What Is a Multinational Corporation?

Multinational Corporations Explained

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A multinational corporation (MNC) is one that has business operations in two or more countries. These companies are often managed from and have a central office in their home country with offices worldwide. There are different types of multinational corporations based on their corporate structure. They often operate as a parent company with separate foreign subsidiaries.

MNCs can have a considerable impact on the economies of each country in which they operate. They create jobs and contribute to the local tax base. That being said, they often face criticism both at home and abroad for perceived negative economic impacts.

What Is a Multinational Corporation?

To be considered a multinational corporation, also known as a multinational firm or multinational enterprise, a company must derive at least 25% of its revenue from operations outside of its home country. Many multinational companies outsource manufacturing and labor to developing economies, taking advantage of lower corporate tax rates or moving products closer to new prospective markets.

Some of the largest firms in the world are MNCs, such as Apple and Microsoft. One of the largest is Walmart: Its home base is in the United States, but it does business in 26 countries worldwide.

How Multinational Corporations Work

In addition to a primary headquarters in its home country, a multinational corporation makes a direct investment in a foreign country by establishing operations there. Some multinational companies might have a presence in just one other country, while others have subsidiaries all over the world.

MNCs aren’t limited to just the U.S.: A number of corporations based in other countries are also considered MNCs, including Toyota, BP, and Volkswagen.

Selling its goods and services in another country doesn’t make a company a multinational corporation. Plenty of domestic corporations export their products overseas without meeting the definition of a multinational corporation. 

Types of Multinational Corporations

Multinational corporations can be organized according to different objectives, phases of growth, and management styles.

International Division

A company that separates its international operations from its domestic ones may have a designated “international division” that handles all operations in foreign markets. This can allow managers with an understanding of international markets greater decision-making autonomy but may also cause issues with company cohesiveness or corporate direction.

Decentralized Corporation

This type of multinational corporation maintains a strong presence in its home country but without a central headquarters. Instead, the company has many locations, both at home and abroad, that each have their own management structure. This design allows corporations to grow quickly, without the bureaucracy of everything going through a central office. 

Global Centralized Corporation

A centralized global corporation has a primary headquarters in its home country. This headquarters is likely where the chief executive officer and other decision-makers are located. A global corporation handles domestic and international operations under the same management and decision-making umbrella; locations elsewhere may need prior approval from the home office for management decisions.

Transnational Corporation

A transnational corporation is marked by a parent-subsidiary relationship in which the parent company directs operations of the subsidiary company or companies. Leadership structure tends to be centralized but may also be decentralized or exhibit less formality.

Subsidiaries may be located in other countries or in the home country and may also have different names than the parent company. For instance, Nespresso is a subsidiary of Nestle.

Multinational Corporation vs. Domestic Corporations

While a multinational corporation is one with a physical presence in two or more countries, domestic corporations have operations in only one country. These companies may still import supplies or sell their products internationally, but they don’t have corporate offices or management located in other countries.

Multinational Corporations Domestic Corporations
Physical presence in multiple countries Physical presence in one country
More complicated business model  Simpler business model
Does business in multiple languages Does business primarily in one language
Subject to International Financial Reporting Standards (IFRS) Subject to Generally Accepted Accounting Principles (GAAP)
Ability to outsource to foreign markets for more favorable labor costs and taxation Subject to the labor costs and taxation of its home country
Often criticized for outsourcing jobs and for negative impacts on the countries in which they do business May be celebrated for keeping jobs in their home country
  • Efficiency

  • Job creation

  • Tax benefits

  • Subject to multiple accounting laws

  • Job losses in home country

  • Monopolization

Pros Explained

  • Efficiency: Rather than manufacturing a product in one country and shipping it internationally, multinational corporations can manufacture products where the market is. They can also access cheaper local materials and labor and avoid the tariffs that may come with shipping internationally.
  • Job creation: Multinational corporations create jobs in multiple countries. The company has the benefit of a larger talent pool, while employees may have access to better pay than local companies offer.
  • Tax benefits: Multinational corporations can establish subsidiaries in countries with more favorable tax rates than their home country and take advantage of different tax rates when pricing products.

Cons Explained

  • Subject to multiple tax and accounting laws: Multinational corporations are subject to more accounting and tax standards, as each subsidiary must follow the laws of the country in which it does business.
  • Job losses in home country: Multinational corporations often face criticism for taking jobs overseas. They may eliminate jobs in their home country in favor of cheaper labor elsewhere.
  • Monopolization: By establishing physical locations in other countries, multinational corporations compete with smaller local businesses and may end up putting many out of business.

What Multinational Corporations Have To Do With Individual Investors

According to the Securities and Exchange Commission, investing in multinational corporations is a way for U.S. investors to diversify their investment portfolios and gain international exposure without direct investment in foreign stocks

Some investors may not realize that they have international exposure if invested in household-name MNCs like Nestle or Coca-Cola.

Key Takeaways

  • A multinational corporation is a company with business operations in two or more countries that derives at least 25% of its revenue from foreign operations.
  • Multinational corporations make a foreign direct investment in another country by establishing branches or foreign subsidiaries.
  • MNCs can be structured and managed differently.
  • MNCs are subject to various laws specific to the countries in which they operate.
  • MNCs often face criticism for the impact they have on the countries they move into and for moving jobs out of their home country.