The Multinational Corporation

In the period after World War One, America fell under the sway of “America First” thinking. In 1929, a great financial disaster occurred, and America suffered its worst depression. At first, laissez faire economic methods were adopted, but with the election of Franklin Roosevelt, a British economist's theories were tried. John Maynard Keynes came up with the idea that government should “prime the pump” of the national economy with spending programs. It seemed to work. After World War II, America took the opposite approach and helped its world neighbors rebuild their economies.

The die was cast for more international involvement. Before many years had passed, American companies had invested money in many foreign lands. Revlon, Coca‐Cola, GM, most of the oil companies, and even major banks all had large international operations.

If a company wants to venture into the international marketplace, it can use several different methods. In each case, the levels of risk and control move together. The four most common approaches include the following:

  • Exporting. The selling of an organization's products to a foreign broker or agent is known as exporting. The organization has virtually no control over how products are marketed after the foreign broker or agent purchases them. Because the investment is relatively small, exporting is a low‐risk method of entering foreign markets. The only real danger here is what the foreign agent might do with the products to hurt the organization's or product's image.
  • Licensure agreement. This approach allows a foreign firm to either manufacture or sell products, or the right to place a brand name or symbols on products. Disney World, for example, has licensure agreements with many foreign firms. This approach provides more control than an export sale, as a firm can require that certain specifications be met, yet it is still not the manufacturer in the foreign market.
  • Multinational approach. With this approach, a firm is willing to make substantial commitment to a foreign market. Normally, products or services are modified to meet the foreign market demands, and in many cases, substantial fixed investments are made in plants and equipment. The most common ways to become a multinational firm are to form joint ventures or global strategic partnerships, or to establish wholly‐owned subsidiaries.
    • Joint ventures occur when a company forms a partnership with a foreign firm to develop new products or to give each other access to local markets. Normally, the roles and responsibilities of each organization are clearly spelled out in the joint‐venture agreement. This approach increases both control and risk.
    • Global strategic partnerships are much larger than a simple joint venture. Two firms join together and make a long‐term commitment, in the form of time and investments, to develop products or services that will dominate world markets. This approach does not modify products for a particular market but develops a single product market strategy that can be utilized in all markets in hopes of dominating the worldwide market for that product.
    • Wholly‐owned subsidiaries occur when a firm purchases either controlling interest or all of a foreign firm. Often, the subsidiary firm is given considerable freedom in terms of how to operate in the foreign market, and heavy use of foreign managers and employees is very common. The owning firm does have the most control, but it also has substantial investment risk.
    • Vertically integrated wholly‐owned subsidiaries exist where a firm owns not only the foreign manufacturer but the foreign distributors and retailers as well. Again, the main emphasis is on dominating a worldwide product or service area with a single product market strategy. True global products are very difficult to develop, and it is even more difficult to dominate all global markets.

Of these approaches, multinational corporations, defined as organizations operating facilities in one or more countries, are major forces in the movement toward the globalization of businesses. Common characteristics of successful multinational corporations include the following:

  • Creation of foreign affiliates
  • Global visions and strategies
  • Engagement in manufacturing or in a restricted number of industries
  • Location in developed countries
  • Adoption of high‐skills staffing strategies, cheap labor strategies, or a mixture of both.