What Is a Multinational Corporation?

What Is a Multinational Corporation?

A multinational corporation (MNC) is a company that has business operations in at least one country other than its home country and generates revenue outside of its home country.

The East India Company, established in 1600 was an early multinational corporation. This British multinational enterprise participated in international trade and exploration and operated trading posts in India. Other examples include the Swedish Africa Company, founded in 1649, and the Hudson's Bay Company, founded in 1670. 

How a Multinational Corporation Works

A multinational corporation has business activities occurring in at least two countries. Some may consider any company with a foreign branch a multinational corporation. Others may limit the definition to only those companies that derive at least a quarter of their revenue outside their home country.

Developing an international presence can open up new markets and sales opportunities. Corporations can establish operations in markets where their capital can be used efficiently. If they can produce the same quality of goods at lower costs, multinational companies can reduce prices and increase the purchasing power of consumers worldwide. Multinational companies may also take advantage of lower tax rates in countries eager for direct investments.

Those opposed to multinational corporations point to the potential they may have to develop a monopoly. This can drive up prices, stifle competition, and inhibit innovation. Multinational companies may negatively impact small, local businesses. Activists have claimed that multinational companies breach ethical standards and evade laws to advance their business agendas.

Characteristics of a Multinational Corporation

• Global business presence
• Business conducted in various languages
• A complicated business model and structure
• Direct investments in foreign countries
• Jobs created in foreign countries
• Seeks improved efficiencies, lower production costs, larger market share
• Pays taxes in countries in which it operates
• Reports financial information according to International Financial Reporting Standards (IFRS)
  

Types of Multinational Corporations

• Decentralized Corporation: Maintains a presence in its home country and has autonomous offices and other facilities globally. This type of multinational company can achieve more and faster because it's decentralized. Each office manages the local business itself, making its own decisions.
• Centralized Global Corporation: A central headquarters is located in the home country. Executive officers and management oversee the global offices and operations as well as domestic operations. The offices typically must report to and obtain approval from headquarters personnel for major activities.
• International Division of a Corporation: Part of the multinational corporation responsible for all international operations. This structure facilitates business decision-making and general activities in local and foreign markets. However, operating independently can pose problems when overall corporate consensus and action are required.
• Transnational Corporation: A parent-subsidiary structure whereby the parent company oversees the operations of subsidiaries in foreign countries and the home country. Subsidiaries can use the parent's assets, such as research and development data. Subsidiaries may be different brands. The parent usually maintains a management role directing the operations of its subsidiaries, domestic and foreign.
  

The Bottom Line

Multinational corporations conduct business or establish offices in two or more countries. One of the first multinational corporations was established in 1600. IBM, Apple, and Microsoft are examples of multinational corporations.