CHAPTER – 3

MNC’S and
International
Business
MEANING:

A MNC is an organization doing business in

more than one country. i.e. exporting,
importing, manufacturing in different
countries.
Large corporations having investment and
business in a number of countries, known by
various names such as multinational
corporations, international corporations and
global corporations have become a very
powerful driving force in the world’s economy.
MNC’S play a dominant role in IB and they
exercise massive control over world economy.
FACTORS FOR GROWTH OF MNC’S:
 Expansion of market territory
 Market superiorities
 Financial superiorities
 Technological superiorities
 Product Innovation

Definitions and distinctions among

IC, MNC, Global companies and
TNC:
 International companies
 MNC companies
 Global companies
 TNC companies.
 ORGANIZATIONDESIGN AND
STRUCTURE OF MNC:
Organizations are economic and
social entities in which a number of
persons perform multi tasks in order to
attain common goals. Organization
takes certain inputs from the
environment and converts them into
specified opening as desired by the
society. It deals with analyzing roles
and responsibilities to achieve a
specified goal.
STEPS IN DESIGNING ORGANIZATIONAL
STRUCTURE:
 Analysis of the present and future circumstances
and environmental factors.
 Planning and implementation.
 Organization analysis includes
a.External environment –economic, political, legal
etc.
b. Overall aims and purpose of the firm-survival,
growth, profit and wealth maximization etc.
c. Objectives –specific aims or targets to be
achieved.
d. Activities-assessment of work done and what
needs to be done if company should achieve its
objectives.
e. Decisions to be taken across horizontal and vertical
dimensions. [i.e. transfer, promotion, expansion, etc]
f. Relationship- from the view point of
communications.
g. Organization structure- includes grouping of
activities, span of management, management levels
etc.
h. Job structure- Job design, job analysis, job
description, job specification etc.
i. Organization climate- working atmosphere of the
firm. It includes team work, co-operation,
commitment, creativity, conflict resolution,
confidence, trust, communication, participation etc.
j. Management style – includes democratic or
autocratic
k. Human resource- availability of skill, knowledge,
people etc.
 TYPES OF MNC’s:
1. Based on Investment
 Associates
 Subsidiaries
 Branches
2. Based on Management Orientation
 Ethnocentric
 Geocentric
 Polycentric
 Regiocentric
3. Based on nature of business
 Service
 Manufacturing
 Trading
1. Based on Investment

 Associates: It is an enterprise originating from a

specific country, invests or contributes to capital of
another enterprise situated in another country. The
extent of capital holding should be between 10 to
50 percent.
Ex: Sony Music Entertainment bought 26% stake in
Infibeam Digital Entertainment (an e-commerce Co
retails for books etc.).

 Subsidiaries: A company that is completely or

partly owned by another MNC that owns more
than 50% of stock holding in parent /holding
company. Ex: Colgate-Palmolive has numerous
subsidiaries in 200 countries.
 Branches: These are set in various host countries
which are wholly owned by MNC’s.
Ex: PepsiCo India Holdings Pvt Ltd.

3.Based on nature of business

 Manufacturing MNCs: They are engaged in
activity of creation & assembly of components
and finished products for sale and profit must
be 50% from this activity. Such companies have
centralized head office to co-ordinate global
production.
Ex: Nike, Toshiba, BMW etc.
 Service MNCs: They earn revenue
through providing intangible products and
services. They are involved in retail,
transport, distribution, food services etc.
Ex: Microsoft Company etc.

 Trading MNCs: They are engaged in

marketing activities across globe and
produce products in one country.
Ex: Pharmaceutical Companies etc.
 APPROACHES/ORGANIZATIONAL
STRUCTURE OF MNCs:

There are five approaches to structure the

organization. They are:
 Product organization structure.
 Geographical organization structure.
 Decentralized business/ Functional structure.
 Strategic business unit structure.
 Matrix organizational structure.
Product organization structure:
 Here, the activities are divided on the basis of
individual products and service.
 They are grouped into departments in product
organization structure.
 All important functions like marketing,
production, finance and human resource are
contained within each department.
 Here, for each product all the departments are
set separately.
 The MD will have control over all the products.
Here, product wise department are set.
Advantages:

 Co-ordination among functional areas like product

design, production, marketing is effective as all
functions are performed in each department.
 Responsibility and accountability for market share,
sales, profits can be clearly maintained and fixed.

Disadvantages:
 There is unnecessary duplication of equipment and
personnel among various departments.
 There might be inter departmental conflicts in
sharing of some common resources and overhead
expenses, etc.
Geographical organization structure:
 The activities or functions are grouped into
departments based on the activities performed in
the geographical areas or regions.
 Each geographical unit includes all functions like
production, marketing etc region wise.
Ex: power companies, restaurant chains, banking
companies, insurance companies etc.
 Here, all the functional activities is centralized i.e.
in head quarters.
 All the regional functional activity heads are
located centrally.
Advantages:
◦ Products or services are better designed to
the climate and cultural needs of specific
regions.
◦ It gives better opportunity for firm to serve
the customer needs.
Disadvantages:
 There would be duplication of equipment and
facilities.
 Co-ordination of company wide activities
would be difficult.
 Results in loss specification.
Decentralized business/ Functional unit
structure:
Grouping activities based on product lines is called
decentralized business unit. In any diversified firm,
the basic organizational building blocks are its
business units, where each unit is a profit Centre.

