Ch-2 Managing IB

WHAT IS MULTINATIONAL CORPORATION?

A multinational corporation (MNC) is usually a large corporation operated in home country which

produces or sells goods or services in other countries. Ex- Apple Company (produces goods in China and
other counties but operated or decision via home country America)

Characteristics of a Multinational Corporation

The following are the common characteristics of multinational corporations:

 1. Very high assets and turnover

To become a multinational corporation, the business must be large and must own a huge amount of
assets, both physical and financial. The company’s targets are high, and they are able to generate
substantial profits.

 2. Network of branches

Multinational companies maintain production and marketing operations in different countries. In each
country, the business may oversee multiple offices that function through several branches
and subsidiaries.

 3. Control

In relation to the previous point, the management of offices in other countries is controlled by one head
office located in the home country. Therefore, the source of command is found in the home country.

 4. Continued growth

Multinational corporations keep growing. Even as they operate in other countries, they strive to grow
their economic size by constantly upgrading and by conducting mergers and acquisitions.

 5. Sophisticated technology

When a company goes global, they need to make sure that their investment will grow substantially. In
order to achieve substantial growth, they need to make use of capital-intensive technology, especially in
their production and marketing activities.

 6. Right skills

Multinational companies aim to employ only the best managers, those who are capable of handling
large amounts of funds, using advanced technology, managing workers, and running a huge business
entity.

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 7. Forceful marketing and advertising

One of the most effective survival strategies of multinational corporations is spending a great deal of
money on marketing and advertising. This is how they are able to sell every product or brand they make.

 8. Good quality products

Because they use capital-intensive technology, they are able to produce top-of-the-line products.

 Reasons for Being a Multinational Corporation

There are various reasons why companies want to become multinational corporations. Here are some of
the most common motivations:

 1. Access to lower production costs

Setting up production in other countries, especially in developing economies, usually translates to

spending significantly less on production costs. Though outsourcing is a way of achieving the objective,
setting up manufacturing plants in other countries may be even more cost-efficient.

Due to their large size, MNCs can take advantage of economies of scale and grow their global brand. The
growth is done through strategic manufacturing/service placement, which allows the corporation to
take advantage of undervalued services across the globe, more efficient and inexpensive supply chains,
and advanced technological/R&D capacity.

 2. Proximity to target international markets

It is beneficial to set up business in countries where the target consumer market of a company is
located. Doing so helps reduce transport costs and gives multinational corporations easier access to
consumer feedback and information, as well as to consumer intelligence.

International brand recognition makes the transition from different countries and their respective
markets easier and decreases per capita marketing costs as the same brand vision can be applied
worldwide.

 3. Access to a larger talent pool

Multinational corporations are also known to hire only the best talent from around the world, which
allows management to provide the best technical knowledge and innovative thinking to their product or
service.

 4. Avoidance of tariffs

When a company produces or manufactures its products in another country where they also sell their
products, they are exempt from import quotas and tariffs.

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ADVANTAGES OF MNC (MULTINATIONAL COMPANIES)

1. Assure Quality Standards

2. Modern Technology

3. Research and Development

4. Growth of Industry

5. Expand Exports

6. Best Utilization of Resources

7. Expand Local Industries

8. Management job Opportunities

9. Development of Country

10. Taxes and Other Expenses

11. Increase Employment

12. Remove Monopolies

13. Improvement in Standard of Living

(1) Assure Quality Standards

Multinationals companies mostly have large size and more influence, so these companies tries more to
provide higher quality or experience than expected to each customer. These things assure to the
customers that, they are getting a good quality of products even at less price.

(2) Modern Technology

New technology has an important role in cutting down the cost of production which affects reduce in
the price of goods and produces quality goods on a large scale. These companies get the latest and
upgraded technology from foreign countries. This help developing and poor countries to improve the
technological level.

(3) Research and Development

 The resources and experience of multinational companies in the field of research help the host country
to make product research and development system. This helps the host country to improve the product
quality at a low price.

(4) Growth of Industry

Multinational companies are experienced and fast-growing in nature. These companies also offer
growth opportunities for domestic industries. MNC helps local producers or domestic industries by

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setting up partnerships and uses the local companies for the supply of raw material to make goods for
the international level market.

(5) Expands Export

Multinational corporations produce goods for an international market. It helps the host country to
increase the export of goods. This supports developing countries to earn foreign money and improves

(6) Best Utilization of Resources: These MNC companies assure the best uses of natural and other
resources to the country. These companies try to reduce duplication and waste things which leads to the
best utilization of resources. This way country receives more benefits from the scarce resources.

(7) Expand Local Industries

Multinational corporations provide a ready-made market to local/domestic suppliers for getting raw
material or semi-finished products to make finished products. Most of their requirement in respect of
raw materials, spare parts, etc. are being met by local suppliers.

(8) Management Job Opportunities

These companies open management opportunities to the management students of the host country.
These students can get jobs as professional managers by multinational companies. They can earn an
impressive salary and build a reputation for the country.

(9) Development of Country

Multinational companies help developing countries to increase efficiency and productivity in production,
sales, finance, etc. through the transfer of technology and foreign investment in the hosting country.

10. Taxes and Other Expenses – Taxes are one of the areas where every MNC wants to take advantage.
Many countries allow reduced taxes on exports and imports in order to increase their foreign exposure
and international trade. 

11. Increase Employment

In terms of employment, Multinational corporations hire workers to produce goods on a large scale.
More workers needed when a company needs to increase production. This result can lead to Increase
employment.

(12) Remove Monopolies

when a multinational company enters into any market they compete with existing competitors, this can
result in removing the monopoly of some large companies. In the long run/time, the presence of
multinational companies in the market along with domestic companies is beneficial to the consumers
because customers can get more benefits like less price, better quality, more availability of products.

13. Improvement in Standard of Living

By providing the best quality products and services at a better price, MNCs help to improve the standard
of living of people of host countries.

