Multinational companies, International Factor Movements and Multinational Enterprises

Multi national companies, International Factor Movements and Multinational Enterprises

Definition:

There is no single agreed-upon definition of the multinational (or transnational) enterprise. This is hardly surprising in view of the fact that “multinationality” has many dimensions and may be viewed from any of several different perspectives – economic, political, legal, managerial, and others.

Some observers regard ownership as the key criterion. In their view an enterprise becomes multinational only when the headquarters or parent company is effectively owned by nationals of at least two countries. Shell and Unilever, which are controlled by British and Dutch interests, are commonly cited as examples. By this ownership test, very few international companies may be called multinational.

A second definition of the MNE relies on the criterion of the nationality mix of headquarters management. An international company is seen as multinational only when the managers of the parent company are nationals of several different countries. Here again, very few international companies would qualify as multinational enterprises, because most have headquarters organizations that are entirely or mainly staffed with nationals of the home country.

Most observers of large international companies have been concerned with their economic and business behavior. Accordingly, they have defined the MNE in terms of organizational structure or business strategy. Vernon sees the multinational enterprise as a “parent company that controls a large cluster of corporations of various nationalities.”

 Perlmutter has distinguished three kinds of international companies by reference to the attitudes held by their top executives.

Ethnocentric companies follow policies that are home country–oriented, polycentric companies follow policies that are host country–oriented, and geocentric companies follow policies that are world-oriented.

To Perlmutter, a firm’s multinationality may be judged by “the pervasiveness with which its executives think geocentrically.”

More recently, the United Nations defined the essence of multinationalization (which it calls transnationalization) as “the internalization of international market transactions within an individual decision-making unit, the transnational corporation.”

Consolidated Defintion

The foregoing conceptions may be covered in a single definition of the multinational enterprise that contains both structural and strategic (attitudinal) elements.

A multinational enterprise denotes a headquarters or parent company that

1. engages in foreign production and other activities through its own affiliates located in several different countries

2. exercises direct control over the policies of those affiliates
3. strives to design and implement business strategies in production, marketing, finance, and other functions that transcend national boundaries, becoming thereby progressively more geocentric in outlook

 Because of their vast size, the worldwide operations of multinational companies are now a decisive force in shaping the patterns of trade, investment, and technology flows among nations.

It has become impossible to understand the world economy without an appreciation of the many roles of multinational enterprises as producers, investors, traders, and innovators on a global scale.

National governments must also reckon with this force because of its impact on domestic production, employment, trade, and the balance of payments.

In so doing, they are commonly frustrated by the capability of multinational companies to far outrun national jurisdiction in taxation, antitrust, and other policy areas.

Moreover, many governments view the multinational enterprise as a political threat, representing as it does an intrusion into the national domain by a company whose control is exercised by a headquarters located in another country.

Even in the United States, the multinational enterprise has come under attack by labor and protectionist groups who charge it with exporting jobs and technology to the detriment of the U.S. economy.

The Multinational Enterprise as an International Transfer Agent

The multinational enterprise becomes an international transfer agent when it moves products and factor services (capital, technology, and management) among national economies

  The Multinational Enterprise System

The multinational enterprise performs its role as an international transfer agent through institutional or organizational arrangements that collectively make up the multinational enterprise system. This system, as depicted in Figure 1, comprises the parent company and its foreign affiliates.

The parent company (denoted by the P circle) is the enterprise decision center that determines the goals and controls the operations of the entire system. The key decisions of the parent company relate to the establishment (or acquisition), country location, size, and “product mix” of its production affiliates; the direction, volume, and composition of transfers among the affiliates; and the national markets to be served by the affiliates.

These strategy decisions generate a pattern of factor and product flows among the members of the system. The parent company and its affiliates (denoted by the A circles) are located in different countries, as indicated by the dashed lines. Most of the affiliates perform both production and marketing functions, but some perform only a marketing or Financial function.

The affiliates are connected to the parent company and, in some instances, to other affiliates by a variety of cross-national flows of products, capital, technology, and management.

Flows of factor services, usually accompanied by product flows, generally move from the parent company to the affiliates. Any of these kinds of flows may also link pairs of affiliates.

• To illustrate, A1 may transfer parts or components that it manufactures to A6 , which uses them to manufacture other products.
• A4 may transfer certain finished products to A5 , which then resells them in the local market.
• Idle funds accumulating in A2 may be transferred to A3  to finance a capital expansion.
• A5 may develop new technology that is transferred to A3 .
• A manager in A6 may be transferred to a new position in A2 .
• Some products and factor services may also be transferred from an affiliate to the parent company, such as from A to P.

One of the distinctive features of the multinational enterprise system is the rapid growth of inter affiliate transfers as managers in the parent company try to improve the performance of the entire system.

Managers perceive a worldwide market  for the company’s products, and they work to build up inter affiliate transfers on regional or global levels to take advantage of similarities among national markets, economies of scale, and international specialization. Hence, the multinational enterprise system becomes progressively more integrated in production, marketing, Finance, research and development, and management.