Advantages:
Diversification is generally managed by decentralizing
decision making and delegating authority and
responsibility to a chief manager of that business unit.
Each business unit operates a single profit Centre.
 All strategies, key activities and operations
decisions are with chief manager.
Disadvantages:
There is absence of mechanism for
coordinating related activities across business
units.
Managing alone the entire business unit is
complicated task.
Cost will increase as these will be different
functional activities for each business and
different products.
 Here, for each business unit there are different
functional activities, irrespective of number of
products each business unit operate.
Strategic business unit structure:

 A single chief manager [executive] cannot

control a number of decentralized units of a
broadly diversified company [i.e. product A, B
etc.].
Therefore if senior executive[manager] is
delegated with the authority and
responsibility for its management. He will be
in turn reporting to chief manager.
It will improve strategic planning.
Advantages:
Reduction of the corporate headquarters’ span
of control as chief manager will control senior
managers of each strategic units.
It helps in coordination between divisions
which are similar[like marketing, technological
etc.]
It helps to allocate corporate resources to
areas with greatest growth opportunities.

Disadvantages:

 Conflicts between the strategic business will

increase.
 Corporate portfolio analysis becomes complicated in
structure.
Matrix Organization structure:

 It possesses a dual chain of command.

Both functional and project managers will
exercise authority over organizational
activities for each country or region in matrix
structure.
Thus, we have 2 superiors[i.e. project
manager and the functional department head
quarters manager].
This structure is useful only when, the
problem solving is complex and large
organization follow this structure.
 Here, economics of scale require the sharing
of human resource expertise to achieve high
performance.
 Also when technological change is rapid in
the organization.
Advantages:
 Creates checks and balance among competing view
points.
 Give formal attention to each dimension of strategic
priority.
 Facilitates operation in complex and dynamic
environment. And
 Encourages efficient use of functional expertise and
optimization of organizational goals.
 Managers will be aware of strategic issues.

Disadvantages:
 Requires too much time for meeting and
collaborations.
 May result in conflict between functional and project
manager.
 Very complex to manage.
 It is hard to move quickly and decisively without
getting clearance from many other people.
Difference between Domestic and
Foreign companies:
1. Legal definition
2. Scope of operations
3. Strategic plan
4. Degree of competition
5. Political and legal system
6. Foreign exchange risk
7. Situational analysis
8. Cultural variations
9. Marketing mix
10. Market fluctuations.
Role of MNCs in International Business:
1. Meets global demand for goods and services.
2. Promotes global investment and savings.
3. Facilitates economic development.
4. Cause for liberalization of trade.
5. Filling management and technological gap.

Conclusion: MNCs are the main players and major

spenders to fuel IB activities, they also cause the
continued improvement in global company. Much
of the development is attributed to IB.
 Role of MNC in India:
Profit Maximization
International network of marketing by increasing their
exports and FOREX.
Diversification policy. Ex: ITC etc.
Concentration in consumer goods. Ex: HLL
Techniques to achieve public acceptability: i.e. by using Hindu
sentiments in their advertisements. Ex: Colgate Palmolive
used cow and calf in their toothpaste advertisement.
Existence of Modern and sophisticated technology. Ex: IBM
etc.
Improved competition.
Unconcern towards social responsibility and business ethics.
Cultural erosion. Ex: Cigarettes, liquor, beverages. Etc.
Unconcern for environmental pollution or ecological balance.
Ex: Bhopal gas tragedy.
Access to technology and best practices.
Challenges faced by MNCS in India:
1. Diverse political ideologies and leaderships.
2. Rampant corruption
3. Complexity of the bureaucracy
4. Cultural diversity
5. Infrastructure issues
Conclusion:
India's poor public finance, weak international
position, structurally flawed business, corruption and
political atrophy threaten to overwhelm its future
prospects for MNCs growth in India.
ADVANTAGES OF MNC:
 Economic and industrial development increase due to
growth of ancillary and service industry.
 The investment level, employment level and income level
increases.
 The industry gets latest technology from other countries
through the MNC.
 Domestic industry can make use of the R&D outcomes of
MNC.
 They can take advantage of foreign culture.
 It will reduce imports and increase the exports due to the
goods produced by MNC.
 There will be favorable balance of payments.
 It creates opportunities for marketing the products
produced in the home country throughout the world.
Disadvantages:
 MNC may kill the domestic industry by monopolizing
the host country’s market.
 It will cause unemployment problem to unskilled
labours.
 It will give scope for other countries to exploit
natural resources and human resources of home
country.
 They spoil our home culture and adopt foreign
culture.
 Home country’s SSI will be affected.