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DISADVANTAGES OF MNC (MULTINATIONAL COMPANIES)

The Threat of a multinational investing to host countries may include:

1. Environmental Damage

2. Increases competition

3. Pressurize Governments

4. Uncertainty in jobs

5. Reduces Tax Liability

6. Low-skilled employment

7. Exploiting Workers

8. Export Profits 

9. Impact On Societies

10. Inappropriate technology

1. Damage Environment

Multinationals corporations require or like to produce goods in bulk so that become more efficient and
cheap. This may not always be the best environmental practice. Sometimes these companies produce
goods using low standards, it does lower prices but it also damages to the environment i.e. Creating air
& water pollution, etc. Poor governments exchange environmental damage for additional
profits. Example – MNC can reduce expenses by not taking proper precautions to stop pollution.

2. Increases competition

Another disadvantage of multinationals corporations is Increases competition in a market. Mnc has the
ability to Increase Competition. These large corporations can easily dominate the market due to better
products and lower prices because Mnc has the financial resources to buy in bulk.

3. Pressurize Governments

Multinational Corporation’s investment can be very important to a country but this often gives an
unbalanced influence over government and other organizations in the host country. Mnc economic
importance in the host country, it makes often that governments agree to changes that may not be
beneficial for the long-term welfare of their people.

4. Uncertainty in jobs 

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The MNC can move or shift their production factory or offices in a very short time. This creates
uncertainty for the host country. If more companies transfer their offices and centering operations,
more jobs for the people living in these countries are threatened.

5. Reduces Tax Liability

Multinationals constantly aim to reduce their tax liability to a minimum amount. This can be done with
the help of transfer pricing. They target to reduce their tax liability in countries with high tax rates and
increase in the countries with low tax rates.
MNC can do this by transferring components and part-finished goods between different countries at
different prices. If any country has high tax rates, they transfer the goods at a relatively high price to
make the costs appear higher. This reduces their overall tax bill.

6. Low-skilled employment 

As multinational companies want to reach efficiency level quickly in production, marketing, etc., to make
this possible Mnc needs skilled employment. But Mnc doesn’t have sufficient time to create local
employment skills that encourage high productivity levels.
In this situation, Mnc starts to import skilled employment from other countries to meet their needs. So
the jobs created in the local area can be low-skilled or lower level in multinational companies.

7. Exploiting Workers

Mnc often invests in developing countries to take advantage of cheaper labor. Most multinational
corporations prefer to put up branches in these parts of the world where regulation and laws are not
strict for workers and where people need jobs because these multinationals demand cheaper labor and
lesser healthcare benefits.

8. Export Profits 

Another biggest disadvantage of Mnc is exporting and transferring their profits. Large multinational are
likely to take profits back to their ‘home country ‘, leaving little financial benefits for the host country.

9. Impact On Societies

 Large numbers of foreign businesses can remove local and traditional cultures. These companies
increase the culture of fast food and soft drinks in developing nations.
For example – burger and coke, This type of food are not even good for health but Mnc like McDonald,
Promoting the foreign culture.

10. Inappropriate technology

Another disadvantage of MNC is unsuitable Technology. The technology given by mnc from their home
country can be inappropriate for host countries. It can be too old or too advanced. Moreover, we
discussed earlier Mnc doesn’t have time to train local people to acquire skills in technology.

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The International Organization Models
1. Global Organizational Model

In his book “A Manager’s Guide to Globalization” Dr. Steven Rhine smith says, “Going Global does not
mean just doing business abroad”. It is easy to see that this misconception is widely prevalent in many
of today’s organizations.
In a true Global Company there is harmony between different cultures. Resources and materials are
moved seamlessly across different countries so that the company enjoys maximum competitive
advantage.

Example of a global company is Royal Dutch Shell. Because Shell is pushing forward, hoping to begin
drilling this July for some of the estimated 90 billion barrels of recoverable oil in the Arctic. Over the next
10-20 years, the company expects oil from the Arctic to be its largest source of crude.
In the short-term, Shell has done well, boosting its earnings for the first quarter of 2012 by 11%,
compared to the previous year, to $7.7 billion. Part of the increase in earnings comes from Shell’s long-
term projects that have just started producing: namely, a gas-to-liquids plant in Qatar and projects in
the Canadian oil sands.

2. Transnational Organizational Model

A Transnational Corporation (TNC) differs from a traditional MNC (Multinational Company) in that it
does not identify itself with one national home. While traditional MNCs are national companies with
foreign subsidiaries, TNCs spread out their operations in many countries sustaining high levels of local
responsiveness.
Transnational’s can compare costs at different locations, and can switch activities to different areas as
appropriate. Transnational’s are made possible by improved international communications which
provide rapid containerized transshipment and foreign travel, easy communication of information, and
international mobility of capital. When one market is saturated, the multinational can rapidly develop
others, since foreign investment cuts transport costs, and make possible a rapid response to local
markets. It also eases tariff barriers—the UK has been an attractive location for many Japanese
manufacturers.

An example of a TNC company is Nestlé who employ senior executives from many countries and try to
make decisions from a global perspective rather than from one centralized headquarters.

3. International Organization Model

An international business company or international business corporation (IBC) is an offshore company (a

company which is incorporated outside the jurisdiction of its primary operations) formed under the laws

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of some jurisdictions as untaxed company which is not permitted to engage in business within the
jurisdiction in which it is incorporated.

One of the examples that i choose is Guangzhou Shipyard International Co., Ltd. (GSI). GSI, which was
parented by China State Shipbuilding Corporation, is the largest modern integrated shipbuilding
enterprise in South China and one of the 500 biggest enterprises in China. GSI is based on core
operations of shipbuilding and focused on building and exploitation of handy size ships.

4. Multinational Organizational Model

A multinational corporation/company is an organization doing business in more than one country. ‘In
other words it is an organization or enterprise carrying on business in not only the country where it is
registered but also in several other countries. It may also be termed as International Corporation, global
giant and transnational corporation.

