MULTINATIONAL CORPORATIONS

Special Terms

Pre-text assignment

A. Match these terms with their definitions

Subsidiary, resources, global structure, nationalization, decentralization, mul­tinational corporation, innovation, international division structure, centralization, transnational corporation.

a) A corporation controlling production and marketing systems in several countries besides its own.

 

b) A corporation that operates like an MNC but with the following difference: na­
tionals of the country of origin no longer dominate as in the multinational corporation.

c) The creation of new products and technology. Innovation is an important in­
gredient for a company's growth in sales and profits.

 

d) Confiscation of a company's property by a foreign government with or
without adequate compensation.

e) A corporation in which over 50 percent of the capital belongs to a multina­
tional corporation. If less than 50 percent of a company is owned by an N4NC, it is
called an affiliate of the larger corporation.

f) Raw materials, manpower, and capital - all vital elements to an MNC's

growth.

g) A system of reporting and communication between a foreign subsidiary
and a head office through an international department at the parent company. Infor­
mation flows through an international department rather than through the various
functional areas.

h) An organizational structure in which the entire top management of a parent company is involved in international as well as domestic matters. There is no separate international division.

i) A system in whereby foreign subsidiaries have a significant voice in mak­ing crucial decisions.

j) A system whereby a parent company retains decision making power, main­tains direct and tight control over subsidiaries, and establishes nearly all policies.

B. Vocabulary Practice

1. What is a multinational corporation?

2. In what aspect does a transnational corporation differ from an MNC?

3. What is the importance of innovation for a company?

4. What does nationalization mean?

5. What determines whether a company is referred to as a subsidiary or an af­
filiate?

6. Name three important resources available to corporations.

7. What two structures do MNCs use to communicate with their overseas com­
panies?

8. What is the difference between decentralization and centralization?

Multinational Corporations

When a corporation expands its activities across its borders and engages in in­ternational trade, it could be on the way to becoming a multinational corporation. A multinational corporation (MNC) has industrial and commercial organizations in foreign countries. Manufacturing plants are established abroad, in conjunction with supporting marketing systems. These activities have political and economic implica­tions, and sometimes friction results between MNCs and sovereign states.

 

 

An MNC seeks international markets when it finds limitations in the homo market. It tries to approach a foreign market in the most effective way- either on a local or national level. For example, a Frei-ch MNC may choose to adjust its ap­proach to the United States market according to United States business customs. It would not set up three or four sales offices to sell machinery in the United States as it might do in France. Instead, a strong and extensive dealer network is usually most ef­fective in the United Slates.

Decisions made in an MNC are locally inspired. But major decisions are made by a central management, located in the country of origin of the MNC. In a transna­tional corporation, decisions are made by officials of the overseas nationality. No longer is the country of origin a major concern in the decision making process.

How multinational can a corporation get? Some companies, like Nestle of Switzerland, make over 90 percent of their sales on exports and manufactured goods abroad. Today the large MNCs control from 50 to 200 foreign subsidiaries with 30 to 90 percent of their sales exported and produced abroad. In general, however, the most active period of multinationalization is probably over for most countries. This may be due partly to the differences that arose between individual nations and MNCs.

National trade unions began demanding strong worker participation in their companies, and many would-be investors were scared away. Wage demands put some MNCs in bankruptcy.

A favorable aspect about MNCs is that they create jobs in foreign countries. They also contribute to innovation or creation of new products and technology. But when innovation levels off and local technology reaches a point of sufficiency, MNCs are sometimes considered to be no longer useful. At this point MNCs run the risk of nationalization, which is the confiscation of a company's property (plant, equipment, etc.) by a foreign government with or without adequate compensation.

Multinational investment has a long history. The Dutch started trading with Ja­pan on the island of Deshima in the seventeenth century. The British established their first trading company, the East India Trading Company, in 1600 and its Canadian company, Hudson Bay, in 1670. But basically these companies only traded and had no manufacturing capabilities abroad. In the early part of this century, European companies realized that their own home markets were small. European nations are relatively modest in size, and, of course, free trade zones like the Common Market (officially called the European Economic Community) or the European Free Trade Association (EFTA) had not yet been established. Just as the Americans went west in the 1800s, European companies like Nestle, Unilever, and Royal Dutch Shell went overseas for new markets and became MNCs well before World War II. United States companies, which have a large home market of over 218 million people, had other incentives to multinationalize. Establishment of an MNC was a way to generate income from diversified sources, thereby spreading recession risks. It was a way to maximize return on investments, arid it was a way to benefit from cheaper labor abroad.

 

 

The formation of the European Economic Community (EEC) in 1958 spurred the growth of MNCs, especially the American ones. The EEC established import duty-free association of countries, thus creating vast markets. This meant that one Western European plant of a United States MNC could sell its products within the EEC lo a market of 200 million people without running into customs duties between countries. United States multinational growth in Europe was soon followed by the establishment of United States bank branches. And as Japanese business increased in Europe a little later. Japanese banks followed the American example and opened their own offices.

Most MNCs are made up of vast numbers of foreign subsidiaries, companies in which over 50 percent is owned by the parent company. Like all corporations, MNCs are organized according to the goals they set for themselves. They strive to retain ac­cess to the resources that make a company tick; raw materials, manpower, and capi­tal. Furthermore, they try to grow in the global corporation by increasing their access to world resources. This leads them to expand their foreign market position, in other words, to increase their market share. MNCs grew into strong entities by reinvesting their profits prudently so as to further increase access to resources. They had to hire more and more talented local people abroad, and they had to purchase raw materials in foreign countries.

