The evolution of multinational corporations has its root in the origin of trade in and between various cultural communities across regions. Marked by the struggle of transacting across regions, trading has always been affected by the unequal and varied distribution of resources across geographies. It is this unequal distribution that has led traders to travel long distances and undergo unusual risks for the hope of gain.
The past few decades have witnessed the way global boundaries have shrunk, and communications and technology has bridged the gap. Advancements in technology have resulted in the development of new products, processes and forms of business that have changed the dynamics of economic environment the world over.
Economies started to change to accommodate these progressive developments. Organizations in order to capitalize on the growing opportunities globally started to change and expand. This gave rise to multinational corporations.
Multinational corporations are profit seeking enterprises having international power, capital, manpower, and resource-seeking practices. We can say that an organization that performs its business in two or more countries is a multinational company. These companies operate worldwide through their own branches and subsidiaries or through agents who represent them.
All the business activities are managed and controlled by the central head office of the organization, which is usually situated in the home country of the company.
The equity capital of the subsidiaries or branches in various countries is contributed by both the host company and the parent company. However, management and control of the branches is governed and controlled by the parent company.
As these organizations coordinate production and distribution on a global scale, they become enormous in size and wield enormous power, both economically and politically.
Multinational firms arise −
· Because capital as a resource is mobile and can be used across geographies.
· The growing global marketplace has created enormous consumerism.
· The mutual cooperation among friendly nations and development of new technology has facilitated mass production.
· Inexpensive labor and skills are available in many countries.
· Raw materials availability is spread across geographically.
Managers working in multinationals are required to understand and operate in multi-cultural international environment. As a result, they are required to constantly monitor the political, legal, sociocultural, economic, and technological environments across international markets.
Some of the common forms of Multinational Companies are −
Under this form, a multinational corporation endows firms in foreign countries the legal right to use its business model and brand per the terms and conditions of franchise agreement, which can be reviewed and renewed periodically. The firms who get the right or license pay royalty or license fee to multinational corporations.
In this kind of a system, the multinational company opens its own braches in different countries, which operate under the direct control and supervision of the company’s head office. Sometimes, a multinational company may establish subsidiaries in foreign countries. These subsidiaries may be fully owned by the multinational (parent company) or partly owned, where the host countries own share capital. The subsidiaries follow the guidelines of the parent company.
A multinational company establishes its company in a foreign country in partnership with the local firms or companies in the host company. The ownership and control of the business is shared by multinational and foreign company, where the governing policies are that of the multinational company and the day-to-day management is left to the local company.