Transnational Corporations

Definition
Economists are not in agreement as to how multinational or
transactional corporations should be defined. Multinational
corporations have many dimensions and can be viewed from several
perspectives (ownership, management, strategy and structural, etc.)
The following is an excerpt from Franklin Root (International Trade
and Investment, 1994)
Ownership criterion: some argue that ownership is a key criterion. A
firm becomes multinational only when the headquarter or parent
company is effectively owned by nationals of two or more countries.
For example, Shell and Unilever, controlled by British and Dutch
interests, are good examples. However, by ownership test, very few
multinationals are multinational. The ownership of most MNCs are
uninational.
Depending on the case, each is considered an American
multinational company in one case, and each is considered a foreign
multinational in another case. Thus, ownership does not really matter.
Nationality mix of headquarters managers: An international
company is multinational if the managers of the parent company are
nationals of several countries. Usually, managers of the headquarters
are nationals of the home country. This may be a transitional
phenomenon. Very few companies pass this test currently.
Business Strategy: global profit maximization
According to Howard Perlmutter (1969)*:
Multinational companies may pursue policies that are home countryoriented.
Or host country-oriented or world-oriented. Perlmutter uses such
terms as ethnocentric, polycentric and geocentric.

However, "ethnocentric" is misleading because it focuses on race or

ethnicity, especially when the home country itself is populated by
many different races, whereas "polycentric" loses its meaning when
the MNCs operate only in one or two foreign countries.
According to Franklin Root (1994), an MNC is a parent company that
1. engages in foreign production through its affiliates located in
several countries,
2. exercises direct control over the policies of its affiliates,
3. implements business strategies in production, marketing,
finance and staffing that transcend national boundaries
(geocentric).
In other words, MNCs exhibit no loyalty to the country in which they
are incorporated.
*Howard V. Perlmutter, "The Tortuous Evolution of the Multinational
Corporation," Columbia Journal of World Business, 1969, pp. 9-18.
Evolution of Global Business
Three Stages of Evolution
1. Export stage

initial inquiries => firms rely on export agents

expansion of export sales
further expansion foreign sales branch or assembly
operations (to save transport cost)

2. Foreign Production Stage

There is a limit to foreign sales (tariffs, NTBs)
DFI versus Licensing
Once the firm chooses foreign production as a method of delivering
goods to foreign markets, it must decide whether to establish a
foreign production subsidiary or license the technology to a foreign
firm.

Licensing
Licensing is usually first experience (because it is easy)
e.g.: Kentucky Fried Chicken in the U.K.
it does not require any capital expenditure
it is not risky
payment = a fixed % of sales
Problem: the mother firm cannot exercise any managerial
control over the licensee (it is independent)
The licensee may transfer industrial secrets to another
independent firm, thereby creating a rival.
Direct Investment
It requires the decision of top management because it is a critical
step.
it is risky (lack of information) (US -> Canada)
plants are established in several countries
licensing is switched from independent producers to its
subsidiaries.
export continues
3. Multinational Stage
The company becomes a multinational enterprise when it begins to
plan, organize and coordinate production, marketing, R&D, financing,
and staffing. For each of these operations, the firm must find the best
location.
Rule of Thumb
A company whose foreign sales are 25% or more of total sales. This
ratio is high for small countries, but low for large countries, e.g. Nestle
(98%: Dutch), Phillips (94%: Swiss).
Examples: Manufacturing MNCs
24 of top fifty firms are located in the U.S.
9 in Japan
6 in Germany.

Petroleum companies: 6/10 located in the U.S.

Food/Restaurant Chains. 10/10 in the U.S.
US Multinational Corporations Exxon, GM, Ford, etc.