multinational company instead of staying in the local market. They might create jobs in every local market, but they also funnel out a lot of the profits back to their centralized office. Some might see this as a return on their infrastructure and educational investment, but it can also be a decision that further weakens an already underperforming government or economy.
Nothing or no one can stop multinational corporation from importing their skilled labor. At times the company will not hire local workers, opting instead to import positions from the centralized office to get things up and running. This process will still provide contribution to the local economy and providing a handful of jobs that fall outside this, but tends to benefit company and workers more than the local community.
During globalization there has been increasingly impact of multinational corporations as they expand their operations in more than one country. There has been both positive and negative impact.
Positive impacts of multinational corporations include addition of a country’s Gross Domestic Product(GDP). Through the spending of the corporation in the host country maybe through payment of supplier and capital investments.
Another positive impact is that profitable multinational corporations like the Royal Dutch Shell act as a source of tax revenue. For example, on profits earned as well as payrolls and sales related taxes.
Negative impacts of multinational corporations include slow economic growth of the host country since the profits are not invested in the country.
Multinational corporations may make use of transfer pricing and other tax avoidance measures to significantly reduce the profits on which they pay tax to the government of the host country.
In conclusion, multinational companies can adopt different organization structures depending on the nature of the corporation. Also, there’re certain features a company has to meet for it to be ranked as multinational company and the features are clearly seen in the top five multinational corporations. There are also some reasons as to why a company wants to operate as a multinational company. The corporations have advantages and disadvantages as well as positive and negative impacts to both the host country where it establishes subsidiaries and affiliates as well as the home country where the centralized office is located.
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Hagel, John; Brown, John (12 March 2013). ”Institutional Innovation: Creating Smarter Organizations.”
Taylor, Bryan (6 November 2013). “The Rise and Fall of the largest Corporation in History.”
