What Is an MNC? (Definition, Types and Pros and Cons)
By Indeed Editorial Team
Published 29 September 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Companies that frequently explore new ways to increase sales and grow their business may expand overseas to international markets. Through this process, companies can transform into a multinational corporation (MNC) and operate in multiple countries, which allows them to achieve certain advantages such as cost and scale. Learning more about MNCs and knowing how they function can help you in working with them or for them. In this article, we define what an MNC is, explain how it works, outline the major types and review its pros and cons.
What is an MNC?
A multinational corporation (MNC) is a corporation that's based in one country but also has business operations, assets, offices and facilities in other locations around the world. The MNC maintains an active presence by situating its headquarters in one country but uses factories or offices to conduct business in other countries. MNCs can leverage resources and incentives to establish businesses and offices in different markets and earn higher corporate profits.
Leaders and company management can choose to take advantage of tax and cost savings available in other countries and move their production or business offshore. It may also be more efficient for MNCs to have facilities in other locations with accessibility to raw materials, which allows them to scale up production faster and at a lower cost. Here are some key characteristics of MNCs:
Worldwide presence: MNCs set up branches or offices in multiple countries to conduct business, which can include call centre operations, manufacturing, sales, marketing and other activities. Some countries may offer generous incentives like tax breaks or lower regulatory requirements to encourage MNCs to consider opening branches in their jurisdictions.
Sustained business growth: MNCs earn additional revenues from their combined offices and subsidiaries in multiple locations. They leverage these financial resources to grow their business and expand physically to new territories, which enables them to continue growing their business.
Public trade: Some MNCs may opt to go public and raise funds by offering shares of the company to investors in exchange for cash. This provides MNCs with an additional source of funds that they can use to expand their business operations, hire new talent and take on more profitable projects.
4 different types of MNCs
Here are four different types of MNCs that companies can consider transitioning their businesses into:
In a decentralised MNC, the parent company's management and leadership team make macro-level decisions for their group of companies and subsidiaries. They set group-level goals and use strategic planning to map out key objectives and results for the financial year. Individual companies generally have the authority to make decisions involving their respective business and they can also set and plan how to achieve their goals.
For instance, a decentralised MNC has multiple branches in a country, each with its own autonomous management structure. The branch managers and leadership are responsible for their own business and have the freedom to make decisions without seeking approval from the head office or headquarters. This allows for more efficient and responsive decision-making that enables companies to adjust better to changing business conditions. Leaders with self-autonomy and independence in a decentralised MNC are also able to develop creative and innovative solutions to business challenges they face.
2. Global centralised
Global centralised MNCs feature a core leadership that makes decisions for the rest of the business, including the respective companies and branches across the world. The main leadership team may outline broader goals for the entire business and delegate responsibilities to senior managers of different companies. Then, leaders and managers of subsidiaries and branch offices work with their teams to complete the assigned goals and objectives for their market. Global centralised leadership also retains control over aspects of the brand such as creative licencing and likeness.
They're responsible for outlining and establishing standard protocols and procedures for operations. This helps to streamline processes throughout the business, leading to greater cost efficiency and productivity gains. It also ensures that the brand can achieve consistency in the quality of its products, which can help the business attract more customers.
Transnational MNCs comprise elements of centralised and decentralised organisational structures. In a transnational MNC, individual offices may not follow the traditional parent-subsidiary relationship, which allows them to operate freely without direct oversight from the head office. They're autonomous and can act independently to grow their business. Although the home office may prescribe guidelines on the business, it doesn't control individual offices.
Instead, branch and country offices set their own goals and develop plans to grow the business in the markets and countries where they operate. Country and branch offices may still leverage certain divisions and resources of the parent company, such as proprietary technology or research and development.
4. International company
Creating an international company allows an MNC to separate its domestic operations from international businesses and companies. The newly formed international company oversees and manages the MNC's operations in other countries. Through the international company structure, an MNC is able to effectively manage a collection of companies in a particular region and strategically target a larger pool of customers.
Pros of MNCs
Here are several advantages of MNCs:
Lower product costs
Due to their size, MNCs can enjoy economies of scale in production and pass on lower costs in the form of cheaper prices to consumers. MNCs generally order raw materials in bulk to mass manufacture products for their customers worldwide. They use offices and branches in specific locations where production, labour and raw material costs are lower to manufacture and assemble products before distribution. Lower production and manufacturing costs allow MNCs to charge a lower price at high volumes, which also helps their brand and products to stay competitive in the market.
New job creation
MNCs that expand into a new country usually hire locals due to their first-hand knowledge of market conditions. They typically require manpower urgently to scale up their production and manufacturing facilities in new countries. The rapid pace of expansion for MNCs often means aggressive hiring and the creation of new job opportunities around the world. They also invest in infrastructure, such as production facilities, plants and warehouses, which can help create jobs in construction and engineering and contribute to the local economy.
MNCs with multiple branches and stores in various countries prefer to standardise their products and service offerings. This consistency makes it easier for customers to identify with their brand, understand their value proposition and appreciate their products. Standardising products and specifications can help build stronger customer relationships with the brand and improve awareness of the products and business around the world. Doing so also provides customers with an assurance of quality, which reflects positively on the organisation and brand in the industry.
Economies of scale
An MNC can achieve economies of scale in production and pass on the savings to benefit other aspects of the business. They can produce goods and deliver services at a cheaper cost than their competitors. This allows them to increase their market share and invest in research and development to continue improving their products and services. Since they frequently transact in large volumes, MNCs can also enjoy lower procurement costs. Investors may feel confident about the business and financial prospects, which can help the company secure additional funds for expansion and other business activities.
Larger research and development budget
Due to their international business presence, MNCs can generate significant revenue and earn higher profits. They can channel the increased profits into improving different aspects of the business such as research and development to explore new technologies. MNCs can increase their group research and development budget and explore new methods to improve the quality or functionality of their products. This can give an MNC a distinct competitive advantage over its competitors and incentivise more customers to switch over to its brand.
Cons of MNCs
Take note of the following disadvantage of MNCs:
Due to their international presence and size, MNCs can have a monopoly on the local markets in which they operate. Country offices may feel comfortable with the status quo and stop investing in further innovation, which can cause the company's growth to stagnate. Also, unlike smaller companies that iterate and refine products to gain market share, MNCs can become complacent and stop improving.
Heavier compliance burden
MNCs with commercial offices and operations in different countries around the world typically incur heavier compliance costs. To conduct business in certain countries requires the firm to abide by local laws. Corporations may invest to find local partners that can help them meet the necessary compliance requirements to start operations. This includes understanding intellectual property rights, tax agreements, trademarks, patents and trade regulations when transacting with overseas customers.
Additional environmental costs
Due to the size of their operations, MNCs may impact the environment when extracting natural resources or raw materials. To mitigate any potential harm, MNCs allocate a larger portion of their budget to tackle environmental issues and help to promote responsible business practices, which increases business expenses. This helps restore trust with local communities and builds a positive image for their business.
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