What Is a Multinational Corporation? (Definition and Types)
Updated December 20, 2022
Business leaders and executive team members often look for new ways to increase their revenue and reach more customers. One way companies accomplish this is by becoming multinational corporations. If you're interested in working in a leadership position for an international business or considering expanding your company's current operations overseas, you may benefit from learning about these organizations.
In this article, we explain what a multinational corporation is, describe how it works, list four types of companies that fall under this category and explore the pros and cons of being a multinational corporation.
What is a multinational corporation?
A multinational corporation (MNC) is an organization that has assets or facilities in multiple countries. While they typically have a main office in their home country, these organizations may have offices, factories and other locations spread out across the world. To be considered a multinational corporation, an organization must have at least one location in another country, even if they already export goods abroad. Throughout your career, you may also hear multinational corporations referred to as MNCs, international corporations, multinational enterprises or stateless corporations.
Many business owners want to diversify their portfolios by expanding their companies into new markets. This can create international exposure, and an MNC often has a positive impact on each of the countries where it operates. However, it's important to consider how MNCs may affect the politics, resources and economies of the countries where they operate.
How do multinational corporations work?
The structure and operations of multinational corporations may vary depending on the industry they're in, the size of their organization and the goods or services they produce. While some authorities define a multinational corporation as any organization that has at least one foreign branch, others think companies need to generate at least one-quarter of their revenue from foreign countries to earn this title. However, the primary requirement to become a multinational corporation is to make a direct investment into another country by operating part of your business there. Here are some characteristics of typical MNCs:
Large number of assets: To become a successful MNC, a company needs a high number of assets. This includes tangible assets, like employees, as well as financial assets.
Broad networks: Many MNCs have a broad network that stretches to many places on the globe. A company operates each branch to manage manufacturing, production and sales operations.
Constant growth: A successful MNC may experience constant growth. These corporations might try to expand their impact by placing one or more branches in the same location, or by placing several branches in various countries.
4 types of multinational corporations
Here are some of the most common types of multinational corporations:
1. Decentralized corporation
Decentralized corporations may have multiple offices, facilities and assets in foreign countries, but they still maintain a powerful presence in their home country. Typically, decentralized corporations don't have a central headquarters. Each country they operate in may have its own management structure. This helps the corporation scale quickly while ensuring it adheres to the regulations in each geographic area.
2. Global centralized corporation
A centralized global corporation may have a head office in its home country, where the chief executive officer and other senior leaders reside. These corporations often look for opportunities to increase revenue by purchasing cheap resources and materials from foreign countries. The same management team typically handles both domestic and international decisions. They also oversee all global operations.
3. International division
Corporations may keep their domestic operations separate from their international operations by creating an international division. This new division oversees all the corporation's operations in foreign countries. While this structure can help companies reach a wider audience and make decisions that appeal to different cultures, it can also be challenging to maintain a cohesive brand image.
4. Transnational enterprise
A transnational enterprise may exist within a parent-subsidiary relationship. This allows them to access many of the parent corporation's resources, such as their research and development (R&D) team, even though they may operate in separate countries. Typically, the parent company oversees the transnational enterprise and makes decisions on its behalf. While they typically follow a centralized leadership structure, this can vary from one corporation to the next.
Advantages of becoming a multinational corporation
Organizations that become multinational corporations may experience several benefits, including a faster growth rate. They can also have a positive effect on the international economies they conduct business in by creating more jobs. Becoming a multinational corporation may also benefit your organization by:
Meeting consumer demand in foreign countries
Reducing shipping and transaction costs
Increasing your market share abroad
Lowering production and labor costs
Expanding product variety
Increasing revenue margins
Growing your customer base
Competing within international markets
Disadvantages of becoming a multinational corporation
While organizations may benefit from becoming multinational corporations in a variety of ways, there are also some common challenges it's important to be aware of so you can mitigate risks. Here are some potential challenges of operating as a multinational corporation:
Decreased innovation: Often, the most innovative developments come from small, nimble companies rather than large multinational corporations that have secured a significant share of the market. To prevent your organization from becoming too comfortable with the status quo, invest in R&D.
Depleted environmental resources: Expanding operations to foreign countries often requires land development, which can deplete natural resources. Be mindful of your organization's impact on the environment and look for more sustainable alternatives, such as repurposing preexisting buildings.
Complicated regulations: Operating in multiple countries can make it more complicated to comply with the regulations in each area. Make sure you invest in a skilled legal team and experienced accountants who are familiar with the requirements of each country you operate in to mitigate legal risks.
Tips for deciding whether to become a multinational corporation
Here are some tips that can help you decide whether becoming a multinational corporation is the right choice for your organization:
Research other countries. Before you expand your business, research other countries thoroughly. Learn about their tax structure, regulations, cost of living and political environment.
Consider your competitors. Make a list of competitors who operate in the same region. Then analyze opportunities to increase your market share by expanding your operations.
Network with business leaders. Reach out to other business leaders in your network who oversee multinational corporations to see if they have any advice. Ask questions about their experience to help you prepare.
Review your finances. Analyze your profit margins and forecasted revenue to determine whether you have the resources necessary to open another location in another country. You can also research the costs of opening a new branch or facility to create a budget.
Develop a strategic plan. Collaborate with other executive leaders and key stakeholders in your company to develop a strategic business plan. Outline what resources you would need to expand your operations, what your revenue streams are, how you can market your services and what the potential risks are to help you visualize what steps your company needs to take to become an MNC.
Explore more articles
- How To Refer Someone for a Job in 3 Steps (With Example)
- 10 Marketing Plan Objectives To Consider and the KPIs To Measure Them
- How To Get a Workday HCM Certification in 4 Steps
- 5 Essential Public Relations Skills and How To Improve Them
- "I Got Fired, Now What?" How To Respond and What To Do Next
- The Consumer Decision-Making Process Defined (With Examples)
- How To Calculate Total Assets (With Examples)
- What Is Continuous Improvement? (With 13 Examples)
- 11 College Benefits To Weigh When Pursuing Higher Education
- How To Build Trust on Your Team in 7 Steps
- Guide to Nursing Interventions (With Types and Examples)
- Letter of Intent for Graduate School Admission (With Template)