Successful MNCs eventually must learn how to interrelate their subsidiaries with the parent company, how to delegate decision making authority, and how to de­velop satisfactory methods of control and supervision. The most traditional organiza­tional structure is the International division structure, in which communication with the parent company is channeled through an international division. In the global structure there is no international division for overseas activities; instead, the entire top management becomes involved in international as well as domestic matters. The global approach unifies domestic and international divisions into one global division. It therefore eliminates the danger of competition between an international division and a domestic one.

The question of how much power and autonomy a subsidiary should have is a critical subject. In MNCs centralized guidance and the decision making are impor­tant. On the other hand, the parent company's decisions are very much dependent on feedback received from abroad. If foreign subsidiaries have no decision making authority, they may become less enthusiastic partners. They may not report fully to the parent company. Cultural differences, distance, time lag, and problems of inter­national finance could then become even bigger problems than they already are. Therefore, some sort of balance has to be achieved. Long-range goals are normally set by a parent company, but subsidiaries will usually have authority for operations and sometimes for development of new products. Giving more decision making power to subsidiaries is called decentralization. The trend, however, appears to be toward increased centralization whereby the parent company retains more decision making power. An MNCs prime role is to make optimum use of resources in order to remain competitive in the market. Decentralization can easily lead to fragmentation

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of the use of resources. Thus, centralized management can better achieve optimum

results.

Having entered the international arena, an MNC faces an awesome task. It must worry not only about how to overcome the communication barriers already mentioned (cultural differences, distance, and environment) but also how to deal with the different legal and tax structures in the various countries. An MNC also has to cope with foreign currency so that it can protect its foreign assets. It must decide whether to delegate authority to subsidiaries or centralize. Some other problems an MNC has to consider are how to secure continued access to resources; how to in­crease market share in view of foreign competition; how to deal with increased criti­cism and interference by foreign governments; and how to deal with labor laws and antitrust legislation both at home and abroad.

The key to success is continued access to natural resources as well as human resources. A successful MNC will exploit its position by hiring the most knowledge­able people possible. These people, experts in labor law, antitrust law, finance, and marketing, provide the input for an MNC's approach to a foreign market.

Continuous innovation is also necessary for success. This helps to light com­petition, and it heads off political criticism of foreign intervention in national affairs. Research and development are usually centralized at the parent company, although some occur at the subsidiary level.

To handle foreign currency problems, MNCs hire foreign exchange experts. They buy and sell foreign currency and borrow or repay the loans abroad. This fi­nances MNC's foreign assets.

In recent years MNCs have come under heavy criticism at home and abroad. Domestically they have been accused of exporting jobs, meaning that jobs are lost at home because the MNCs set up plants in other countries, sometimes exporting the products back home for consumption. Less developed countries, on the other hand, charge that for years they have been underpaid for their natural resources.

Widely publicized reports of payoffs to government officials by MNCs, and even interference in local politics, have brought heavy pressure on MNCs to exercise greater care, police their tactics, and redefine their strategy.

It is obvious that MNCs will continue to grow and expand in the world and constantly adjust to changing conditions.

Expanding vocabulary A. Say it in English

Головна роль ТИК, конфіскація власності без відповідної компенсації, підштовхнути зростання, подолати бар'єри, велика дилерська мережа, більш то­го, усунути погрозу конкуренції, повернення по інвестиціях, переважати, зазна­ти різкої критики, прийняті рішення диктують на місцях, найважливіша скла­дова, система звітності, централізоване керівництво, частка на ринку, втручан­ня уряду, доступ до світових ресурсів, вступити на міжнародний ринок, під­тримувати жорсткий контроль над дочірніми підприємствами, країна похо-

дження, виявити обережність, реалізувати продукцію у межах ЄЕС, зберігати повноваження щодо прийняття рішень, запізнення у часі, відлякати потенцій­них інвесторів, сприяти наближенню ТИК до зовнішнього ринку, пристосува­тися до ринку, усунути загрозу конкуренції, економічні і політичні ускладнен­ня, підкуп чиновників, не мати можливостей для виробництва за кордоном, пе­рспективні цілі, справитися з конкуренцією, переглянути стратегію, стимули для створення ТНК, виявити обережність, безмитний імпорт.

В. Find in the text and give the translation

To secure access to resources, to delegate authority, a feedback received from abroad, the most knowlegeable people, in conjunction with supporting marketing systems, to achieve optimum results, methods of control and supervision, international and domestic matters, having entered the international arena, an MNC faces an awesome task, how to increase market share in view of foreign competition, an MNC has to cope with foreign currency so that it can protect its foreign assets, to set up offices, friction between MNC and sovereign states, a corporation expands its activities across its borders and engages in international trade, MNC runs a risk of nationalization, they strive to retain access to the resources that make a company tick, when innovation levels off and local technology reaches a point of sufficiency, to run into customs duties, wage demands put some MNCs in bankruptcy, a way to benefit from cheaper labor abroad, to approach a foreign market in the most effective way, to find limitations in the home market, to be a major concern in the decision-making process, to generate income from diversified sources, thereby spreading recession risks, to adjust the approach to the US market according to US business customs.