Management of Multinational Corporation

Lecture- 1
Market: Market consists of buyer, seller & products. It is a medium that allows
buyers and sellers of a specific good or service to interact in order to facilitate an
exchange.
Market Share: Market share is the ratio of firms sale to industry sales. Market
share is calculated by taking the company's sales over the period and dividing it by
the
total
sales
of
the
industry
over
the
same
period.
Industry: An industry is a group of manufacturers or businesses that produce a
particular kind of goods or services. Industry consists of those who sales similar kind
of products.
Firm: Firm is one unit of the industry. Firm is a business organization, such as a
corporation, (limited liability) company or partnership. Firms are typically
associated with business organizations that practice law, but the term can be used
for a wide variety or business operation units. It has the ownership and controlling
entity of the production process. Multinational is a firm.
Factory:
A
building
or
group
of
are manufactured or assembled chiefly by machine.

buildings

where

goods

Corporation: Corporation is a large company or group of companies authorized to

act as a single entity and recognized as such in law. Corporations enjoy most of
the rights and responsibilities that an individual possesses; that is,
a corporation has the right to enter into contracts, loan and borrow money, sue
and be sued, hire employees, own assets and pay taxes.
Company:
A voluntary association formed
and organized to
carry
on
a business. Types of companies include sole proprietorship, partnership, limited
liability, corporation, and public limited company.
Trade: (the action of buying and selling goods and services) Trade is a basic
economic concept that involves multiple parties participating in the voluntary
negotiation and then the exchange of one's goods and services for desired goods
and services that someone else possesses. Trade is the act or process of buying,
selling, or exchanging commodities, at either wholesale or retail, within a country or
between countries: domestic trade; foreign trade.
Commerce: (the activity of buying and selling, especially on a large scale)
Commerce is an interchange of goods or commodities, especially on a large scale
between different countries (foreign commerce) or between different parts of the
same country (domestic commerce) trade; business. Social relations, especially the
exchange of views, attitudes, etc.
Business: (commercial activity) Business is an organization or economic system
where goods and services are exchanged for one another or for money.

Economics: Economics is a social science that studies how individuals,

governments, firms and nations make choices on allocating scarce resources to
satisfy their unlimited wants. It is the branch of knowledge concerned with the
production, consumption, and transfer of wealth.
Close Substitute: Substitute goods are two goods that could be used for the same
purpose. If the price of one good increases, then demand for the substitute is likely
to rise. Therefore, substitutes have a positive cross elasticity of demand. If two
goods are close substitutes, there will be a high cross elasticity of demand.
Example, if price of Sainsburys flour increases 10%, demand for Hovis flour may
increase 20%. Therefore, the cross elasticity of demand is +2.0
Cross Elasticity of Demand: Cross Elasticity of Demand An economic concept
that measures the responsiveness in the quantity demand of one good when a
change in price takes place in another good.
Globalization: The broadening set of interdependent relationships among people
from different parts of a world that happens to be divided into nations.
International
Trade:
The exchange of goods or services along
international
borders.
This
type
of trade allows
for
a
greater competition and
more competitive pricing in the market.
International
Business:
All
commercial
transactionsincluding
sales,
investments, and transportationthat take place between two or more countries
Export-Import: Merchandise exports & imports- Merchandise exports are tangible
products or goods sent out of a country. Merchandise imports are goods brought
into a country. They are sometimes called visible exports & imports. They are
usually a countrys common international economic transaction. The term export &
import frequently apply to merchandise, not to a service.
Service exports & imports- The company or individual receiving payment is making
a service export. The company or individual paying is making a service import. It
generates non product international earnings. Services are recently been the fastest
growth sector for international trade.
Portfolio Investment: Foreign portfolio investment (FPI) does not provide
the investor with direct ownership of financial assets, and thus no direct
management of a company. This type of investment is relatively liquid, depending
on the volatility of the market invested in.
Foreign Direct Investment (FDI): Foreign Direct Investment (or FDI) is an
investment made by a company or entity based in one country, into a company or
entity based in another country. FDI provide the investor with direct ownership of
financial assets and control.
Shares: A unit of ownership interest in a corporation or financial asset. While
owning shares in a business does not mean that the shareholder has direct control
over the business's day-to-day operations, being a shareholder does entitle the
possessor to an equal distribution in any profits, if any are declared in the form