According to the United Nations a multinational corporation is “an enterprise which owns or controls
production or service facilities outside the country in which it is based”. In the words of W H Moreland,
“Multinational Corporations or Companies are those enterprises whose management, ownership and
controls are spread in more than one foreign country”.

Thus a multinational company carries on business operations in two or more countries. Its headquarters
are located in one country (home country) but its activities are spread over in other countries (host
countries). MNC’s may engage in various activities like exporting, importing, manufacturing in different
countries. It may also lend its patents, licenses and managerial services to firms in host countries.

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Organizational Structure – Definition, Types and Elements
Organizational structure is the formal and structured hierarchy in an organization. Various activities such
as Task allocation, subordination, supervision, coordination are based on the structure of the
organization. For a new employee, knowing the structure is important because it will help him reach a
proper authority by following a process. Functions are divided based on the position in the
organizational structure. Almost all Standard Operating Procedures involve organizational structure and
in cases of emergency, it is vital for the employees to know the structure. The structuring may be done
as workgroup, teams, department, branch and so on.

Importance of Organizational Structure

1) Proper coordination

To have proper work coordination and the flow of the tasks and responsibilities, it is very crucial for the
management of the firm to realize the Importance of Organizational Structure. It is also of the vital
importance to make this specific facet as an integral part of the entire work culture and environment as
it also brings along the various merits and benefits such as an increase in the productivity
and efficiency levels of the employees.

All of it has a positive cascading effect on the quick attainment of the long term and short term
objectives of the firm. Proper coordination is a vital key to higher and effective work efficiency and goal
accomplishment.

2) Higher productivity levels of the employees

Taking forward the point of discussion on the Importance of Organizational Structure, when the human
resource department and the top management of firm realize the same there is an increase in the
productivity levels of the firm that works as one of the biggest merits. Owing to the proper structure,
each and every employee of the firm knows and is well aware of its roles and responsibilities that are
listed in his KRA’s there is no rubbing factor at all.

This further results in less of issues such as insecurities, jealousy, and attrition rate that takes a toll on
the productivity levels of the firm. It is very necessary for the firm to keep its employees happy and
satisfied by giving them a positive working environment, challenging roles, and proper rewards to keep
them motivated. And all of it is possible by following the Importance of Organizational Structure.

3) Increased efficiency

With the aspects of motivation, agility, and higher productivity levels of the employees, there is a direct
effect on the work efficiency. When the employees are happy and highly motivated they put their heart
and soul in accomplishing their duties and responsibilities resulting in the growth and the required
success of the firm.

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Hence, all the industry experts, veterans, and HR professionals harp on the Importance of Organizational
Structure. With the increased efficiency levels, the firm is able to carve a niche for its brand in
the market in a short span of time beating the competition.

4) Retain and attract expert and experienced employees

For having a positive and a healthy perception in the market amongst the job aspirants, the firm has to
realize and follow the Importance of Organizational Structure to the core, let us discuss the same in
detail. Whenever any job aspirant applies for a job in any specific company, he takes a thorough and a
detailed low down on the work culture, environment, and the organization structure of the firm.

He gets all the details from his industry peers and various online forums and websites. And only if he is
satisfied with the structure and his clear role and responsibilities, he will go for the firm. And if he is
happy and satisfied with the structure, role, duties, remuneration, and the overall working atmosphere
he will stick with the firm with long term objectives in his mind.

5) Proper flow of communication

Miscommunication can actually hinder the entire workflow of the organization and showcase it in a bad
light. Plus the issue of miscommunication not only affects that one specific department from where it
has been stemmed but also affects the working of various other interdependent departments and its
employees.

One of the major reasons for this issue is the lack of proper organizational structure and the hierarchy
levels with each and every employee knowing its role, duties, and responsibilities. There is no rubbing
effect at all ensuring the proper flow of communication.

Hence, it can be totally understood and vouched that the firm has to adhere and follow the Importance
of Organizational Structure no matter of its size, employee strength, and market share.

6) Job satisfaction

Let us get this fact loud and clear that the job satisfaction of the employees of the firm is just not
dependent on their remuneration, rewards, and performance appraisal levels. But one of the major
reasons behind the same is the proper and organized structure and the hierarchy levels.

As it results in their elevated motivational levels, healthy competition, challenging tasks and
responsibilities, and positive work culture and overall environment making them feel happy and satisfied
to the core. And if they are highly satisfied with their job, they tend to stay longer with the firm.

7) No duplication of work:

When the firm follows the Importance of Organizational Structure and applies the same at each and
every of its business operation, there is no duplication of work as every employee is crystal clear about
his role, duties, and responsibilities. If there is no proper organizational structure and the hierarchy

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levels, the employees are not very aware and clear about their tasks resulting in the rubbing off the
effect with one single work managed and completed by two or more employees.

All of it gives rise to the internal clashes, decreased productivity levels, and less efficiency of work
making the entire work atmosphere unhealthy and full of competition. Making a proper organization
structure is the main task and onus of the top management of the firm along with the human resource
department.

8) Specialization of the tasks and responsibilities

Realizing and following the Importance of Organizational Structure results in the specific jobs assigned
to the employees that specialize in the same owing to their professional qualifications, experience,
expertise, and knowledge. The firm is able to optimally utilize their knowledge and expertise plus the
employees are also highly happy and satisfied as they are given the tasks related to their domain plus it
makes them learn and grow in the best possible manner.

Also, they are able to prove their worth in the company that earns them the rewards and acclamations
from their immediate managers and top management.

9) The distinctiveness of power and authority

With the proper adherence to the Importance of Organizational Structure, there is a proper
Distinctiveness of power and authority. For instance, the marketing department is headed by the CMO
followed by Head- Marketing, Marketing Manager, Marketing Executives, and Marketing
Management Trainees.

Each of them is aware of their roles, powers, duties, responsibilities, and reporting authority without any
sort of confusion and issues.

