MNCs

MNC is an org. doing business in more than one

country.
MNCs have worldwide involvement & a global
perspective in their mgt & decision making.
They consider opportunities throughout the globe
though they do business in a few countries
They invest considerable portion of their assets
internationally
They engage in int. production & operate plants in a
no. of countries
They take managerial decisions based on a global
perspective.

Multinational Corporation:
A multinational corporation / company is an organization
doing business in more than one country.
Engages in exporting, importing, manufacturing in different
countries.
Although MNC took birth in the early 1860s it was after
the Second world war that multinationals have grown rapidly.
Definition:
International Labour Organization (ILO) report, the
essential nature of the multinational enterprises lies in the fact
that its managerial headquarters are located in one country
(home country) while the enterprise carries out operations in a
number of other countries as well (host country).

Global Corporation:
Global Corporation (GC) produces in home country or in
a single country and focuses on marketing these products
globally or produces the products globally and focuses on
marketing these products domestically.
International Corporation:
International Corporation (IC) conducts the operations
(exporting, producing etc) in one or more foreign countries,
but with domestic orientation.
Transnational Corporation:
A Transnational Corporation differs from a MNC in that
it does not identify itself with one national home. TNC
produces, markets, invests, and operates across the world.

Features of MNC:
World wide operation:
The multinational companies extend their operation to two
or more countries. They establish parent office in one country
and extend branches ,subsidiary and affiliation to other
countries.
Create maximum operation:
The multinational companies are extended to many
countries. People can grasp the opportunity.
People can join the multinational companies according to
their capabilities.
Manpower can be well utilized in the multinational
companies.

High efficiency:
Advanced technology are used for multinational
companies. So, manpower can give well training which
increase efficiency of manpower.
Due to this cause, the multinational companies can provide
large volume of quality products at cheaper price.
Increase in employment opportunity:
A multinational company requires a large number of skilled
as well as unskilled employees to operate its activities.
Thus it provides employment opportunity to the people of
host country as a result economic standard of society is
improved.

Research and development:

In complete world, it is need of Research and Development.
To meet international standard of its products and services, a
multinational company conducts several research and
development activities.
Constantly such programs are beneficial to society. It helps
to develop better equipments, quality products and advanced
technology in production.
Why companies become MNCs?
To protect themselves from uncertainties and risks.
To tap global markets.
To increase market share.
To overcome tariffs.

REALITY FACTS:
According to the latest World Investment Report 2007 (WIR
07), Indias outward FDI was the second highest at US$ 20.4
billion after Brazil at US$ 28 billion.
In 2007, India Inc spent US$ 33 billion on overseas mergers
and acquisitions (M&As), compared to the US$ 15 billion spent
by foreign firms for acquisitions in India.
Tata Motors takeover of Jaguar and Land Rover (JLR) for US$
2-2.5 billion is an excellent example set by an INDIAN MNC
towards this glory.
Consequent to this surging FDI outflows, there has been an
increase in the overseas earnings (in terms of dividend, royalty,
license and technical fee and other inward remittances) of
Indian companies.

In fact, 2006 will be remembered in Indias

corporate history as a year when Indian
companies covered a lot of new ground. They
went shopping across the globe and acquired a
number of strategically significant companies.
This comprised 60 per cent of the total mergers
and acquisitions (M&A) activity in India in 2006.
And almost 99 per cent of acquisitions were
made with cash payments.

They extend their industrial/marketing operations

through a network of branches or though their
majority owned foreign affiliates
They produce goods in one or a few countries & sell
in most of the countries.
Factors contributed for the growth of MNCs
MNCs today exercise massive control over world
economy.
Many factors have contributed for the rapid growth of
MNCs; some of them are
Expansion of market territory growth of various
economies along with growth in GDP & per capita
income resulted in rise in living standard of people.
Such factors have contributed for expansion of
market beyond national territory.

Market superiorities MNCs enjoy a no. of mkt.

superiorities over domestic cos.
For e.g. more reliable & up-to-date information about
the product & market, high reputation, less difficulty
in marketing the product, ability to adopt better &
effective advertising & sales promotion or better
transportation & warehousing facilities.
Financial strength MNCs enjoy financial
superiorities over domestic cos. because of which
they can have better R & D programs, more
aggressive advertising, ability to expand their
operations etc.
Technological superiorities because of heavy
investment in R & D, they always have access to
latest technology.