of dividends. The two main types of shares are common shares and preferred
shares.
Securities: A security is a financial instrument that represents an ownership
position in a publicly-traded corporation (stock), a creditor relationship with
governmental body or a corporation (bond), or rights to ownership as represented
by an option. A security is a fungible, negotiable financial instrument that
represents some type of financial value. The company or entity that issues the
security is known as the issuer.
Stocks: A type of security that signifies ownership in a corporation and represents
a claim on part of the corporation's assets and earnings. There are two main types
of stock: common and preferred. Common stock usually entitles the owner to vote
at shareholders' meetings and to receive dividends. Preferred stock generally does
not have voting rights, but has a higher claim on assets and earnings than the
common shares. For example, owners of preferred stock receive dividends before
common shareholders and have priority in the event that a company goes bankrupt
and is liquidated.
Profit: A financial benefit that is realized when the amount of revenue gained from
a business activity exceeds the expenses, costs and taxes needed to sustain the
activity. Any profit that is gained goes to the business's owners, who may or may
not decide to spend it on the business. Calculated as:

Dividend: A dividend is a distribution of a portion of a company's earnings, decided

by the board of directors, to a class of its shareholders. Dividends can be issued as
cash payments, as shares of stock, or other property.
Retained Earnings: Retained earnings is the percentage of net earnings not paid
out as dividends, but retained by the company to be reinvested in its core business,
or to pay debt. It is recorded under shareholders' equity on the balance sheet. The
formula calculates retained earnings by adding net income to (or subtracting any
net losses from) beginning retained earnings and subtracting any dividends paid to
shareholders: Retained Earnings (RE) = Beginning RE + Net Income - Dividends
Licensing: This term refers to a written agreement entered into by the contractual
owner of a property or activity giving permission to another to use that property or
engage in an activity in relation to that property. The property involved in a
licensing agreement can be real, personal or intellectual. Almost always, there will
be some consideration exchanged between the licensor and the licensee.
Franchising: A franchise is a type of license that a party (franchisee) acquires to
allow them to have access to a business's (the franchiser) proprietary knowledge,
processes and trademarks in order to allow the party to sell a product or provide a
service under the business's name. In exchange for gaining the franchise, the
franchisee usually pays the franchisor initial start-up and annual licensing fees.

Management Contract: Agreement between investors or owners of a project, and

a management company hired for coordinating and overseeing a contract. It spells
out
the conditions and duration of
the
agreement,
and
the method of computing management fees.
Turnkey Operations: A deal where a company takes all responsibility for
constructing, fitting and staffing a building (such as a school, hospital or factory) so
that it is completely ready for the purchaser to take over.
Countertrade: International trade in which goods are exchanged for other goods,
rather than for hard currency. Countertrade can be classified into three broad
categories
barter, counterpurchase and
offset.
Multinational Enterprises (MNEs): Multinational enterprises take a global
approach to markets and production or have operations in more than one country.
Value added activities, cross-border transactions are involved in multinational
enterprises. Sometimes they are referred to as:
Multinational Corporations (MNCs)
Multinational Companies (MNCs)
Transnational Companies (TNCs)
Multinational Organizations: Multinational organizations are profit based & nonprofit based. Non-profit based multinational organizations are called N.G.O.s.
Multinational
Corporations:
A multinational corporation
(MNC)
or multinational enterprise is an organization that owns or controls production of
goods or services in one or more countries other than their home country. It can
also be referred as an international corporation, a "transnational corporation", or a
stateless corporation. Multinational corporations are
1.
2.
3.
4.
5.

International Company
Multi-domestic Company/Corporations
Global Corporation (Standardized Product)
Transnational Corporations
World Company (World companies dont believe in host believe in home &
host countries, ex- Nestle)

International Orientation of Multinational Corporations:

1. Ethnocentric: International Company
2. Polycentric: Multi-domestic Company/Corporations
3. Geocentric: Global Corporation
Transnational Corporations: Transnational corporations combines both
polycentric & geocentric orientations. Transnational corporations (TNCs) are
incorporated or unincorporated enterprises comprising parent enterprises and their
foreign affiliates. A transnational, or multinational, corporation has its
headquarters in one country and operates wholly or partially owned subsidiaries in
one or more other countries.

