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Types of MNCs

By Dr Preeti Sharma
Different forms of MNCs
A firm is considered a multinational corporation (MNC) if it owns, in part or in whole, a
subsidiary in a second country. High profile MNCs have many subsidiaries. Multinational
Corporations operate in the following ways.
1.Franchising
In this form, multinational corporation grants firms in foreign countries the right to use its
trade marks, patents, brand names etc. The firms get the right or licence to operate their
business as per the terms and conditions of franchise agreement. They pay royalty or
licence fee to multinational corporations. In case the firm holding franchise violate the
terms and conditions of the agreement, the licence may be cancelled. This system is
popular for products which enjoy good demand in host countries.
2.Branches
In this system multinational corporation opens branches in different countries. These
branches work under the direction and control of head office. The headquarters frames
policies to be followed by the branches. Every branch follows laws and regulations of the
head office and host countries. In this way multinational companies operate through
branches.
3. Subsidiaries
A multinational corporation may establish wholly owned subsidiaries in foreign countries.
In case of partly owned subsidiaries people in the host countries also own shares. The
subsidiaries in foreign countries follow the polices laid down by holding company (Parent
company). A multinational company can expand its business operations though
subsidiaries all over the world.
Different forms of MNCs
4.Joint Venture
In this system a multinational corporation establishes a company in
foreign country in partnership with local firms. The multinational and
foreign firm share the ownership and control of the business.
Generally, the multinational provides technology and managerial skill
and the day to day management is left to the local partner. For
example, in Maruti Udyog the Government of India and Suzuki of
Japan have jointly supplied capital. Suzuki supplies technology and the
day to day management lies with the Government of India.
5.Turn Key Projects
In this method, the multinational corporation undertakes a project in
foreign country. The multinational constructs and operates the
industrial plant by itself. It provides training to the staff in the
operation of plant.
It may also guarantee the quality and quantity of production over a
long period of time.
Different categories of MNCs
Horizontally integrated multinational: The acquisition of additional business
activities that are at the same level of the value chain in similar or different
industries. This can be achieved by internal or external expansion. Because the
different firms are involved in the same stage of production, horizontal
integration allows them to share resources at that level. If the products offered
by the companies are the same or similar, it is a merger of competitors. If all of
the producers of a particular good or service in a given market were to merge, it
would result in the creation of a monopoly. Also called lateral integration.
Benefits of horizontal integration to both the firm and society may
includeeconomies of scaleandeconomies of scope. For the firm, horizontal
integration may provide a strengthened presence in the reference market. It
may also allow the horizontally integrated firm to engage inmonopoly pricing,
which is disadvantageous to society as a whole and which may cause regulators
to ban or constrain horizontal integration.
An example of horizontal integration in the food industry was theHeinzandKraft
Foodsmerger. On March 25th, 2015, Heinz and Kraft merged into one company.
Both produce processed food for the consumer market.Syscohad planned to
acquireUS Foodsbefore a federal ruling against the deal.This would have been
horizontal integration as both distribute food to restaurants, healthcare and
educational facilities
Different categories of MNCs
Vertically integrated multinational: In vertical integration the
subsidiary provides inputs to the parent which produces a final good.
When a company expands its business into areas that are at different
points on the same production path, such as when a manufacturer
owns its supplier and/or distributor. Vertical integration can help
companies reduce costs and improve efficiency by decreasing
transportation expenses and reducing turnaround time, among other
advantages. However, sometimes it is more effective for a company to
rely on the expertise and economies of scale of other vendors rather
than be vertically integrated.

Oil companies are good examples of vertically integrated MNCs. Oil


exploration and production are accomplished abroad where the
subsidiary exports crude petroleum to the parent corporation which
then refines the crude into gasoline.


Some other Examples of vertical
integration include:

- A mortgage company that both originates and services mortgages,


meaning that it both lends money to homebuyers and collects their
monthly payments.

- A solar power company that produces photovoltaic products and also


manufacturers the cells, wafers and modules to create those products
would be considered vertically integrated.

- The merger of Live Nation and Ticketmaster created a vertically


integrated entertainment company that manages and represents
artists, produces shows and sells event tickets.
Different categories of MNCs
Conglomerate Multinational
Aconglomerateis a combination of two or
morecorporationsengaged in entirely
different businesses that fall under
onecorporate group, usually involving a
parent companyand manysubsidiaries.
Often, a conglomerate is amulti-industry
company. Conglomerates are often large
andmultinational.

FDI and MNC


Foreign direct investment (FDI) are the
means which an MNC obtains or expands
a subsidiary can take a variety of forms.
FDI can be by merger or acquisition of an
existing firm, by participating in the
construction of a new firm, or by
expanding existing subsidiaries.
Motives for Direct Foreign
Investment
The underlying factors which may have
dictated these flows of revenues and
costs are demand and cost factors.
The main decision for FDI is whether it is
more profitable to set up production in
one form or another with a foreign
subsidiary or to increase production at
home and expand exports of the good.
The advantages to setting up a
subsidiary fall into two categories,
demand factors and cost factors.
Motives for Direct Foreign
Investment
Demand Factors
On the demand side, by having a foreign subsidiary,
the firm will be capable of monitoring the foreign
market more closely and, consequently, respond to
changes in a more timely manner. This is especially
true if the foreign market is large and growing
rapidly.
A second consideration on the MNCs demand side is
more direct. If foreign competition is eroding the
firms market share, then simply by buying the
competitor maintains the firms market power.
Cost Factors
Firms may relocate production to take
advantage of lower labor costs. The
attraction to lower labor costs must
also take labor productivity into
consideration.
If foreign labor productivity is
sufficiently low so as to offset the
gains from lower wages, then FDI will
not be profitable.
Thank You