Different Types of organizational structures

Set up an organizational structure that is defined and distinctive if you are interested in an efficient,
professional environment. Both small and large entities need a prepared configuration to encourage
smooth and effective work-flow.

There are several common organizational structures that you can mold or change as per your
requirements.

It is important to realize which one is going to suit you the best so that you can implement it in your
system. Some of the most popular and common organizational structures have been explained below
for your convenience.

1 Hierarchical Structure 

Large business organizations, governments, military organizations, and organized religious groups are
some prominent examples that follow a hierarchical structure.

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It incorporates several levels of authority and management by grouping the employees under capable
supervision. The hierarchical structure is no doubt one of the most common organizational structures,
and it uses the vertical command system for organizing the workers and allocating them their
responsibilities.

The grouping of employees is based on several factors like the geographical location for instance in case
of an international entity the company might decide to group its workers according to the country of
their origin and in some cases, the employees are grouped in lieu of the common services they provide.

2 Functional Organizational Structure

If you are looking for a common organizational structure that can departmentalize by common job
criteria and functions, then you should opt for Functional organizational structure. It is appropriate for
departments like purchase, finance, marketing, accounting, and human resource
that needs individual handling.

The structures enable you to group employees as per your needs; for example, you can make a group of
salespeople or people dealing with the purchasing department together. Each department will have a
manager of its own who will answer to the head of all the functional divisions.

He, in turn, will have to report directly to the company head or a specific director who has undertaken
the responsibility of handling operational areas.

3 Horizontal Structures

If you are looking for an apt and common organizational structure for a small business entity or a new
start-up, then you should certainly opt for Horizontal Structure.

In a small company, there are few employees, and you can easily eliminate several structure levels that
are part of middle management.

Now the well-trained workers can make independent decisions and act quickly for the betterment of
their organization. Direct involvement does not mean that the employees do not have superiors. It
signifies shared accountability in a relatively transparent system.

4 Matrix Structure

If you are looking for a common organizational structure, then one of the best options is Matrix
structure. In this organizational management system, the workers with similar skills are grouped to
complete a specific assignment.

The reporting relationship is set up as a matrix where you have to follow both vertical and horizontal
reporting level, and hence, this is why it is known as a Matrix structure.

For example, an employee is part of a team and reports to his team manager, but he may also be
working as a member of another group and will also have to report to the head of that group.

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 The advantage of incorporating a matrix organizational structure is that the employees are aware from
the onset that they have a dual responsibility, one towards their department and other towards
organizational projects. They learn to prioritize their responsibilities and work accordingly.

The twin command chain offers a balanced thought-process and greater flexibility. It also creates
new opportunities to share resources and encourages open communication.

An important disadvantage of matrix organizational structure is that sometimes the complex layers can
create confusion, especially during tiring times. The most important question that needs answering at
that point in time is who is responsible for the wrong decisions.

5 Divisional Structures

If you are looking for a common organizational structure, then the perfect choice is no doubt Divisional
Structure. Within this system, the organizational entity has several divisions that are based on
geographical location, market, or products, and each of them is equipped with required resources for
better dealings.

You can also opt for multi-divisional structure if your parent company owns further subsidiaries that use
its brand name in the market. The different divisional structures are as follows-

 Product-based divisional structure

If your company is dealing in multiple products, then the best common organizational structure for the
entity is product-based divisional structure.

All the divisions within the organization are equipped to handle a specific product line. The structure
includes smaller as well as multiple divisions and has its sales and marketing team.

Each group reports to its executive, who is responsible for overseeing that particular line. The advantage
of this organizational structure is that every product is dealt with separately, and you can pay attention
to all the finer details in an efficient manner.

An important advantage of Divisional Structure is that the failure of one entity does not threaten other
subsidiaries as the operational working is independent.

 Market-based divisional structure

In the market-based divisional structure, the division is based on customer, industries, and markets. It is
suited for entities that deal in specific and unique services and products. The customized approach is
appropriate to meet customer expectations.

This structure also helps the company to remain aware of demand changes so that it can take
appropriate steps to meet them successfully.

 Geographical divisional structure

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Sometimes an organization is spread over a vast place, and it needs to organize its common
organizational structure by region because of the difference in the needs and demands of that place.

The geographical divisional structure is ideal for companies that need to be near a particular location
either for the source of supply or because the products are suited for the customers of that particular
location.

The geographical structure is organized as per districts, states, and even particular regions, and the
employees have to report to its central authority.

6 Network Structure

One of the common organization structures is Network Structure. It is a flexible and decentralized
system that helps to manage, control, and coordinate both external and internal relationship between
top-brass and managers.

It felicitates open communication and the independent making of decisions and hence, is considered a
more agile and controlled structure.

7 Modular structures

One of the most common organization structures is Modular Structure that helps to create strategic
units. These focus on special areas and departments that are outsourced to create further benefits for
the company.

The key lies in the fact that you will have to separate the department without causing harm to the entire
organization.

This structure helps the company to become flexible and take outside help when required. For instance,
your company might be proficient in manufacturing but might be lacking in marketing tactics. Hence it
takes help of an outside business entity for increased brand awareness.

8 Team-Based Organizational Structures

Team-based organizational structure is a flexible and common organization structure that ensures
admirable teamwork, instant decision-making, and suitable problem solving within a company.

Teams are created to work for a common goal where the individual workers keep on working diligently
with their specific task. The team is comprised of people that compliment each other in skills so that the
specific task can be achieved with minimum effort.

The teams are disbanded after the completion of that specific project, and you have to create another
one for another project. Team-based organizational structure is gaining more and more prominence in
recent times as it can increase the work efficiency and productivity of an organization to a greater
degree.

Elements of Organization Structures:

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The elements of organizational structure help management in effecting change for the achievement of
organizational goals. The six elements include;

1) Company size and number of employees

The more the employees, the more the tiers of management. This is for efficiency and effective running
of the organization structure. The organizational structure needs to be evenly elastic so as to
accommodate more employees and possibly more managers in future.