Lecture- 2
Stages of Internationalization:

(i) Purely Domestic Company (PDC)

(ii) PDC doing indirect/direct export,
franchising/licensing
(iii) International Company
(iv) Multinationa/Global
(v) Transnational Corporations
Ten (10) Incoterms:
1. EXW (Ex-Works)
2. FOB (Free on Board)
3. FCA (Free Carrier)
4. FAS (Free Alongside Ship)
5. CFR (Cost and Freight)
6. CPT (Carriage Paid To)
7. CIP (Carriage and Insurance Paid To)
8. DAT (Delivery at Terminal)
9. DAP (Delivery at Place)
10.DDP (Delivery Duty Paid)
Measurement of the degree of foreign involvement
Q) According to World Investment Report (WIR) 1997 by United Nations (UN)
Year
MNCs
No. of Subsidiaries
WIR 1997
45,500
2.77 lakh
WIR 2009
85,000
8 lakh
Why this high growth of MNCs? Justify your answer.
Answer: The high growth of MNCs occurs because of globalization. Factors in
increased globalization are:
1. Increase in and expansion of technology
2. Liberalization of cross-border trade and resource movements
3. Development of services that support international business

4. Growing consumer pressures

5. Increased global competition
6. Changing political situations
7. Expanded cross-national cooperation
Reasons that firms engage in International Business are
1. Expanding Sales
2. Acquiring Resources
3. To diversify or Minimizing Risks
Trans-nationalization Index:
The Transnationality Index (TNI) is a means of ranking multinational
corporations that is employed by economists and politicians. It is calculated as
the arithmetic mean of the following three ratios (where "foreign" means outside of
the corporation's home country)
Foreign Assets/Total Assets (the ratio of foreign assets to total assets)
Foreign Sales/Total Sales (the ratio of foreign sales to total sales)
Foreign Employment/Total Employment (the ratio of foreign employment
to total employment)
The Transnationality Index was developed by the United Nations Conference on
Trade and Development. Multinational corporations are also ranked by the amount
of foreign assets that they own. However, the TNI ranking can differ markedly from
this.
*Case Study 1: The Rise and Fall of British Sports car
Q.1) Give another title of the case.
Answer: The Cost of Complacency
Q.2) What lessons can a manager learn from this case?
Answer: 1. Managers should not be complacent. They should not refuse to
acknowledge that they may face potential competitive threats.
2. They need to invest in technology to maintain efficient production
method.
3. In spite of heavy demand they need to improve the quality and
reliability of their products.
4. When changes are necessary they should tend to approach it
superficially.
5. In case of monopoly market they must try to find their weaknesses.
6. Quick try to develop new products may cause poorly designed and
under engineered product with numerous flaws and weaknesses when hitting the
market.
7. To keep focus on their market and in tune with their customers.
Q.3) If you were a British executive today, would you consider re-entering the sports
car market? Why or why not?
Answer: No. I wouldnt consider re-entering the sports car market.

*Term paper & Presentation Topic- Continental Profile of MNCs

1. Number, size and industry wise distribution of companies within a contract
2. A brief profile of socio-economic, demographic, and cultural profile of a continent
3. Major features of American, Europeans, Japanese, NIC companies, MNCs, and
companies from developing countries.
Common to each group:
List country wise names of 10 companies under the continent you have
chosen.
Market groups and business opportunities within a continent.
Continent and country wise list of companies operations in Bangladesh.

Lecture 3
(* Hong kong- Belgium- Luxembourgtransnationalized countries)

Trinidad

and

Tobago

are

the

most

Environment of MNCs
Economic Factor+ Cultural Factor + Social Factor + Technological Factor +
Demographic Factor= Total Environment

Domestic (Country)

Internal (Company)

Internationa
Business/MN
Cs
Global

Foreign

Risks faced by MNCs:

Political Risks of Global Business
Issues of sovereignty, different political philosophers, and nationalism are manifest
in a host of governmental actions that enhance the risks of global business. Risks
can range from confiscation, the harshest, to many lesser but still significant
government rules and regulations such as exchange controls, import restrictions,
and price controls that directly affect the performance of business activities.
Although not always officially blessed initially, social or political activist groups can
provoke governments into action that proves harmful to a business. Of all the
political risks, the most costly are those actions that result in a transfer of equity
from the company to the government, with or without adequate compensation.
The most political risk is confiscation, that is, the seizing of a companys assets
without payment. The two most notable recent confiscations of U.S. property
occurred when Fidel Castro became the leader in Cuba and later when the Shah of
Iran was over thrown the Helms-Barton Act is part of a continuing embargo against
Cuba as retaliation for the confiscation of U.S. asset in Cuba. The United States also
has imposed an embargo against trade with Iran.
Less drastic but still severe, is expropriation, which requires some reimbursement
for the government-seized investment. A third type of risk is domestication, which
occurs when host countries take steps to transfer foreign investments to national
control and ownership through a series of government decrees. Governments seek
to domesticate foreign-held assets by mandating

