Politics of the Multinational Firm

This article will focus on the issues that multinational corporations (MNC) face as they attempt to develop their business in foreign countries. Supporters of MNCs believe the organizations are an asset to the economy by providing jobs, income and technology to underdeveloped countries. However, critics argue that there are some negative consequences of having a MNC operating in underdeveloped countries. Leaders in a MNC have to face different obstacles from those encountered by their domestic counterparts. These leaders must be able to manage their operations in an environment that is usually different from their home. International human resource management strategies play an important role in assisting MNCs with overcoming some of the risks associated with doing business in another country.

A multinational corporation (MNC) has a presence (e.g., facilities, human resource capital) in at least one other country besides the one it originated in. Many organizations have offices or facilities in many different countries, with one centralized office that manages the international projects. Most major MNCs are in the United States, Japan, or Western Europe (e.g., Exxon, GM, McDonalds, Coca-Cola, Toshiba, and Honda). Supporters of MNCs believe that they are an asset to the economy as they provide jobs, income, and technology to underdeveloped countries. However, critics argue that there are some negative consequences to having an MNC operating in an underdeveloped country. For example, there is the potential for MNCs to have too much political influence over the governments in these countries, exploit the countries, and create a loss of jobs in their home countries. This article will explore the different dynamics and influences an MNC has and discuss the types of political issues that it has to overcome.

Origin

A corporation can be considered a multinational if the parent company is owned by nationals in two or more countries, the managers of the parent company are nationals of several countries, or the business strategy is focused on maximizing profit by doing business at a global level. According to Root (1994), an MNC is a company that participates in foreign production through partners located in several countries, has direct control over the policies of its partners, and is considered geocentric.

There are three stages that an organization may experience as it evolves into a multinational firm: export, foreign production, and multinational status. During the export stage, the organization is in the beginning stages of conducting business globally and relies on exporters to handle most of its transactions. However, as the sales expand, many corporations will decide to produce their goods in a foreign country in order to save on transport costs. At this point, the organization enters the second stage, which is foreign production. During this stage, an organization makes a choice between two different methods of foreign production, licensing or direct foreign investment. What are the differences between the two methods?

• Licensing This method is usually the first choice because it is easier than direct foreign investment. Licensing occurs when an MNC grants another company the right to manufacture and distribute a product under the MNC's trade name in the target country. The licensee pays a fee in exchange for the rights. Since there is little investment required, licensing has the potential to provide a large return on investment. Licensing tends to be a viable option to enter a market when either the exporter does not have sufficient capital, the foreign government's import restrictions preclude other ways to enter the market, or a host country is not comfortable with foreign ownership.

Advantages of this method are that there is no capital expenditure requirement, it is not risky, and payment is a fixed percentage of sales. Disadvantages are that the MNC does not have any managerial control over the licensee because it is independent, and the licensee can give the multinational's trade secrets to a potential competitor.

• Direct Foreign Investment Direct investment refers to the ownership of facilities within a foreign country. It requires large amounts of resources and high levels of commitment from both sides. This type of market entry can occur through either acquisition of an existing enterprise or the creation of a new enterprise. It requires the transfer of capital, technology, and personnel resources. Direct ownership can provide a high level of control over the operations as well as the opportunity to better know the potential customers and competitive environment.

MNCs may select this method when they want to:

• Grow. The organization reaches a point where it realizes that it is not growing. Therefore, there is an incentive to identify new markets so that it can continue to make a profit.
• Bypass protective instruments in the target country. American MNCs set up subsidiaries in order to avoid the common external tariff imposed by the European market.
• Prevent competition. An MNC may buy a foreign company so that it will not become a competitor.
• Reduce costs. Labor costs differ depending on the country. Many MNCs will establish facilities in countries that have qualified workers who will work for lower wages. For example, many American MNCs have outsourced their customer service and technology functions to India.

The final stage is becoming a full MNC. An organization has reached this level when it begins to handle the administrative and operational activities such as production, marketing, financing and staffing in a foreign country. As a rule, an MNC has at least 25% of its total sales coming from foreign sales.

Multinational Environment

Leaders in an MNC have to face different obstacles from those encountered by their domestic counterparts. These leaders must be able to manage their operations in an environment that is usually different from their home environment. According to Phatak, Bhagat, & Kashlak (2005), there are five dimensions that an MNC must master in order to be successful in a foreign country. Four of the five dimensions are economic, political, legal, and cultural.

Economic

Many countries have attempted to eliminate barriers to free trade. Initiatives such as the Treaty of Rome and the General Agreement on Tariffs and Trade (GATT) were created in an effort to enforce free trade between countries. The work of these initiatives led to the creation of the European Economic Community. This entity was very successful and led to what is now known as the European Union (EU). The main objective of the EU continues to be the promotion of free trade among the membership as well as the living standards of the people in the union. Major developments that helped promote free trade include the establishment of the World Trade Organization (WTO) and the creation of regional trade blocs such as the North American Free Trade Agreement (NAFTA).