Room for growth is an important factor in the companies’ structure. Structures that allow for growth are
easily edited for salary scales and different job descriptions with very minimal or no disruptions to the
company’s operations

2) Geography

Organizational structure may at times depend on the number of corporate locations that are needed to
account for planning. The more locations the business has the more autonomous each location will be in
order to be efficient. Hierarchy communication sometimes becomes a challenge during the creation of
an organizational structure within a larger geographical area. Those managers with their seniors in a
different location must, therefore, establish a clear way of communication so as to obtain proper
instructions and guidance.

3) Product Evolution

During startup, companies start with single line products that comprehensively cover the industry. As
time goes by and as the company grows, departments that cater for other products are created leading
to product development and thus adverse effects and changes to the company’s organizational
structure.

4) Authority of Distribution

According to research carried out recently, an organization’s structure is adversely influenced by the
authority preferred. Authority can either be centralized or decentralized. Decentralized management
allows lower-level managers to have an influence on the decision making process. Centralized
management keeps key decisions with specific executives.

5) The marketplace

The target market and location also influence the company’s structure. E.g. manufacturing companies
may opt to sell their products via wholesalers or directly to consumers. For this to be successful, the
structure needs to be set up in such a way that these factors are kept separate. This will also include a
different marketing team and sales force.

6) Control

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Most management Gurus comply to the fact that companies with a higher level of quality products have
more strict rules and operate in a regimented environment; this mostly affects companies
that manufacture high-end technology products, medical equipment, and some handcrafts
organizational structure..

Those companies in mass production may not have much control over product quality and will,
therefore, have a different organizational structure.

Considering the above, therefore, organizations should embrace the idea of establishing a well-
organized structure through which decisions are made and employees’ roles clearly spelled as this will
not only guarantee efficiency but profitability as well organizational structure.

Transnational Corporation: Definition & Examples

A transnational corporation is a large corporation that has a home base with a headquarters but
operates in various other countries. Learn more about the definition and characteristics, and see some

What is a Transnational Corporation?

Bill has been looking for a job for two months. After endless applications, he finally got a job with
Wolcott flooring. Bill's first few weeks consisted of training and learning more about the operations of
the company. It wasn't until Bill finished his training that he learned that Wolcott flooring may be based
in his home state of Washington, but that it also had facilities in many other countries around the world.
Bill soon learned that he worked for a transnational corporation.

So, you may be asking yourself right now, what it means to be a transnational corporation.
A transnational corporation, also known as a multinational corporation, is a corporation that has a
home base, but is registered, operates and has assets or other facilities in at least one other country at
one time. These corporations have a headquarters in one country, such as the company that Bill worked
for in our example, but have offices or factories in various other countries.

Characteristics

When a corporation plateaus in growth, especially where demand is concerned, they often seek to
expand in other countries for that additional growth. While this is what often makes a corporation a
transnational corporation, it isn't without controversies. The following characteristics are often
associated with a transnational corporation:

1. Transnational corporations may not be loyal to all of the countries they operate in, and look to
maintain their own interests. In other words, they're mainly concerned about what's best for them even
if it's at the expense of the other country's values or standards.

2. Transnational corporations avoid high tariffs involved in importing when they set up in foreign

countries. This allows a corporation to cut costs, but it's not always in the most honest way.

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3. They reduce costs by using foreign labor at a cheaper price than they would in their home country.

4. They block competition by acquiring businesses. If they purchase foreign companies, they will not
have as much competition.

5. They may have political influence over some governments. This means that they may use their power
to convince some governments to support their practices.

6. They can create a loss of jobs in their home country.

7. They can minimize taxes. The IRS has to study transnational companies very thoroughly to make sure
they are paying taxes correctly.

Examples

Using what we have learned about a transnational corporation, let's generate a mock example to better
explain the concept. Take for example, Kyle. Kyle owns a toy company that has maximized the demand
for their toys. While many corporations would be happy with this kind of success in their home country,
Kyle wants more. He decides to open up a facility in China and Brazil. Because he can cut labor costs, he
decides to manufacture the majority of his toys in China so he can utilize cheaper labor than he could
back home.

What Is a Transnational Business Strategy?

In simple terms, transnational businesses carry out commerce across international boundaries. The
transnational model is invested in foreign assets and operations, making them effectively tied to each
nation in which they do business. They are, however, distinct from international, multinational and
global business models.

Global, International and Multinational Business Models

The international model focuses on import and export markets, but the company is solely based in its
own country. Companies arrange the movement of goods in and out of their home country based on
global supply and demand. A multinational company invests in other countries but is focused on creating
offerings specific to those markets.

An example is a fast food chain that focuses on burgers in the United States. A global company has
consistent products delivered to multiple countries.

Dissecting a Transnational Business

Transnational businesses are typically extensive and vested in numerous countries. In many cases, they
are tied to natural resources and play a complex role in the operations of governments and extraction-
based industries. Transnational models also include consumables like those from Nestle.

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Although the transnational has a central corporate office, each country has its own central location
where specific operations take place. These individualized operations work within the bigger picture,
making the company powerful in each location but also nimble as the footprint is spread across
numerous locations.

Transnational Business Strategies

Transnational’s have a major advantage over local businesses. They are large, well resourced, and can
enter markets efficiently and effectively. One strategy employed is assessing the demand for specific
products within a market and simply out-competing local vendors by using efficiencies created over
time.

Production, supply chain advantages and marketing dollars make transnational’s more effective than
local business with limited operating capital. The ability to sell a similar product at a lower price is a
commonly employed strategy. Transnational’s in the extraction industries are skilled and can use
advanced technology and processes to operate more efficiently than localized mining and drilling
operations. In some cases, the transnational’s expand the local economy by using their advanced
methods, but they may also exploit labor and local resources to supply a global market.

An Unfair Advantage

The argument for an unfair advantage among transnational companies is common. They are effective
and have incredible power. Although a central corporate office controls the arms of business, the
transnational is really stateless and can shift power throughout the different arms for political purposes.