A transfer of ownership in part or totally to nationals

The promotion of a large number of nationals to higher levels of
management
Greater decision-making powers resting with nationals

A greater number of component products locally produced

Specific export regulations designed to dictate participation in world markets

A combination of all of these mandates are issued over a period of time, and
eventually control is shifted to nationals. The ultimate goal of domestication is to
force foreign investors to share more of the ownership and management with
nationals than was the case before domestication.
A change in government attitudes, policies, economic plans or philosophy
concerning the role of foreign investment in national economic and social goals is
behind the decision to confiscate, expropriate, or domesticate existing foreign
assets. Risks of confiscation and expropriation have lessened over the last decade
because experience has shown that few of desired benefits materialize after
government takeover. Rather than a quick answer to economic development,
expropriation and nationalization have often led to nationalized business that were
inefficient, technologically weak, and noncompetitive in world markets. Today,
countries that are concerned that foreign investments may not be in harmony with
social and economic goals often require prospective investors to agree to share
ownership, use local content, enter the labor and management agreements, and
share participation in export sales as a conclusion of entry.
Economic Risks
Even though political risks, international companies are still confronted with a
variety of economic risks that often occur with little warning. To conserve scarce
foreign exchange, to raise revenue, or to retaliate against unfair trade practices, are
the real or imagined reasons for economical restraints.

Exchange Controls
Local Content Laws
Import Restrictions
Tax Controls
Price Controls
Labor Problems

Violence. Although not usually government initiated, violence is another related

risk for multinational companies to consider in assessing the political vulnerability of
their activities.
Cyber Terrorism. New on the horizon is cyber terrorism. Although it is infancy, the
internet is the medium of terrorist attack by foreign and domestic antagonists
wishing to inflict damage to a company with little chance of being caught.
Process of Minimizing the Risks:
Good Corporate Citizenship. A company is advised to remember the followings:

It is a guest in the country and should act accordingly

The profits of the enterprise are not solely the companys, the local national
employees and the economy of the country should also benefit

It should train its executives and their families to act appropriately in the
foreign environment
The company should try to contribute to the countrys economy and culture
with worthwhile public projects
Although English is an accepted language overseas, a fluency in the local
language goes far in making sales and cementing good public relations

In addition to corporate activities focused on the social and economic goals of the
host country and good corporate citizenship. MNCs can use other strategies to
minimize political vulnerability and risks.
Joint Ventures. Typically less susceptible to political harassment, joint ventures
can be with locals and other third-country multinational companies in both cases, a
companys financial exposure is limited. A joint venture with locals helps minimize
anti MNC feelings, and a venture with another MNC adds the additional bargaining
power of a third country.
Expanding the Investment Base. Including several investors and banks in
financing an investment in the host country is another strategy. Thus the company
has the advantage of engaging the power of the banks whenever any kind of
government takeover or harassment is threatened.
Marketing and Distribution. Controlling distribution in market outside the
country can be used effectively if an investment should be expropriated the
expropriating country would lose access to world markets. This has proved
especially for MNCs in the extractive industries.
Licensing. A strategy that some firms find eliminates almost all risks is to license
technology for a fee. Licensing can be effective in situations where the technology is
unique and the risk is high.
Planned Domestication. It can be effective in forecasting or minimizing the effect
of a total takeover. Where an investment is being domesticated by the host country,
the most effective long range solution is planned phasing out, that is, planned
domestication.
Assessment of Risks:
MNCs asses risk reactively rather than investing in predictions. Moreover, risk can
be analyzed either subjectively or objectively. Rummel and Heenan (1978) describe
techniques such as

Grand Tour: Grand tour usually involve dispatching a company delegations

to inspect the local surroundings and meet with local officials. However, the
delegates receives only selective information and miss the whole picture.
Old Hands: The old hand method involves the judgments of expertseducators, diplomats, and other business persons- and relies on external
sources of information.
Delphie Technique: Delphie Technique, using internal and external sources
(or a combination of both), identify selective elements of the political

environment and judge their importance. This approach requires accuracy

and comprehensiveness, well-reasoned and timely opinions, and sound
judgment.
Quantifiable Method: Quantifiable methods predict trends, describe
relationship, identify indicators, develop typologies, and analyze events.

