Business English II – Basics of Economics

Chapter 5 : Multinational corporations

1) INTRODUCTION
All Multinational Corporations (MNC) have :
- Facilities in at least 1 country other than home country

- A centralised head-office where they coordinate their global management

- Generally, operations outside of home country represent ¼ of its revenue

Multinationals have many :

● Cultural barriers

● Transfer of technical expertise, experienced personnel, strategies

The opponents of globalisation saw them as an economic/political means of foreign
domination.

MNC is a business that has subsidiaries (company that is owned by a larger company) in more
than 1 country. It also has headquarters in an industrialised country.

MNC’s activities represent ⅔ of the world economy.

In the 2013 World Investments Report, it is said that the turnover of the 100 largest MNCs was
9 trillion $ (its 3x larger than the UK GDP).
The turnover is the value of goods and services that a company sells in a particular period of
time (le chiffre d’affaires)

Multinationals make foreign direct investment (FDI) : multinationals invest in companies that are
located in foreign countries.
3 types of investments :
● A multinational can invest in order to build a new subsidiary overseas

● Can invest to expand an existing subsidiary overseas

 ● Can invest to acquire an existing business through merger (fusion) of through acquisition
Transition economy is changing from a centrally planned economy (=companies are regulated
by the government) to a market economy
Ex : China is a transition economy, used to be communist and the government regulated
everything and now it’s more liberal.

2) DIFFERENT TYPES OF MNCS

Multinationals vary from one to another in terms of size, business sector, production locations,
organisation structures.

2) a) Size :
The largest firms in the world are multinationals. Yet, small multinationals exist also, and
very often they are specialist firms.

2) b) The Business sector :

We can find multinationals in every type of industry :
● Oil industry

● Mining industry

● Chemical industry

● Manufacturing

● Finance sector

● Agricultural production sector

● Phone operations etc…

 ⇨ There’s no typical line of activity, every sector can include multinationals.
Examples of multinationals :
● Walmart : is a retailer, and it is the largest multinational in the world.

● Shell : it’s a British multinational in the oil sector and gas

● SinopeC : located in China in the oil and gas sector

● Bp : in the UK in the oil and gas sector

● TOTAL : multinational based in France in the oil and gas sector

● Volkswagen : a German multinational in the automobile sector

● Apple : based in the US, sector of technology

2) c) Production locations :
They can vary in production locations, in terms of number of locations, and the location itself.
Some multinationals locate their production in many different countries / regions.
⇨ Those corporations are “truly” global.

Other multinationals decide to focus their production in only one other country / region.
The location of the production depends on the needs of the corporation.

Multinationals that provide services tend to locate in developed countries for 2 main reasons :
1. Cause there is a rich market

2. High demand of services.

Multinationals that need a large workforce tend to locate in developing countries : they also
find a cheap workforce there.
2) d) Organisational structure :
Doing business in foreign markets requires adjusting to :
- Sociocultural

- Technological

- Legal

- Political

- Economic systems

Organisational structure of a multinational :

⇨ There are the usual business functions : production, CEO, marketing, …)

⇨ The structure also includes functions required to succeed beyond the domestic market.

The most appropriate organisation/ best organisation is determined :

● By the overall global strategy of the company

● By the size of international operations

● By the characteristics of the marketplace

2) d) 1) International division :
International division is the type of organisation used by companies when they start to
expand abroad.
An international division is created to manage all international activities. In that case, there’s a
separation between domestic activities and international activities.
The main disadvantage of international division is that the managers of the foreign subsidiaries
don’t have a lot of influence. Not as much as the managers of the national subsidiaries. It’s
linked to the fact that most companies deal with foreign markets.

2) d) 2) Geographic area structure :

A geographic area may be a country or a region, and each geographic area is managed by
a country or region manager = each area is a self-standing (independent) organisation.
Advantage :
→ Country/region managers are more influential

Disadvantage :
→ This type of structure can lead to a fragmentation into territories

2) d) 3) Global product division structure :

The company is divided into production divisions, and each product division is a self-standing
entity, but has full worldwide responsibilities.

Advantage :
→ This type of structure reduces inefficient duplication in multiple countries

Disadvantage :
→ The country is not as locally responsive

2) d) 4) The Global matrix :

This one would be perfect because it reduces the disadvantages of the geographic area
structure and the disadvantages of the global division structure, but :
⇨ It’s the most complicated to implement.

Because the reporting relationships are established as a matrix : the fact that workers must
report to their boss, (usually there is only 1 reporting relationship, to just 1 boss) but in the
matrix case, employees must report to at least 2 managers
⇨ A dual reporting relationship

In this type of structure : there are multiple layers of management : it slows down decision
speed (decision making is slower, takes more time) and it increase costs.
3) GOING MULTINATIONAL
When domestic markets become saturated and when there are fewer opportunities for the
growth on the domestic level, many companies want to find a new market and new
opportunities in foreign countries by expanding their production in foreign countries.

→ John Dunning : British economist, his considers the father of interactions business. He
studied the economies of international direct investment, and he also studied the multinational
enterprise
In the 1980’s, he developed an organising framework that was known as the “Eclectic
Paradigm” which was also known as the OLI model.
This framework explains :
- The pattern and growth of international production

- It also identifies the gains to companies from being multinational.

He identifies 3 types of advantages :

OLI : Ownership advantages / Location advantages / Internalisation advantages

3) a) Ownership advantages :
They refer to the assets owned by a firm, their core competencies (strategies, technologies, the
name of the brand…) . Those competencies can be transferred in foreign countries at low cost.

3) b) Location advantages :
They are key elements to determine which countries will become host countries for the
multinational.
- Location advantages will lower costs (mostly production costs)

- And they will improve quality

So when they compare potential locations, multinationals will consider various aspects :
● The factors of production (the needs of the multinational) : different depending on the
countries, some countries can be rich in labour, capital or raw material
 ● Low wages : it’s also something companies will consider to choose a location

● Quality : because companies want to improve quality.

● General economic climate / environment : important to determine the location :

- With a booming economic growth (developing countries)

- By countries with a large market size

- Countries with a high disposable income

- Low inflation

- Low taxation

- Few restrictive regulations on business

- Good transport network.

3) c) Internalisation advantages :
They imply, that the benefits of setting up a subsidiary overseas / in a foreign country are
greater than the cost of arranging a contract with an external party.
=> it means that internalising production is more profitable than having an import agent in the
foreign country.
First, when they become international, companies tend to export in foreign countries and tend
to use an agent/ intermediary in the foreign country. But then, many companies prefer to invest
directly in the foreign country (for example by setting up a subsidiary) because it will be more
profitable.

Example: Toyota
First they exported cars to the UK and used an intermediary to resell the cars. Then, Toyota
decided to set up a manufacturing site in Derbyshire at the beginning of the 1990s.

4) PROBLEMS FACING MULTINATIONALS

Due to their geographical expansion, multinationals may face some problems:
 ● Language barriers

● Social and cultural differences

🡺 Some strategies might be inefficient in one country like in another.
🡺 Product and promotion may not be adapted to another culture, they may be
irrespective of the culture of the foreign country.
=> this irrespective product or promotion : may lead to some sort of resentment or hostility.

● Attitudes of the host government :

🡺 Governments will try to get the best deal for their country :
- Some governments will try to get part ownership in the subsidiary
- Fight regulations governing the MNC’s behaviour
- Harsh tax regimes
=> but you have to fight the right balance, or else the multinational may locate elsewhere.

Communication and coordination between subsidiaries may be longer or more complex.