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Development Stages of a Transnational Corporation
There are five stages in the evolution of the transnational corporation. These stages describe significant
differences in the strategy, worldview, orientation, and practice of companies operating in more than
one country. One of the key differences in companies at these different stages is in orientation.

Stage One–Domestic

The stage-one company is domestic in its focus, vision, and operations. Its orientation is ethnocentric.
This company focuses upon domestic markets, domestic suppliers, and domestic competitors. The
environmental scanning of the stage-one company is limited to the domestic, familiar, home-country
environment. The unconscious motto of a stage-one company is: “If it’s not happening in the home
country, it’s not happening.” The world’s graveyard of defunct companies is littered with stage-one
companies that were sunk by the Titanic syndrome: the belief, often unconscious but frequently a
conscious conviction, that they were unsinkable and invincible on their own home turf.

The pure stage-one company is not conscious of its domestic orientation. The company operates
domestically because it never considers the alternative of going international. The growing stage-one
company will, when it reaches growth limits in its primary market, diversify into new markets, products,
and technologies instead of focusing on penetrating international markets.

Stage Two–International

The stage-two company extends marketing, manufacturing, and other activity outside the home
country. When a company decides to pursue opportunities outside the home country, it has evolved
into the stage-two category. In spite of its pursuit of foreign business opportunities, the stage-two
company remains ethnocentric, or home country oriented, in its basic orientation. The hallmark of the
stage-two company is the belief that the home-country ways of doing business, people, practices,
values, and products are superior to those found elsewhere in the world. The focus of the stage-two
company is on the home-country market.

Because there are few, if any, people in the stage-two company with international experience, it
typically relies on an international division structure where people with international interest and
experience can be grouped to focus on international opportunities. The marketing strategy of the stage-
two company is extension; that is, products, advertising, promotion, pricing, and business practices
developed for the home-country market are “extended” into markets around the world.

Almost every company begins its global development as a stage-two international company. Stage two
is a natural progression. Given limited resources and experience, companies must focus on what they do
best. When a company decides to go international, it makes sense at the beginning to extend as much of
the business and marketing mix (product, price, promotion, and place or channels of distribution) as
possible so that learning can focus on how to do business in foreign countries.

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A fundamental strategic maxim is that it is a mistake to attempt to simultaneously diversify into new
customer and new-product/technology markets.

The international strategist observes this maxim by holding the marketing mix constant while adding
new geographic or country markets. The focus of the international company is on extending the home-
country marketing mix and business model.

Stage Three–Multinational

In time, the stage-two company discovers that differences in markets around the world demand an
adaptation of its marketing mix in order to succeed. Toyota, for example, discovered the former when it
entered the U.S. market in 1957 with its Toyopet. The Toyopet was not a big hit: Critics said they were
“overpriced, underpowered, and built like tanks.” The car was so unsuited for the U.S. market that
unsold models were shipped back to Japan. The market rejection of the Toyopet was chalked up by
Toyota as a learning experience and a source of invaluable intelligence about market preferences. Note
that Toyota did not define the experience as a failure. There is, for the emerging global company, no
such thing as failure: only learning experiences and successes in the constantly evolving strategy and
experience of the company.

When a company decides to respond to market differences, it evolves into a stage-three multinational
that pursues a multi-domestic strategy. The focus of the stage-three company is multinational or in
strategic terms, multi- domestic. (That is, this company formulates a unique strategy for each country in
which it conducts business.) The orientation of this company shifts from ethnocentric to polycentric.

A polycentric orientation is the assumption that markets and ways of doing business around the world
are so unique that the only way to succeed internationally is to adapt to the different aspects of each
national market. Like the stage-two international, the stage-three multinational, polycentric company is
also predictable. In stage-three companies, each foreign subsidiary is managed as if it were an
independent city-state. The subsidiaries are part of an area structure in which each country is part of a
regional organization that reports to world headquarters. The stage-three marketing strategy is an
adaptation of the domestic marketing mix to meet foreign preferences and practices.

Philips and its Japanese competition was dramatic. Matsushita, for example, adopted a global strategy
that focused its resources on serving a world market for home entertainment products.

Stage Four–Global

The stage-four company makes a major strategic departure from the stage-three multinational. The
global company will have either a global marketing strategy or a global sourcing strategy, but not both. It
will either focus on global markets and source from the home or a single country to supply these
markets, or it will focus on the domestic market and source from the world to supply its domestic
channels. Examples of the stage-four global company are Harley Davidson and the Gap. Harley is an
example of a global marketing company. Harley designs and manufactures super heavyweight
motorcycles in the United States and targets world markets. The key engineering and manufacturing

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assets are all located in the home country (the United States). The only Harley investment outside the
home country is in marketing. The Gap is an example of a global sourcing company. The Gap sources
worldwide for product to supply its U.S. retail organization. Each of these companies is operating
globally, but neither of them is seeking to globalize all of the key organization functions.

The stage-four global company strategy is a winning strategy if a company can create competitive
advantage by limiting its globalization of the value chain. Harley Davidson gains competitive
advantage because it is American designed and made, just as BMW and Mercedes have traded on their
German design and manufacture. The Gap understands the U.S. consumer and is creating competitive
advantage by focusing on market expansion in the United States while at the same time taking
advantage of its ability to source globally for product suppliers.

Stage Five–Transnational

The stage-five company is geocentric in its orientation: It recognizes similarities and differences and
adopts a worldview. This is the company that thinks globally and acts locally. It adopts a global
strategy allowing it to minimize adaptation in countries to that which will actually add value to the
country customer. This company does not adapt for the sake of adaptation. It only adapts to add
value to its offer.

The key assets of the transnational are dispersed, interdependent, and specialized. Take R&D, for
example. R&D in the transnational is dispersed to more than one country. The R&D activities in each
country are specialized and integrated in a global R&D plan. The same is true of manufacturing. Key
assets are dispersed, interdependent, and specialized. Caterpillar is a good example. Cat manufactures
in many countries and assembles in many countries. Components from specialized production facilities
in different countries are shipped to assembly locations for assembly and then shipped to customers in
world markets.

