Multinational Company

Types of multinational companies

There are four types of multinational companies: decentralised multinational corporations, global centralised corporations, international companies, and transnational enterprises:

Fig. 1 - Types of multinational companies

Decentralised multinational corporations

Decentralised multinational corporations have a strong presence in their home country. The term 'decentralisation' means there is no centralised office. Each office can operate separately from the headquarter. Decentralised multinational corporations allow for rapid expansion, as new entities can be set up quickly throughout the nation.

Global centralised corporations

Global centralised corporations have a central administrative office in the home country. They may outsource production to developing countries to save time and production costs while making use of local resources.

For example, Apple is a global centralised corporation that outsources the production of iPhone components to countries like China, Mongolia, Korea, and Taiwan.

International companies

International companies utilise the resources of the parent company to develop new products or features that will help them gain a competitive edge in local markets.

Transnational enterprises

Transnational enterprises have a decentralised organisational structure with branches in several countries. The parent company has little control over the foreign branches.

Features of multinational companies

Below are the main features of multinational companies:

• Large volume of sales: with customers around the world, MNCs generate a large sum of revenue each year. For example, Amazon's international sales reached $127.79 billion in 2021.³ Coca Cola’s net operating revenues amounted to $33.01 billion in 2020.⁴ McDonald’s global revenue was $23.2 billion in 2021.⁵

• Unity of control: multinational companies often have their headquarters in the home country to manage overall business activities across the globe. Each international branch, while operating separately, must follow the general framework of the parent company.

• Economic power: Multinational companies have significant economic power due to their enormous size and turnover. They grow their power by setting up subsidiaries or acquiring businesses in foreign countries.

• Aggressive marketing: Multinational companies spend a lot of money on advertising in both the home and foreign markets. This allows them access to a large variety of products and services while raising global awareness.

• High-quality product: Multinational companies enjoy a worldwide reputation. To keep the reputation intact, MNCs need to maintain a superior quality of their products and services.

Challenges of multinational companies

Multinational companies' special characteristics create a set of challenges that they have to face to succeed. Here are some examples:

• Cultural differences: This refers to difficulties in localisation of not only products and marketing strategy but also the corporate culture.

• Different political and legislative environments: MNCs have to adapt to different regulations affecting their products

• Long supply chains: Coordinating transportation from one country to another can be very complex and time-consuming.

• Managing geopolitical and economic risks: This refers to the political and economic stability of the host countries.

• Competition in the global market: It can be more challenging to compete with other global companies.

• Currency fluctuations: MNCs are affected by changes in exchange rates of multiple currencies.

Examples of multinational companies strategies

There are two primary strategies for firms to provide their products and services on a global scale: standardisation and adaptation:

• Standardisation means offering the same products and services with little variation in order to save costs and achieve economies of scale (with more output, the cost per unit decreases).

• Adaptation is the opposite strategy, in which firms adapt their product offerings to match the tastes and preferences of the local customers. This way, the products and services have a higher chance of acceptance.

In most multinational firms, there is a combination of standardisation and adaptation strategies. We will examine this further in a couple of examples below:

Fast food multinational company

McDonald’s is a multinational company with more than 39,000 restaurants located in 119 markets. It is one of the world's most prestigious fast-food chains with a brand value of $129.32 billion in 2020. McDonald's also ranked 9th in the leading global firms, along with companies such as Apple, Facebook, and Amazon.⁸

McDonald's worldwide success can be put down to the mixed strategy of standardisation and adaptation. On the one hand, the company adopts a standardised menu of McChicken, Filet-O-Fish, and McNugget in different markets across the globe, along with the same logo, brand colour, and packaging. On other hand, it is adaptive to the local markets. Each restaurant can adjust the menu items to suit the needs and preferences of customers in the host countries.

Coffee multinational company

Fig. 2 - Starbucks multinational company

Starbucks is a US-based multinational coffee chain. It serves coffee along with multiple beverages and snacks to middle- and high-class customers. As of today, the company has over 33,833 stores with a customer base of more than 100 million customers.¹³

Like McDonald’s, Starbucks’ international strategy is a mixture of standardisation and adaptation. While the company has a clear expectation of how the brand image should be perceived by the customers, it allows each franchise the freedom to design its own store, menu items, and marketing campaign to attract regional audiences.

Threats of multinational companies

While the existence of multinational companies brings many benefits to local economies, such as providing more jobs and contributing to tax and social welfare, many critics believe they are doing more harm than good. Here are some challenges facing the host countries in which multinational companies operate:

Fig. 3 - Threats of multinational companies

Monopoly power

With the huge market share and turnover, multinational companies can easily obtain a leading position in the market. While many MNCs commit to healthy competition, some may abuse their monopoly power to drive smaller firms out of business or prevent new ones from entering. In some cases, the presence of multinational companies also poses a challenge for other businesses to operate.

Independence loss

Multinational companies yield significant market power, which allows them to manipulate the laws and regulations of the host countries. For example, some governments of developing countries may refuse to raise the minimum wage for fear that the higher labour cost will make the multinational company switch to other cheaper economies.

Resource exploitation

Another disadvantage of MNCs outsourcing is the exploitation of local resources. These include not only natural but also capital and labour resources.

Advanced technology

The technology used by multinational companies may be too advanced for the host country. Without sufficient training, local staff may find it difficult to operate the new machine or system. In other cases, new technology may replace local jobs.

Multinational companies make up a large part of the business scenery, and their popularity will only grow with the trend towards globalisation. While MNCs bring many benefits to the host country such as job creation and tax contribution, there are also threats to the state's independence and local resources. Maximising the positive outcomes that multinational companies offer, while limiting their negative consequences, is a major challenge for many economies today.

Sources:

1. Multinational Corporations, Espace Mondial Atlas, 2018.

2. The four types of multinational business (And the financial benefits of each), MKSH, n.d.

3. Don Davis, Amazon’s North America revenue ticks up 18.4% in 2021, Digital Commerce 360, 2022.

4. M. Ridder, Coca-Cola Company's net operating revenues worldwide 2007-2020, Statista, 2022.

5. Julie Creswell, McDonald’s, now with higher prices, topped $23 billion in revenue in 2021, New York Times, 2022.

6. Benjamin Kabin, Apple's iPhone: Designed in California But Manufactured Fast All Around the World (Infographic), Entrepreneur Europe, 2013.

7. Siddharth Sai, Multinational Corporations (MNCs): Meaning, Features and Advantages | Business, Your Article Library, n.d.

8. S. Lock, The number of McDonald's restaurants worldwide 2005-2020, Statista, 2021.

9. Bernadine Racoma, McDonald’s International Strategy: Adapting Around the World, Day Translations Blog, 2019.

10. Aida Cisse, 10 Awesome McDonalds Food You Can Only Get In The UK, The Travel, 2019.

11. George Young, 20 Menu Items Only Found In European McDonald's, The Travel, 2018.

12. Miraclewatage, 50 McDonald's Menu Items Only in Japan, Tsunagu Japan, 2021.

13. Starbucks stores: U.S. and international, Statista, 2021.