Multinational corporations: definition, features, types and organisational structures

1. Definition

A multinational corporation (MNC), also called a multinational enterprise (MNE) or transnational corporation (TNC), is an enterprise that owns or controls production or service facilities in more than one country, managed from a headquarters in its home country.

• ILO: a corporation which has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries.
• UNCTAD (used in the World Investment Report): an enterprise comprising a parent and its foreign affiliates, where the parent controls assets of entities in countries other than its own, usually through an equity stake of 10 per cent or more.
• OECD Guidelines: companies or other entities established in more than one country and so linked that they may coordinate their operations in various ways.

Under Indian company law, a company incorporated outside India with a place of business in India is a foreign company (section 2(42) of the Companies Act, 2013), and must comply with Chapter XXII of the Act; most MNCs, however, operate through Indian subsidiaries, which are ordinary Indian companies.

2. Features

1. Operations in several countries through branches, subsidiaries, joint ventures or franchises.
2. Huge size: the revenue of the largest MNCs exceeds the GDP of many countries.
3. Centralised control: strategy, finance and research controlled by the parent; operations decentralised.
4. Common ownership of affiliates linked by equity and contracts.
5. Advanced technology and large research spending.
6. Professional management drawn from many nationalities.
7. Global brands and aggressive marketing.
8. Integrated production: global sourcing and production sharing; much of their trade is intra-firm.
9. Oligopolistic power: they usually operate in industries with a few large sellers.

3. International companies and multinational companies distinguished

Some writers add a third category, the global or transnational company, which integrates operations worldwide (Bartlett and Ghoshal, Managing Across Borders, 1989).

4. Types of MNCs

(a) By form of integration

• Horizontally integrated: makes the same product in several countries (Coca-Cola bottling plants, Suzuki car plants).
• Vertically integrated: different stages of production in different countries (an oil company with wells in one country and refineries in another).
• Conglomerate: unrelated businesses in several countries (Tata Group, General Electric in its earlier form).

(b) By orientation (Perlmutter)

Ethnocentric, polycentric, regiocentric and geocentric MNCs (see the Unit I note on orientations).

(c) By form of operation in the host country

• Branch of the foreign company itself.
• Subsidiary, wholly or majority owned.
• Joint venture with a host-country firm.
• Franchise or licensing arrangement.
• Turnkey or management contract.

(d) By ownership

Private MNCs (most of them), state-owned MNCs (ONGC Videsh, Chinese state firms), and cooperative MNCs.

5. Organisational structures

As a firm grows abroad its structure changes (Stopford and Wells, 1972, linked structure to the share of foreign sales and product diversity).

1. Export department: a unit inside the home company handles export sales. Fits the early export stage.
2. International division: all foreign operations grouped under one division, alongside domestic product divisions. Simple, but creates a split between domestic and foreign managers.
3. Global product structure: each product division (say, consumer electronics, appliances) has worldwide responsibility for its product. Suits firms with many unrelated products; weak on local knowledge.
4. Global area (geographic) structure: the world divided into regions (Europe, Asia-Pacific, Americas), each with full responsibility for all products in its area. Suits firms with few products and strong local differences, such as food and consumer goods companies; risks duplication.
5. Global functional structure: worldwide departments for production, marketing, finance, research. Suits firms with a narrow, standard product line (oil, mining).
6. Matrix structure: two lines of authority at once, usually product and area; a country manager reports to both a regional head and a product head. Balances global efficiency and local response, but dual authority causes conflict and slow decisions.
7. Transnational or network structure: subsidiaries specialise and serve the whole group (a research centre in Bengaluru for the world), with knowledge flowing in all directions rather than only from headquarters.

How this is examined

For features, give two definitions with sources and eight or nine features. For types, use the four classifications in section 4. The distinction note is the table plus one sentence on the transnational form. The structures essay is section 5 with diagrams, ending with the factors deciding structure: product diversity, share of foreign sales, need for local adaptation and the firm’s orientation.