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What Is International Trade Theory?

What Is International Trade?

International trade theories are simply different theories to explain international trade. Trade is the
concept of exchanging goods and services between two people or entities. International trade is then
the concept of this exchange between people or entities in two different countries.

People or entities trade because they believe that they benefit from the exchange. They may need or
want the goods or services. While at the surface, this many sound very simple, there is a great deal of
theory, policy, and business strategy that constitutes international trade.

In this section, you’ll learn about the different trade theories that have evolved over the past century
and which are most relevant today. Additionally, you’ll explore the factors that impact international
trade and how businesses and governments use these factors to their respective benefits to promote
their interests.

What Are the Different International Trade Theories?

To better understand how modern global trade has evolved, it’s important to understand how countries
traded with one another historically. Over time, economists have developed theories to explain the
mechanisms of global trade. The main historical theories are called classical and are from the
perspective of a country, or country-based. By the mid-twentieth century, the theories began to shift to
explain trade from a firm, rather than a country, perspective. These theories are referred to
as modern and are firm-based or company-based. Both of these categories, classical and modern,
consist of several international theories.

Classical or Country-Based Trade Theories

Mercantilism

Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic
theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver
holdings. In its simplest sense, mercantilists believed that a country should increase its holdings of gold
and silver by promoting exports and discouraging imports. In other words, if people in other countries
buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in
gold and silver. The objective of each country was to have a trade surplus, or a situation where the value
of exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the
value of imports is greater than the value of exports.

A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism
flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their
nations by building larger armies and national institutions. By increasing exports and trade, these rulers
were able to amass more gold and wealth for their countries. One way that many of these new nations

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promoted exports was to impose restrictions on imports. This strategy is called protectionism and is still
used today.

Nations expanded their wealth by using their colonies around the world in an effort to control more
trade and amass more riches. The British colonial empire was one of the more successful examples; it
sought to increase its wealth by using raw materials from places ranging from what are now the
Americas and India. France, the Netherlands, Portugal, and Spain were also successful in building large
colonial empires that generated extensive wealth for their governing nations.

Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries
such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports
through a form of neo-mercantilism in which the countries promote a combination of protectionist
policies and restrictions and domestic-industry subsidies. Nearly every country, at one point or another,
has implemented some form of protectionist policy to guard key industries in its economy. While
export-oriented companies usually support protectionist policies that favor their industries or firms,
other companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of
select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who
pay more for foreign-made goods or services. Free-trade advocates highlight how free trade benefits all
members of the global community, while mercantilism’s protectionist policies only benefit select
industries, at the expense of both consumers and other companies, within and outside of the industry.

Absolute Advantage

In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of
Nations.Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W.
Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists. Smith
offered a new trade theory called absolute advantage, which focused on the ability of a country to
produce a good more efficiently than another nation. Smith reasoned that trade between countries
shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should
flow naturally according to market forces. In a hypothetical two-country world, if Country A could
produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could
focus on specializing on producing that good. Similarly, if Country B was better at producing another
good, it could focus on specialization as well. By specialization, countries would generate efficiencies,
because their labor force would become more skilled by doing the same tasks. Production would also
become more efficient, because there would be an incentive to create faster and better production
methods to increase the specialization.

Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and
trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much
gold and silver it had but rather by the living standards of its people.

Comparative Advantage

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The challenge to the absolute advantage theory was that some countries may be better at producing
both goods and, therefore, have an advantage in many areas. In contrast, another country may not
have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist,
introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had
the absolute advantage in the production of both products, specialization and trade could still occur
between two countries.

Comparative advantage occurs when a country cannot produce a product more efficiently than the
other country; however, it can produce that product better and more efficiently than it does other
goods. The difference between these two theories is subtle. Comparative advantage focuses on the
relative productivity differences, whereas absolute advantage looks at the absolute productivity.

Let’s look at a simplified hypothetical example to illustrate the subtle difference between these
principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out
that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per
hour. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both
jobs? No. For every hour Miranda decides to type instead of do legal work, she would be giving up $460
in income. Her productivity and income will be highest if she specializes in the higher-paid legal services
and hires the most qualified administrative assistant, who can type fast, although a little slower than
Miranda. By having both Miranda and her assistant concentrate on their respective tasks, their overall
productivity as a team is higher. This is comparative advantage. A person or a country will specialize in
doing what they do relatively better. In reality, the world economy is more complex and consists of more
than two countries and products. Barriers to trade may exist, and goods must be transported, stored,
and distributed. However, this simplistic example demonstrates the basis of the comparative advantage
theory.

Heckscher-Ohlin Theory (Factor Proportions Theory)

The theories of Smith and Ricardo didn’t help countries determine which products would give a country
an advantage. Both theories assumed that free and open markets would lead countries and producers
to determine which goods they could produce more efficiently. In the early 1900s, two Swedish
economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain
comparative advantage by producing products that utilized factors that were in abundance in the
country. Their theory is based on a country’s production factors—land, labor, and capital, which provide
the funds for investment in plants and equipment. They determined that the cost of any factor or
resource was a function of supply and demand. Factors that were in great supply relative to demand
would be cheaper; factors in great demand relative to supply would be more expensive. Their theory,
also called the factor proportions theory, stated that countries would produce and export goods that
required resources or factors that were in great supply and, therefore, cheaper production factors. In
contrast, countries would import goods that required resources that were in short supply, but higher
demand.

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For example, China and India are home to cheap, large pools of labor. Hence these countries have
become the optimal locations for labor-intensive industries like textiles and garments.