Product innovation MNCs are able to collect

information regarding customers taste &
preference more frequently & also because of
active & strong R & D wing, they are able to
constantly incorporate additional features in their
products.
Advantages of MNCs
In the process of carrying out their business, MNCs
directly & indirectly benefit both the home country &
the host country
Advantages to host country
Investment level, employment level & income level
of people in host country increases
Industrial growth & economic development
increases because of the growth of ancillary &
service industry in the host country

Host country will be benefited by the latest

technology brought in by the MNC.
Supplier of various inputs & mkt. intermediaries in
host country experience improved business.
Create an atmosphere of competition & thereby
improves the competitiveness of domestic cos.
Domestic industry will be benefited by the R & D
outcomes of MNCs.
Host country can reduce its imports & improve its
exports & thereby improve its BOP position
Last but not the least, when MNC brings in capital,
it improves the foreign exchange position of the
host country.

Advantages to home country

Opportunities for marketing the products produced
in home country throughout the globe
Create employment opportunities for the people of
home country
Industrial activity of home country will grow at a
faster rate.
However, MNC culture is not free from limitations
Limitations of MNCs to host country
Technology developed by MNCs may not be
suitable to developing countries. For e.g. capital
intensive production method may not solve
unemployment problem of host country.

Sometimes the operation of MNC can threaten the

national autonomy & sovereignty & can affect the
functioning of host country govt.
Can be a threat to domestic industry in the host
country
Sometimes can adopt ethnocentric approach
(home country orientation) in staffing & thus may
not solve unemployment problem of host country
Might exploit the natural resource indiscriminately
for its selfish motto.
Repatriation of profit in the form of payment of
royalty & dividend & thus can deplete the forex
reserve of host country.

Political interference often it is said that MNCs

through their financial & other strengths, influence
the decision-making process of the govts
especially in developing countries.
Through their strong lobby, they might try to even
destabilise the govt.
Therefore, in many of the third world countries, the
govts are in the clutches of these MNCs.
Technology transfer & its implication usually
MNCs dont engage in R & D activities relevant to
developing countries.
MNCs dont transfer advanced technology to third
world countries
Sometimes, technologies transferred may not be
suitable to the developing countries.

Limitations to home country

Transfer capital from home country to host

countries causing unfavorable BOP position
to home country
MNCs may not create employment
opportunities in home country, if it follows
geocentric or polycentric approach
Might neglect home countrys industrial &
economic development.
Might bring foreign culture to home country
which may be detrimental to home country.

MNCs & Code of Conduct

The code of conduct for MNCs drawn up by the
Commission on Transnational Corporations, set up by
the UNs Economic & Social Council specifies the
following guidelines
Respect the national sovereignty of host countries &
observe their domestic laws, regulations &
administrative practices
Adhere to host countrys economic goals,
development objectives & sociocultural values
Respect human rights
Dont interfere in internal political affairs or in
intergovernmental relations
Dont engage in corrupt practices
Apply good practices in relation to payment of taxes,
abstention from involvement in anti-competitive
practices, consumer & environmental protection & the
treatment of employees.

Disclose relevant information to host country govts.

MNCs should contribute positively to economic &
social progress of host countries in the following
ways (According to the 1976 Declaration of the
OECD Code of Practice)
Contribute for host countrys science & technology
objectives by permitting the rapid diffusion
(dispersal) of technologies
Do not behave in manners likely to restrict
competition by abusing dominant position or market
power.
Provide full information for tax purpose
Consult with employee representatives regarding
major changes in operations, avoid unfair
discrimination employment & provide reasonable
working conditions.

Consider host countrys BOP objectives while taking

major business decisions.
Regularly make public significant information on
financial & operational matters.
However, the demand by developing countries that
the Code should become legally binding was
rejected by the UN General Assembly due to
pressure by advanced countries.
Organisational Structure for MNCs:
Organizations for MNCs can be designed based on 2
options vertical/tall org. & horizontal/ flat org.
Vertical org refers to increase in length of orgs
hierarchy chain of command.
Chain of command represents cos authorityresponsibility relationship between superior &
subordinates.

Authority & responsibility flows from top to bottom

through all levels of hierarchy.
Accountability flows from lower level to higher level
employees at each level should report to their
superior, who in turn should report to his/her boss.
Authority is more centralised in tall orgs.
Horizontal/flat org refers to increase in width of orgs
structure.
More suitable for small size business firms.
Authority is more decentralised in flat structure
Managers with broad span of control grant more
authority to their subordinates.
Organizational activities are mostly performed
informally.