The WTO was established to enforce the GATT. This organization has a panel of trade experts who assist in settling disputes. The WTO selects the panel from a list of trade experts supplied by member countries, and the two countries involved in the dispute agree upon the membership of the panel. Decisions made by the trade panel are binding unless overturned by consensus of the WTO membership. The policies and procedures allow countries that win the case the right to take action against the country that was found guilty of the charge. The guilty party will have two choices: change its laws or face sanctions, such as tariffs on exports.

Some critics fear that the WTO may overstep its boundaries and have too much power and influence. They are concerned that the WTO may make rulings that will be detrimental to a country trying to do business in a foreign environment. What these critics fail to realize is that the WTO does not have any legal power to change the laws of another country. The critics should be concerned with whether or not a country plans to impose sanctions.

Trade blocs are becoming popular, and they have three major features: almost every country belongs to at least one trade bloc, most trade blocs are formed based on geographic location (e.g., countries sharing borders), and regional arrangements are accelerated in various parts of the world (e.g., NAFTA has launched a campaign to have most Western countries as members). According to Phatak, Bhaght, & Kashlak (2005), there are five types of trade. The types include:

• Free trade area (FTA). Many of the strongest agreements started as trade areas. In a free trade area, bloc member countries eliminate barriers on trade between member countries but retain the right to impose their own separate barriers on trade with countries outside of the trade bloc.
• Customs union. This type of agreement is among member countries, and it establishes a general position regarding trade with non-bloc members.
• Common market. A common market is a customs union that allows free movement of resources (e.g., labor and capital).
• Economic union. A common market where the national economic policies of member countries are in sync with one another.
• Political union. A union in which the member countries coordinate government, social, and economic policies.

Regional trade blocs are formed as a result of geographical proximity and the sharing of common borders, common economic and political interests, similar ethnic and cultural backgrounds, similar levels of economic development, and similar views on the mutual benefits of free trade, and regional political needs and considerations.

Political

Political systems have a set of players. The government is one of the key players; other players include members of significant groups that exist in that environment, including special-interest groups such as political parties, labor unions, and religious organizations. Each group has a certain amount of power and uses it to control and influence other groups, such as the government of a host country. Organizations such as the United Nations, the World Bank, the International Monetary Fund (IMF), and the WTO are major players in the international political system, and they can change the course of history. Therefore, businesses must understand the political risks involved in doing business with other countries and these organizations.

Political risk can be linked to MNCs as they perform business, and it has been found that a shift in political and economic turmoil may cause risk for a business. Examples of such risks include demonstrations and strikes by workers and changes in government leadership. These types of changes may cause unforeseen paradigm shifts in a country, and the changes may have a direct or indirect effect on the organization's ability to operate efficiently and effectively. Therefore, political risk can be defined as the amount of uncertainty associated with a government's ability to make decisions and the conditions under which they operate.

Political risk can occur as a result of a country, company, or project issue. Country-specific risks occur when there is hostility between two or more countries. For example, there is hostility between Israel and the Middle East. Therefore, it would be difficult for an Israeli firm to do business in the various countries of the Middle East. Company-specific risks may be positive or negative, and the attitude is directed toward the organization. For example, a positive scenario would be when a country welcomes a company such as Microsoft because of the value of the organization's technological expertise, and there may be a belief that the organization's presence is a positive influence. On the other hand, a negative attitude could result if the nation's residents felt the company's presence would have an adverse effect on the local firms' ability to do business and make a profit. Project-specific risks occur when a project receives special treatment. For example, relationships between the United States and Iran are tense. However, Iran may be inteh US oil companies, but the nation would not support US projects in other industries.

Legal

The WTO's dispute-settlement system is an example of how international law can affect a multinational corporation. MNCs must be sensitive to the laws and culture of the foreign countries in which they desire to do business. Offenses can become expensive and hinder the company's ability to grow.

Cultural

Culture and values are important to the people of a country. When corporations elect to do business abroad, they must understand and respect the culture of the host country. Otherwise, unnecessary problems may arise and hinder the growth of the organization. Studies have shown that many international managers have encountered obstacles when dealing with the values of different cultures.

Applications

International Managers & Culture

As globalization increases, more employees are deciding to take assignments in other countries in order to advance their careers (Hodgetts & Luthans, 1993). These employees, also called expatriates, may be challenged by the culture of the host country. Given this concern, many multinationals have reached out to local managers in the host country (Solomon, 1995). Native residents of the host country who understand the culture and have the necessary level of expertise to be successful in the organization would be ideal employees. However, these residents may have trouble understanding the corporate culture of the MNC. Regardless of where employees come from, cultural concerns appear to be a major challenge for many multinational corporations, and researchers have spent considerable time determining how best to handle the dilemma.