Leontief Paradox

In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US economy
closely and noted that the United States was abundant in capital and, therefore, should export more
capital-intensive goods. However, his research using actual data showed the opposite: the United States
was importing more capital-intensive goods. According to the factor proportions theory, the United
States should have been importing labor-intensive goods, but instead it was actually exporting them. His
analysis became known as the Leontief Paradox because it was the reverse of what was expected by the
factor proportions theory. In subsequent years, economists have noted historically at that point in time,
labor in the United States was both available in steady supply and more productive than in many other
countries; hence it made sense to export labor-intensive goods. Over the decades, many economists
have used theories and data to explain and minimize the impact of the paradox. However, what remains
clear is that international trade is complex and is impacted by numerous and often-changing factors.
Trade cannot be explained neatly by one single theory, and more importantly, our understanding of
international trade theories continues to evolve.

Modern or Firm-Based Trade Theories

In contrast to classical, country-based trade theories, the category of modern, firm-based theories
emerged after World War II and was developed in large part by business school professors, not
economists. The firm-based theories evolved with the growth of the multinational company (MNC). The
country-based theories couldn’t adequately address the expansion of either MNCs or intraindustry
trade, which refers to trade between two countries of goods produced in the same industry. For
example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from
Germany.

Unlike the country-based theories, firm-based theories incorporate other product and service factors,
including brand and customer loyalty, technology, and quality, into the understanding of trade flows.

Country Similarity Theory

Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain
the concept of intraindustry trade. Linder’s theory proposed that consumers in countries that are in the
same or similar stage of development would have similar preferences. In this firm-based theory, Linder
suggested that companies first produce for domestic consumption. When they explore exporting, the
companies often find that markets that look similar to their domestic one, in terms of customer
preferences, offer the most potential for success. Linder’s country similarity theory then states that
most trade in manufactured goods will be between countries with similar per capita incomes, and
intraindustry trade will be common. This theory is often most useful in understanding trade in goods
where brand names and product reputations are important factors in the buyers’ decision-making and
purchasing processes.

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Product Life Cycle Theory

Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the
1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct
stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that
production of the new product will occur completely in the home country of its innovation. In the 1960s
this was a useful theory to explain the manufacturing success of the United States. US manufacturing
was the globally dominant producer in many industries after World War II.

It has also been used to describe how the personal computer (PC) went through its product cycle. The
PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s.
Today, the PC is in the standardized product stage, and the majority of manufacturing and production
process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where innovation and
manufacturing occur around the world. For example, global companies even conduct research and
development in developing markets where highly skilled labor and facilities are usually cheaper. Even
though research and development is typically associated with the first or new product stage and
therefore completed in the home country, these developing or emerging-market countries, such as India
and China, offer both highly skilled labor and new research facilities at a substantial cost advantage for
global firms.

Global Strategic Rivalry Theory

Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul
Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive
advantage against other global firms in their industry. Firms will encounter global competition in their
industries and in order to prosper, they must develop competitive advantages. The critical ways that
firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry.
The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or
new market. The barriers to entry that corporations may seek to optimize include:

 research and development,

 the ownership of intellectual property rights,

 economies of scale,

 unique business processes or methods as well as extensive experience in the industry, and

 the control of resources or favorable access to raw materials.

Porter’s National Competitive Advantage Theory

In the continuing evolution of international trade theories, Michael Porter of Harvard Business School
developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a

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nation’s competitiveness in an industry depends on the capacity of the industry to innovate and
upgrade. His theory focused on explaining why some nations are more competitive in certain industries.
To explain his theory, Porter identified four determinants that he linked together. The four determinants
are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers
and complementary industries, and (4) local firm characteristics.

1. Local market resources and capabilities (factor conditions). Porter recognized the value of the
factor proportions theory, which considers a nation’s resources (e.g., natural resources and
available labor) as key factors in determining what products a country will import or export.
Porter added to these basic factors a new list of advanced factors, which he defined as skilled
labor, investments in education, technology, and infrastructure. He perceived these advanced
factors as providing a country with a sustainable competitive advantage.

2. Local market demand conditions. Porter believed that a sophisticated home market is critical to
ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies
whose domestic markets are sophisticated, trendsetting, and demanding forces continuous
innovation and the development of new products and technologies. Many sources credit the
demanding US consumer with forcing US software companies to continuously innovate, thus
creating a sustainable competitive advantage in software products and services.

3. Local suppliers and complementary industries. To remain competitive, large global firms
benefit from having strong, efficient supporting and related industries to provide the inputs
required by the industry. Certain industries cluster geographically, which provides efficiencies
and productivity.

4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and
industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry
between local firms will spur innovation and competitiveness.

In addition to the four determinants of the diamond, Porter also noted that government and chance
play a part in the national competitiveness of industries. Governments can, by their actions and policies,
increase the competitiveness of firms and occasionally entire industries.

Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of
international trade trends. Nevertheless, they remain relatively new and minimally tested theories.

Which Trade Theory Is Dominant Today?

The theories covered in this chapter are simply that—theories. While they have helped economists,
governments, and businesses better understand international trade and how to promote, regulate, and
manage it, these theories are occasionally contradicted by real-world events. Countries don’t have
absolute advantages in many areas of production or services and, in fact, the factors of production
aren’t neatly distributed between countries. Some countries have a disproportionate benefit of some
factors. The United States has ample arable land that can be used for a wide range of agricultural

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products. It also has extensive access to capital. While it’s labor pool may not be the cheapest, it is
among the best educated in the world. These advantages in the factors of production have helped the
United States become the largest and richest economy in the world. Nevertheless, the United States
also imports a vast amount of goods and services, as US consumers use their wealth to purchase what
they need and want—much of which is now manufactured in other countries that have sought to create
their own comparative advantages through cheap labor, land, or production costs.

As a result, it’s not clear that any one theory is dominant around the world. This section has sought to
highlight the basics of international trade theory to enable you to understand the realities that face
global businesses. In practice, governments and companies use a combination of these theories to both
interpret trends and develop strategy. Just as these theories have evolved over the past five hundred
years, they will continue to change and adapt as new factors impact international trade.

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