Approaches to organizational structure of MNCs

There are 5 different approaches to org. structure of
MNCs. product org. structure, geographic org.
structure, decentralized business division, strategic
business units & matrix org structure.
Product org structure
Various activities divided on the basis of individual
products or service & are grouped into different
departments under this form.
Imp functions like marketing, production, finance &
HR are contained within each dept.
This form of structure overcomes many of the major
limitations of functional org. structure.

Advantages
1. More appropriate form of structure than functional
form for firms producing multiple products.
2. Coordination among various functions relating to a
particular product will be more effective as all
functions relating to the product will be performed
by a single dept.
3. Since each dept is independent, most of the
decisions can be made at departmental level
without waiting for top mgt in this process which
results in faster decision.
4. Responsibility & accountability for market share,
sales, profit etc. can be fixed for a particular dept.

However, this form of org structure is not free from

limitations; some of them are
1. The most imp limitation is, there will be
unnecessary duplication of equipment &
personnel among various depts.
2. Each dept will have to perform different functions
like production, marketing, HR, finance, support
staff, maintenance etc. As such specialised
personnel & equipment cannot be procured.
3. Decisions like pay, promotion, product quality,
design or pricing strategy could be inconsistent
among various dept. This might spoil the brand
image of the co.
4. Inter-departmental conflicts might arise regarding
sharing of common resources, allocation of
overhead expenses etc.

 Geographical organizational structure

Various activities/functions grouped into departments
based on activities performed in the
geographical areas/regions.
Each geographical unit includes all functions
required to produce & market the products in a
particular geographical area.
MNCs operating in diverse geographical areas are
organised based on geographical structure.
Advantages
1. Products can be better designed to suit the
geographical & cultural needs of specific
geographical region.

Geographical structure allows a firm to respond

quickly to the technical needs of different
international markets.
3 Production & distribution in different markets
provides the MNCs with an opportunity to serve
the customer needs better in different countries.
4 Enables a co to adjust its operations easily to
suit the legal environment of host country.
5 Also enables an MNC to pinpoint the
responsibility for profits or losses.
Disadvantages
1 More functional personnel are required as the
firm cant appoint specialists to look after a
particular function throughout the globe;
This results in duplication of personnel

2 There would be duplication of equipment &

facilities as the production centers are
spread in different geographical areas.
3 Coordination of activities in different
geographical areas would be a difficult
task
4 Bringing about uniformity in operations of
the firm will be a problem
5 Difficult to maintain consistent co image or
reputation
6 A separate layer of mgt to run each
geographic unit is required.

Decentralized business unit structure

In a multibusiness firm with diversified different
businesses, decentralised business unit
structure is usually followed.
Each business is operated as a stand-alone profit
center.
Each business is placed under the supervision of a
general /chief manager.
Generally practiced based on product lines of
diversified companies.
Advantages
1. Diversification is generally better managed by
having decentralised decision-making &
delegating authority & responsibility to the
general manager for each business unit.

Each business unit is managed by an

entrepreneurially oriented general manager who
is delegated with authority to formulate &
execute business strategies.
3 Each business unit operates as a stand-alone
profit center
Disadvantages
1 Absence of mechanism for coordinating related
activities across business units
2 As the general managers in charge of business
units function independently, coordination
becomes a complicated task.
Headquarters must devise some internal mechanism
for achieving strategic coordination

Strategic business unit structure (SBU structure)

Normally, a single chief executive cant control a
number of decentralised units in a broadly diversified
company.
If the total business is grouped into strategic units &
efficient & senior executive is delegated with the
authority & responsibility for its mgt, the business can
be controlled effectively.
The senior executive will report imp matters to chief
executive.
Top mgt coordinates the interests of the diversified
business units.

SBU is grouping of business subsidiaries based on

some imp strategic elements common to all.
The common or related element could be a common
competitor, closely related strategic mission,
common key success factors etc.
Advantages
1. Provides a strategically relevant way to organise
business unit portfolio of a broadly diversified
company.
2. Facilitates coordination of activities within an
SBU
3. Allows the strategic planning to be done at the
most relevant level within the total enterprise
4. Makes the task strategic review by top mgt more
objective & more effective.

Helps allocate corporate resources to areas with

greatest growth opportunities
6 Improves coordination among business facing
similar strategic issues.
Disadvantages
1 SBU serves no other purpose than mere
coordinating of activities
2 SBUs can still be myopic in charting their future
direction
3 It just adds to another layer to top mgt & thus
increases layers of mgt.
4 unless the head of SBU is having strong will,
little strategic coordination is likely to occur
across various business units in a SBU.
5 At times, SBU goal differs from corporate goals.