Edwards and Kuruvilla (2005) were able to compile a list of research that has been conducted on this topic. Some of these studies and the findings are listed in the chart below.

Researcher Issue Findings Gertson (1990) The study focused on how to select and train international employees, and was based on interviews in seventeen firms and questionnaires in eighty firms. The findings focused on how international employees struggle with balancing adaptation to the local culture and adhering to the corporate culture. Tayeb (1994) This research used a case study of a Japanese firm in Britain, and focused on how Japanese management practices work in a foreign country. It was found that Japanese management practices can be successful in another culture if they are modified and adapt to the local environment. Nam (1995) This research used comparative case studies of a Japanese and American bank to examine how national/cultural affiliations influenced the commitment of local employees. The studies found that the culture of a parent firm shapes a MNCs approach to welfarism. Tayeb (1998) This study used a case study of an American MNC in Scotland, and examined the extent to which MNCs take a global or local approach to HRM. The study found that there is a mix of global and local influences, which are explained by cultural factors with non-cultural context. Ngo, et al. (1998) This study conducted a survey with American, British, Japanese and local firms in Hong Kong, and explored the effects of country origin on human resources and firm performance. The results supported the argument that MNCs are influenced by the national culture in their country of origin. Bae, et al. (1998) This research was based on the survey results of foreign and indigenous firms in Korea and Taiwan, and examined home and host country factors. The finding established the differences between the two groups of firms and attributes the differences to nationality, especially the culture of the country of origin. Wasti (1998) The study conducted a survey of American and Japanese MNCs in Turkey, and reviewed how American and Japanese practices are implemented in Turkey. The findings argued that if a cultural values approach is used, Japanese practices are better suited to Turkey. Liberman & Torbiorn (2000) The study explored variances and commonalities in HR practices based on a MNC in eight countries. Research found that variances are attributable to cultural factors, institutional pressures and other societal forces. Commonalities are explained by common organizational culture. Gamble (2003) This research was based on a case study of a British retail firm operating in China. The results indicated that institutional and cultural features of the host environment better explain the nature of practices than country of origin influences.

Issues

Integration-Responsiveness Issues

The field of international human resources is expanding as researchers focus on the complexities of managing people in different countries. Much of this research examines cross-cultural management, the selection and development of managers, and the issues that arise with career management, expatriation, and repatriation. However, there has been limited research conducted on how these managers should integrate their international experience into their organizational routine (Kamoche, 1996). Many firms are faced with deciding how to manage diverse interests, enhance competitiveness, maintain or increase global market share, manage cultural differences, and survive political and economic unrest. Managers must develop and implement practices that will keep these issues under control. The integration-differentiation approach is a possible solution. This approach examines how firms can balance the internal/headquarters demands for integration with responsiveness at the subsidiary/unit level and determines to what extent the organization can decentralize decision making without compromising central control. This dilemma is commonly referred to as "how to think globally and act locally."

This area of study has received a surge of interest as researchers attempt to understand how this concept can assist MNCs in effectively implementing international human-resource strategies. Integration of activities in complex organizations has always been a research focus, but the shift to examining the significance of differentiation is new. Researchers in international human-resource management realize how this area can assist in understanding the cultural, economic, political, and legal risks that MNCs face.

Conclusion

A multinational corporation (MNC) is a corporation with a presence in at least one other country than the one in which it is based. There are three stages that an organization tends to go through as it evolves into a multinational: export, foreign production, and presence. Leaders of an MNC have to face different obstacles from those encountered by their domestic counterparts.

Terms & Concepts

Direct Foreign Investment (DFI): When a parent company from one country invests in the creation of a subsidiary or affiliated facility in a different country.

European Union (EU): A partnership between various democratic European countries that supports free travel and trade between its member states and instituted a common currency called the euro.

Expatriates: Individuals who reside in a foreign country, sometimes for purposes of work.

General Agreement on Tariffs and Trade (GATT): Trade agreement created in 1947 that encouraged eased trade between member nations through reduced tariffs on goods and guidelines on resolving disputes.

Geocentric: Describes a corporation that implements business strategies in production, marketing, finance, and staffing that transcend national boundaries.

International Monetary Fund (IMF): International organization that observes and regulates exchange rates and balance of payments and offers financial and technical assistance to nations in need.

Licensing: A process by which a parent company grants another company the right to manufacture and distribute a product under the parent company's trade name in the target country.

Multinational Corporation (MNC): A corporation that is spread across numerous nations.

