Multinational Corporations
The term multinational corporation first appeared in American dictionaries about 1970, and it has since been defined in various ways in business publications and textbooks. For the purposes of this text, a multinational corporation is a company that has significant operations in more than one country. Essentially, a multinational corporation is an organization that is involved in doing business at the international level. It carries out its activities on an international scale, which disregards national boundaries, and it is guided by a common strategy from a corporation center.18
Neil H. Jacoby explains that companies go through six stages to reach the highest degree of multinationalization. As Table 4.1 indicates, multinational corporations can range from slightly multinationalized organizations, which simply export products to a foreign country, to highly multinationalized organizations, which have some of their owners in other countries. According to Alfred M. Zeien, CEO of Gillette Company, it can take up to 25 years to build a management team with the requisite skills, experience, and abilities to shape an organization into a highly developed multinational company.19
Table 4.1 Six Stages of Multinationalization
Alternate View
| Stage 1 | Stage 2 | Stage 3 | Stage 4 | Stage 5 | Stage 6 |
|---|---|---|---|---|---|
| Exports its products to foreign countries | Establishes sales organizations abroad | Licenses use of its patents and know-how to foreign firms that make and sell its products | Establishes foreign manufacturing facilities | Multinationalizes management from top to bottom | Multinationalizes ownership of corporate stock |
In general, the larger the organization, the greater the likelihood that it participates in international operations of some sort. Companies such as General Electric, Lockheed, and DuPont, which have each annually accumulated more than $1 billion from export sales, are examples of this generalization. You will find exceptions, of course.
In some industries, even small businesses can prosper in the global marketplace. For example, BRK Electronics, a small firm in Aurora, Illinois, holds a substantial share of world sales in smoke detectors. The company has an advantage because of its reputation for high-quality smoke alarms, carbon monoxide alarms, and fire extinguishers. BRK’s market share has grown through its local distributors in countries like Australia, Mexico, and New Zealand.20 As noted earlier, an increasing number of smaller organizations such as BRK Electronics are undertaking international operations.
Complexities of Managing the Multinational Corporation
From the discussion so far, it should be clear that international management and domestic management are quite different. Classic management thought indicates that international management differs from domestic management because international management involves operating:21
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Within different national sovereignties
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Under widely disparate economic conditions
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Among people living within different value systems and institutions
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In places experiencing the industrial revolution at different times
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Often over great geographical distance
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In national markets varying greatly in population and area
Figure 4.5 shows some of the more important management implications of these six variables and some of the relationships among them. Consider, for example, the first variable. Different national sovereignties generate different legal systems. In turn, each legal system implies a unique set of rights and obligations involving property, taxation, antitrust (control of monopoly) law, corporate law, and contract law. In turn, these rights and obligations require the firm to acquire the skills necessary to assess the international legal considerations. Such skills are different from those required in a purely domestic setting.
Figure 4.5 Management implications based on six variables in international systems and the relationships among them
Risk and the Multinational Corporation
Developing a multinational corporation obviously requires a substantial investment in foreign operations. Normally, managers who make foreign investments expect such investments to accomplish the following:23
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Reduce or eliminate high transportation costs
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Allow participation in the rapid expansion of a market abroad
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Provide foreign technical, design, and marketing skills
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Earn higher profits
Unfortunately, many managers decide to internationalize their companies without having an accurate understanding of the risks involved in doing so.24 For example, political complications involving the parent company (the company investing in the international operations) and various factions within the host country (the country in which the investment is made) could prevent the parent company from realizing the desirable outcomes just listed. Some companies attempt to minimize this kind of risk by adding standard clauses to their contracts stipulating that in the event a business controversy cannot be resolved by the parties involved, they will agree to mediation by a mutually selected mediator.25
The likelihood of achieving desirable outcomes related to foreign investments is usually somewhat uncertain and certainly varies from country to country. Nevertheless, managers faced with making a foreign investment must assess this likelihood as accurately as possible. Obviously, an unwise decision to invest in another country can cause serious financial problems for the organization.