What is a Multinational Company?
The multinational company (MNC) is known as a company with headquarter in one country and its branches or subsidiaries are spread across many different countries. Presence across one more geography allows the generation of higher revenues for the MNC.
Types of Multinational Company (MNC’s)
Following are types of the multinational corporation.
- A company having a strong home presence and a decentralized corporation.
- Centralized firms having a cost advantage through the global presence and having head office at home country
- An international company that is based on the parent company’s technology or R&D.
- A transactional firm with having all the above three components.
Examples of Multinational Company (MNC’s)
Following are examples of the multinational company (MNC’s).
Multinational Company Example #1
Apple inclusive is one of the biggest companies as per market capitalization. The product of apple is available everywhere. Apple purchases its hardware from china and technology from India. The raw materials and labor required for mobile and computer hardware are cheapest in china compare to the U.S. Whereas, the cost of the software developer is cheapest in India. Thus, Apple is sourcing its raw materials and technologies from different part of the world and selling at the same rate. Though the pricing is made as per the U.S. market. Thus, the company is making maximum profits by producing at a nominal cost, in terms of U.S. dollars and selling as per the market rate of U.S.
Multinational Company Example #2
Unilever is a consumer discretionary company having headquarter at Amsterdam, Netherland. The company has a presence across the U.S., Australia, Europe, India, Bangladesh, etc. The company opened subsidiaries in each country and controls from its local country. The products of HUL are almost the same and is available everywhere across the world. The motive of the business is not cheap sourcing or taking any resource advantages, but to get expansion from the entire world, the company has subsidiary at every place. However, the price of the product is not the same across the globe. The price has been fixed as per the currency and economic condition of that country.
Advantages of Multinational Company
Some of the advantages of the multinational company are as follows:
- Presence across one more geography allows the generation of higher revenues. Thus, for an efficient company with having demand for its products will have top-line growth.
- Cheaper sourcing of raw materials or services allows creating cost efficiency for the business. Thus, the margin of the company gets improved.
- Presence across several countries creates a brand for the company. With higher product demand and higher usage with wide acceptability, the price of the product rises. If the consumers are satisfied with the above products, chances of increase in prices of the product are high.
- The work culture becomes cosmopolitan in nature. Several people across the world will participate to fulfill one goal, i.e. primary goal of the company.
- The cost advantage is one of the prime factors. Suppose Company XYZ ltd have a presence across country A, B and C. Country A is the origin of the business, Country B has manufacturing plant because of a cheaper source of raw materials while country C has the higher demand of the produced products. Thus, company XYZ will be producing the product at the lowest range and selling at the best price (as the demand for the product is higher in country C).
Disadvantages of Multinational Company
Some of the disadvantages of the multinational corporation are as follows:
- Due to several socio-political scenarios in the other country, the business environment might be hindered causing erosion of investments.
- Due to several stringent laws and legal procedures, the operation of the companies might be restricted and hence the outcome might not be the same as budgeted.
- There is a logistic cost involved when one product is delivered to another geography. Taxes including import duty and freight might increase the price of the product sky high.
- There is a possibility of trade-war between two countries which might lead to the higher imposition of excise duties and hence, there will be enough rise in prices of exported goods.
- The products made as per special standardization requires specialized people for research and development, which is another factor of cost increment.
- There is volatility in the currency of the two countries. Thus, erosion of the country is not good news for MNC. It can generate higher pricing of the existing product and services. Thus, it can impact negatively the business of MNC. There are several local players which can take the market share of the MNC’s.
Limitations of Multinational Company
Some of the limitations of the multinational corporation are as follows:
- Due to a global presence, a multinational corporation cannot hide its own technology, data, etc. In many cases, there are chances of data leakage, conflict of interests, etc.
- Due to the availability of cheap labor, MNC pays wages which is lower the wage rate of its own country.
- Sometimes, the negativity and socio-cultural of the other country dominates the workflow or the work culture of MNC. This kind of phenomenon hinders MNC culture.
- There are chances of resource outflow as the resource like workforce, technology, data cannot be a secret anymore. The other country can copy the technology and misuse them for their own interest.
- MNC runs to make a profit from the business. Preservation of nature, natural resources, wages of the workforce can be marred due to the benefits MNC’s.
- MNC sometimes appears to be a treat to the monopoly business in the local country. Due to better payment, good overall development programs, MNC can impact other company’s business.
In the era of globalization, business firms can adopt different policies for creating wealth. One of the procedures of creating wealth is to market the company’s product to different countries. Evolution of MNC’s has created new avenues for business, resulting in a higher profit to the employer and better job facilities to the employees or the labors. Through this, the cosmopolitan culture has evolved during the last two-three decades.
This has been a guide to what is the multinational company and its definition. Here we discuss types and examples of the multinational company (MNC’s) along with limitations, advantages, and disadvantages. You can learn more about financing from the following articles –