Rummel and Heenan suggests a combined approach and emphasize the importance
of intuition and sensitivity. They propose four criteria for analyzing risk:

Domestic Instability (amount of turmoil, rebellion)

Foreign Climate (measured by events such as diplomatic expulsion)
Political Climate (reflected in swings from left-wing to right-wing regimes)
Economic Climate (the degree of government intervention, GNP, inflation,
and external debt levels)

Kobrin (1981) proposes a typology of assessment techniques based on structure

(explicitness or implicitness of model) and systemization (formalization of
methodology). Subjective (implicit) models of political risk are unstructured,
whereas objective (explicit) models are considered structured. Systemization can
mean anything from general impressions to sophisticated complete analysis; an
unstructured, systemized approach would be based on intuition and implicit
assumptions regarding an events impact on operations or managerial
contingencies.

An example of a systemized, unstructured approach is BERI (Business

Environmental Risk Index), a computer program combining a highly general
scan of information, and Economic, Social, and Political Analysis (ESP), used
in Latin America, as developed by the chemical industry. In both the
methodologies are formalized but the models are implicit, that is, not
conceptually derived in terms of the predicted impact of events.
Example of systemized structured approaches are the World Political Risk
Forecast, a systemized structured approach based on a deductive model.
Another method, ASPRO/SPAIR (developed by shell oil) uses an inductive
model in which experts estimate the values of variable factors affecting the
business climate. This method, however, is particularly costly and time
consuming.

BERI is useful for general preliminary scan (to assess macro risk) whereas
ASPRO/SPAIR should be used for micro risk assessment (i.e. industry specific)

Lecture 4

Organizational Structures of Multinationals:

Organizationsal
Architecture

Organizationa
l Structure

Horizaontal
Differetiation

Vertical
Differentiati
on

People

Coordination
Mechanism

Process

Control &
Incentives

Organizatio
nal Culture

Organizational Structure- Organization is defined by the formal structure, coordination and control systems, and the organization culture. It is the formal
arrangement of roles, responsibilities and relationships within an organization. It is a
powerful tool to implement strategy.

Vertical Differentiation (Centralization and Decentralization): The

issue of determining where in the hierarchy, the authority to make decisions
stand. In short we can say vertical differentiation is location of decision

making. Centralization is the degree to which high level managers, usually

above the country level, make strategic decisions and pass them over to
lower levels for implementation. Decisions made at foreign subsidiary level
are considered decentralized, and those made at HQ are considered to be
centralized.
Horizontal Differentiation (Subunits): Horizontal differentiation is the
way a company designs its formal structure to perform some specific
functions like to specify the set of organizational tasks, divide these tasks into
jobs, departments, subsidiaries, and divisions to get the work done.

Types of Organizational Structures:

Functional
Structure

Aera
(Geographic)
Division
Structure

Product
Divison
Structure

Customer
Divison
Structure

Matrix
Division
Structure

Hybrid
Product

Functional Structure- In this structure specialized jobs are grouped according to

traditional business functions. The global functional design calls for a firm to create
departments or divisions that have worldwide responsibility for the common
organizational functionsfinance, operations, marketing, R&D, and human
resources management.

Area (Geographic) Division Structure- The global area design organizes the
firms activities around specific areas or regions of the world. These are used when
foreign operations are large and not dominated by a single country or region.

Advantages- Useful when managers can gain economics of scale on a regional

rather than on global basis.
Disadvantages- Firm may sacrifice cost efficiencies
Diffusion of technology is slowed
Design unsuitable for rapid technological change
Duplication of resources
Coordination across areas is expensive
Product Division Structure- The global product design assigns worldwide
responsibility for specific products or product groups to separate operating divisions
within a firm.
Related Products
M- Form
Multidivisional

Unrelated Products
H- Form
Holding

Fig: Samsungs Global Product Design

Customer Division Structure- The global customer design is used when a firm
serves different customers or customer groups, each with specific needs calling for
special expertise or attention.

Matrix Division Structure- A global matrix design, the most complex of

designs, is the result of superimposing one form of organization design on top of an
existing, different form.

Hybrid Design Structure- Most firms create a hybrid design, rather than pure
design, that best suits their purposes, given the firms size, strategy, technology,
environment, and culture, and blends elements of all the designs discussed.

Co-ordination in the Global Organization:

Coordination is the process of linking and integrating functions and activities of
different groups, units, or divisions.