Matrix org structure

All the previous structures possessed a single chain
of command i.e. employees report to only one
manager.
Matrix org structure possesses dual chain of
command both functional & project managers
exercise authority over organisational activities.
Personnel under this structure have two superiors
a project manager & the manager of functional
dept at the HQ.
Matrix form of structure is appropriate when
Mgt attention must be focused on two or more key
issues
Large amount of diverse information need to be
processed

Problem solving is complex due to reasons like

environmental uncertainty, interdependence
among organizational units, complex product
nature or technology etc.
Economies of scale requires sharing of human
resource expertise to achieve high performance.
Advantages
1. Co can have the advantage of both project type
& functional form of organisation structure
2. Same functional personnel can be used by
project managers whenever necessary. This
reduces cost.

The structure has considerable flexibility same

personnel can be transferred from one project to
another project depending upon the necessity of
the project.
Lower level employees are highly motivated &
are having high degree of job satisfaction as
they are involved in decision making regarding
the structure
Each project manager is in charge of a unit
performing general mgt functions; therefore, he
can be developed as a senior mgt executive of
the future.
It facilitates the functioning of the organization in
a complex & dynamic environment.

Disadvantages
1. Very complex form of organization structure to
manage in practice
2. Greater administrative cost associated its
operation;
employees spend much of their time in meeting &
exchanging of information to coordinate
functional areas with projects.
3 This form of structure is characterised by
conflicts between functional managers & project
managers.
4 Promotes an organizational bureaucracy &
curtails creative entrepreneurship.
5 Most imp limitation is that it violates the basic
principle of unity of command.

Relationship between Headquarters &

Subsidiaries
MNC can directly manage, if the no of subsidiaries
are a few.
However, if the no of subsidiaries are more, the HQ
has to make a permanent structural relationship
with the subsidiaries.
This is mainly because MNCs supply various
resources & inputs to their subsidiaries & also
receive inputs from subsidiaries.
thus, transactions between MNCs & subsidiaries
need to be coordinated & controlled
In fact, IT provided on line facility to coordinate &
control the activities between them.

Different aspects of relationship between HQ &

subsidiaries includeInformation sharing, resource sharing, decisions
flow, coordination of activities, control of operations
& strategy formulation.
Information sharing HQ has to share many
information with the subsidiaries.
Information flows in both directions HQ receives
information from subsidiaries regarding their
markets, demand, customer complaints, finance,
product design, host country environment etc.
Similarly, subsidiaries receive information from HQ
regarding resource allocation, approval of various
projects, employment of people etc.

Resource sharing both HQ & subsidiaries share

various types of resources among them like
financial, human, material or technology.
Decision flows decisions made by HQ flow to
various subsidiaries for information &
implementation.
Similarly, subsidiaries inform about the decisions
taken by them to the HQ for approval & to other
subsidiaries for information.
Coordination of activities HQ has to balance
various activities of its subsidiaries including
production, demand for various inputs or
resources.

Similarly, HQ has to coordinate activities of

subsidiaries & other external stake holders like
suppliers of inputs, bankers, market intermediaries,
govts of host countries etc.
Control of operation - HQ has to control
operation of subsidiaries based on customer
needs, competitors positions, govt policies, rules &
regulations of various countries, conditions
imposed by suppliers of materials or financial
institutions.
Strategy formulation HQ helps subsidiaries to
formulate the strategies for their countries.
Further, the HQ can formulate the global strategy to
be followed by all subsidiaries.

Indian MNC on the global platform

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Initiator
TATA GROUP

The Group is one of India's largest

and most respected business
conglomerates. The current chairman
of the Tata group is Cyrus Mistri, who
took over from Ratan Tata in 2012.
It has interests in steel, automobiles,
information technology,
communication, power, tea and hotels.

Wireless Wonder

Bharti

It is good to be Indias biggest wireless

operatordoing business in the worlds
fastest-growing market for mobile
phones. Now, Bharti is looking to expand
in other fast-growing emerging markets
such as Africa. Britains Vodafone owns a
10% stake in Bharti, which also provides
outsourcing services to IBM.

The Tata Nano,

the worlds
cheapest
production car.

The HCL laptop,

the cheapest
production laptop.

Kingfisher Airways,
voted the best
airline of south-east
Asia.
The
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training
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the
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