What do you mean by multinational company?

By Indeed Editorial Team

Published October 8, 2021

Business leaders and executive team members often look for new ways to increase their revenue and reach more customers. One way companies can do this is by becoming multinational corporations. If you're interested in working in a leadership position for an international business or considering expanding your company's current operations overseas, then you may benefit from learning about these organizations. In this article, we explain what a multinational corporation is, describe how it works, list four types of companies that fall under this category and explore the pros and cons of being a multinational corporation.

Related: A Guide to Corporate Structures (With FAQs)

What is a multinational corporation?

A multinational corporation is an organization that has assets or facilities in multiple countries. While they typically have a main office in their home country, these organizations may have offices, factories and other locations spread out across the globe. To be considered a multinational corporation, an organization must have at least one location in another country, even if they already export goods abroad. Throughout your career, you may also hear multinational corporations referred to as MNCs, international corporations, multinational enterprises or stateless corporations.

Related: 7 Types of Company Reporting Structures That Every Company Should Consider

How does a multinational corporation work?

The structure and operations of each multinational corporation may vary depending on the industry they're in, the size of their organization and the goods or services they produce. While some authorities define a multinational corporation as any organization that has at least one foreign branch, others believe that companies need to generate at least one-quarter of their revenue from foreign countries to earn this title. However, the primary requirement to become a multinational corporation is to make a direct investment into another country by operating part of your business there.

Related: 10 International Market Entry Strategies (With Definitions)

4 types of multinational corporations

Here are some of the most common types of multinational corporations:

1. Decentralized corporation

Decentralized corporations may have multiple offices, facilities and assets in foreign countries, but they still maintain a strong presence in their home country. While decentralized corporations typically don't have a central headquarters, each country they operate in may have its own management structure. This helps the corporation scale quickly while ensuring it adheres to the regulations in each geographic area.

Read more: How To Build a Decentralized Organization in 5 Steps

2. Global centralized corporation

A centralized global corporation may have a head office in its home country, where the chief executive officer and other senior leaders reside. These corporations often look for opportunities to increase revenue by purchasing cheap resources and materials from foreign countries. The same management team typically handles both domestic and international decisions. They also oversee all global operations.

Related: 7 Benefits of Centralized vs. Decentralized Structures

3. International division

Corporations may keep their domestic operations separate from their international operations by creating an international division. This new division is responsible for overseeing all of the corporation's operations in foreign countries. While this structure can help companies reach a wider audience and make decisions that appeal to different cultures, it can also be challenging to maintain a cohesive brand image.

Related: What Is a Global Strategy? (With Types and Examples)

4. Transnational enterprise

A transnational enterprise may exist within a parent-subsidiary relationship. This allows them access to many of the parent corporation's resources, such as their R&D team, even though they may operate in separate countries. Typically, the parent company oversees the transnational enterprise and makes decisions on its behalf. While they typically follow a centralized leadership structure, this can vary from one corporation to the next.

Advantages of being a multinational corporation

Organizations that become multinational corporations may experience several benefits, including a faster growth rate. They can also have a positive effect on the international economies they conduct business in by creating more jobs. Becoming a multinational corporation may also benefit your organization by:

• Helping you meet consumer demand in foreign countries

• Reducing shipping and transaction costs

• Increasing your market share abroad

• Lowering production and labor costs

• Decreasing taxes

• Expanding product variety

• Increasing revenue margins

• Growing your customer base

Disadvantages of being a multinational corporation

While organizations may benefit from becoming multinational corporations in a variety of ways, there are also some common challenges it's important to be aware of so you can mitigate risks. Here are some potential challenges of operating as a multinational corporation:

• Decreased innovation: Often, the most innovative developments come from small, nimble companies rather than large multinational corporations who have secured a significant share of the market. To prevent your organization from becoming too comfortable with the status quo, invest in R&D.

• Depleted environmental resources: Expanding operations to foreign countries often requires land development, which can deplete natural resources. Be mindful of your organization's impact on the environment and look for more sustainable alternatives, such as repurposing preexisting buildings.

• Complicated regulations: Operating in multiple countries can make it more complicated to comply with the regulations in each area. Make sure you invest in a skilled legal team and experienced accountants who are familiar with the requirements of each country you operate in to mitigate legal risks.

Tips for deciding whether to become a multinational corporation

Here are some tips that can help you decide whether becoming a multinational corporation is the right choice for your organization:

• Research foreign countries. Before you expand your business, research other countries thoroughly. Learn about their tax structure, regulations, cost of living and political climate.

• Consider your competitors. Make a list of competitors who operate in the same region. Then analyze opportunities to increase your market share by expanding your operations.

• Network with business leaders. Reach out to other business leaders in your network who oversee multinational corporations to see if they have any advice. Ask questions about their experience to help you prepare.

• Review your finances. Analyze your profit margins and forecasted revenue to determine whether you have the resources necessary to open another location in a foreign country. You can also research the costs of opening a new branch or facility to start creating a budget.

• Develop a strategic plan. Collaborate with other executive leaders and key stakeholders in your company to develop a strategic business plan. Outline what resources you would need to expand your operations, what your revenue streams are, how you can market your services and what the potential risks are to help you visualize what steps your company needs to take to become a multinational corporation.