North American Free Trade Agreement (NAFTA): A 1994 trade agreement between Canada, the United States, and Mexico that purports to encourage free trade so as to benefit the respective economies of each nation.

Tariffs: The tax imposed on foreign goods upon arrival into the importing country.

Trade Bloc: A group of nations or other disparate governments that have committed to a tax, tariff, or trade agreement in order to ease the flow of goods between member nations.

Transnational Corporation: Another name for a MNC.

United Nations: The international organization of member countries concerned with ensuring international cooperation in matters dealing with law, security, economic development, social progress, and human rights.

World Bank: An organization comprising five global entities concerned with aiding countries in economic development and poverty elimination through the provision of finance and advice.

World Trade Organization (WTO): An agency responsible for overseeing and administering global trade agreements. Replaced the GATT in 1995.

Bibliography

Bae, J., Chen, S., & Lawler, J. (1998). Variations in HRM in Asian Countries: MNC home country and host country effects. International Journal of Human Resource Management, 9(4), 653-670. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=15740614&site=ehost-live

Edwards, T., & Kuruvilla, S. (2005). International HRM: National business systems, organizational politics and the international division of labour in MNCs. International Journal of Human Resource Management, 16(1), 1-21. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=15740614&site=ehost-live

Gamble, J. (2003). Transferring human resource practices from the United Kingdom to China: The limits and potential for convergence. International Journal of Human Resource Management, 14(3), 369-387. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=10097139&site=bsi-live

Geppert, M., & Do?rrenba?cher, C. (Eds.) (2011). Politics and power in the multinational corporation: The role of institutions, interests and identities. Cambridge, UK: Cambridge University Press. Retrieved November 20, 2013, from EBSCO Online Database eBook Collection. http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=366196&site=ehost-live

Gertson, M.. (1990). Intercultural competence and expatriates. International Journal of Human Resource Management, 1(1), 341-362. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19332335&site=ehost-live

Ghauri, P. N., Hadjikhani, A., & Elg, U. (2012). Business, society and politics: Multinationals in emerging markets. Bingley, UK: Emerald. Retrieved November 20, 2013, from EBSCO Online Database eBook Collection. http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=527207&site=ehost-live

Hodgetts, R., & Luthans, F. (1993, January). U.S. multinationals' expatriate compensation strategies. Compensation and Benefits Review, 25(1), 57. Retrieved May 14, 2007, from ABI/INFORM Global database. (Document ID: 320334).

Kamoche, K. (1996). The integration-differentiation puzzle: a resource-capability perspective in international human resource management. The International Journal of Human Resource Management, 7(1), 230-244. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5822039&site=ehost-live

Liberman, L., & Torbiorn, I. (2000). Variances in staff-relationed management practices at eight European country subsidiaries of a global firm. International Journal of Human Resource Management, 11(1), 37-59. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4219991&site=ehost-live

Nam, S. (1995). Culture, control and commitment in IJVs. International Journal of Human Resource Management, 6(3), 553-567. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5837753&site=ehost-live

Ngo, H., Turban, D., Lau, C., & Lui, S. (1998). Human resource practices and firm performance of MNCs: Influence of country of origin. International Journal of Human Resource Management, 9(4), 632-652. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4176329&site=ehost-live

Phatak, A., Bhagat, R., & Kashlak, R. (2005). International management. New York, NY: McGraw-Hill/Irwin.

Prakash, A., & Griffin, J. J. (2012). Corporate responsibility, multinational corporations, and nation states: An introduction. Business & Politics, 14(3), 1-10. Retrieved November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=90366024&site=ehost-live

Solomon, C. (1995). Learning to manage host-country nationals. Personnel Journal, 74(3), 60. Retrieved May 14, 2007, from ABI/INFORM Global database. (Document ID: 1886303).

Suggested Reading

Dedoussis, V. (1995). Simply a question of cultural barriers? The search for new perspectives in the transfer of Japanese management practices. Journal of Management Studies, 32(6), 731-745. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9512092741&site=ehost-live

Ferner, A., & Quintanilla, J. (2002). Between globalization and capitalist variety: Multinationals and the international diffusion of employment relations. Journal of Industrial Relations, 8(3), 243-250. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=789439&site=ehost-live

Jiun-Shiu, C., & Lovvorn, A. S. (2012). The impact of MNC's home country politics on host country nationals' organizational commitment. Journal of Marketing Development & Competitiveness, 6(3), 56-66. Retrieved November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=91925705&site=ehost-live

Martin, G., & Beaumont, P. (2001). Transforming multinational enterprises: Towards a process model of strategic human resource management change. International Journal of Human Resource Management, 12(8), 12341250. Retrieved May 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebsco-host.com/login.aspx?direct=true&db=bth&AN=5672610&site=ehost-live