Multinational corporations (MNCs) are businesses or enterprises that carry out production or service delivery in more than one country. A great example is Coca Cola which has a vast global reach. It has production and distribution in various countries worldwide, making it a multinational corporation. Such organizations will maintain a central office in one country, from which all coordination and management occur. However, by operating in several different environments and markets, MNCs face various challenges. Economic, social, and political difficulties are associated with running organizations of such size and diversity. Thus, while studying MNCs, it is essential to understand the nature of these challenges and their strategies to address them. In this paper, the various types of challenges that MNCs face will be discussed in detail and the methods that such entities often employ to address them.
Expansion into foreign markets has several benefits. One such benefit is efficiency, as MNCs can easily reach target markets by focusing their production in regions and countries where the target demographic can easily be accessed. Furthermore, by expanding to different countries, they can access raw materials at cheaper costs and labour resources. Another benefit is development. MNCs, especially those operating in developing countries, will also generally pay better than domestic companies. This makes them attractive to the workforce and favoured by the local governments as their investment in the market will lead to regional development. As a result, they often gain access to favourable deals from the government that ease their operations. Another benefit to running a multinational corporation in lieu of exporting to a country is getting insider information to penetrate the market more efficiently. For a company with a foreign country market, setting up local offices will boost understanding of marketing tactics and consumer needs. This increases sales, and as a result, profits. One final reason that multinational companies expand to foreign markets is innovation. As a result of having diverse teams and points of view, these corporations can innovate further in their fields. In adapting to new markets, they can create new and trailblazing products or services. For example, in expanding to the East African market, Vodafone made unrivalled advancement in the mobile money industry through its Kenyan branch – Safaricom (Lai & Sachdev, 2015). Such examples of success demonstrate the rationale for expanding globally. However, despite the varied benefits, the move towards multinational operations has its disadvantages as well.
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Challenges
Economic challenges will generally accompany any shift to a new market and business environment. Market imperfections are a significant financial challenge that MNCs face. Because the company operates in a business environment in which the laws, business practices, and consumer behaviour are different, it becomes difficult for the upper management to adequately predict the business conditions that the corporation will operate in. As a result, gaps in strategic planning and marketing will often occur. In addition to negatively affecting operations, these types of economic challenges are advantageous to local competitors, as they will not be facing the same obstacles. Another factor to consider with regards to financial difficulties is the element of transportation. For firms whose production is not locally sourced, additional transport fees are added to their operational costs. Not only must the MNC account for the basic cost of transport, but they must also pay for tariffs associated with import and export. These elements reduce their profit margin, as they must remain within a competitive price range.
Political challenges also exist for MNCs. Political instability is one such concern. When operating in international markets, instability on the government level becomes a factor that can severely impact a significant portion of a company's revenue stream. Investment stagnates in an unstable region, as does spending. In situations where the government's authority is unstable, the economy suffers, and spending decreases. For businesses, this means lowered profits. Even in less demanding conditions, the element of political instability creates unpredictable business trends that hinder management's ability to adequately strategize either at the corporate or at the business level. The strong association between political instability and corruption further confounds the issue, as the presence of inadequate legal frameworks places foreign investors such as MNCs at regulatory risk.
Lastly, social challenges can affect MNCs by limiting their understanding of the consumer base or affecting their brand image. In one study by Ouyang, Liu, Chen, Li & Qin (2019), the authors discuss liabilities of origin for MNCs. Liabilities of origin refer to disadvantages that MNCs face as a direct result of their foreign origin. Ouyang et al. (2019) state that they are either caused by underdeveloped understandings of local infrastructure from the perspective of the MNC home country and negative stereotypes related to the home country's international image. The first challenge, an underdeveloped understanding of the local area, limits the corporation's ability to predict business trends accurately, consumer characteristics, and appropriate marketing techniques. The second challenge, one of image and stereotypes, creates a barrier between the MNC and their consumer base. The MNC will be strongly associated with polarized opinions based on sociocultural differences between the home country and the new market.
Strategies
Tax competition is one of the strategies that MNCs can use to mitigate their heightened operational costs compared to local businesses. Tax competition refers to the rivalry between countries or regions to have a large MNC establish their headquarters in an area. The establishment of a large MNC in a particular region creates employment, tax revenue and improves the area's economy. Governments will offer assistance, tax exemptions, and improvements to existing infrastructure to attract MNCs to specific locations. Thus, by pitting rival countries or regions against each other, MNCs can receive significant subsidies on their operational costs, which can mitigate their economic challenges.
A recent example is that of Amazon, which created a competition between various cities to establish its headquarters. The company began by publicly "shopping" for a new city to move its headquarters (Perkins 2019). With Arlington, Virginia's final choice, Amazon was able to make savings on not only taxes but also on infrastructure development, as the state agreed to facilitate their development (Collinson, 2020).
Market withdrawal is another tactic that MNCs often use to combat restrictions in new countries. MNCs with a large size can threaten withdrawal, or carry out a temporary withdrawal from the market, to obtain leverage from the government. This is common in the pharmaceutical industry. An example occurred in Brazil when major pharmaceutical companies threatened to leave the market, which would have limited the public's access to antiretrovirals to pressure the Brazilian government into placing restrictions on generic brands of medication (Cueto & Lopes, 2019). These MNCs successfully placed pressure on the foreign market to benefit their operations.
Lastly, partnership with local businesses is a successful strategy for mitigating local challenges. MNCs can maximize joint income by partnering with local businesses, or better yet, carrying out mergers and acquisitions. They can also lower the amount of competition in the local market by taking out a major player. Partnerships and mergers are the most recognized form of strategizing against MNC challenges in the local setting. It also creates localization of company policy. In the paper by Ouyang et al. (2019), by localizing branch policy by adapting it to local needs, the company can mitigate many social challenges faced with a lack of understanding of the local culture.
Partnerships for MNCs
Partnerships allow MNCs to take advantage of well-established infrastructures and understandings of the local business environment, with a relatively short time investment by acquiring a company that understands these market elements. Through partnerships, alliances, mergers, or other arrangements that link the MNC to an established local actor, the MNC becomes well placed to succeed and dominate the new market. There are various benefits to such alliances.
The first is innovation. One study by Piening et al. demonstrates that MNCs that carry out partnerships with local companies have better innovation across the board. Innovation improves product and service quality, which provides a competitive advantage. Thus, partnerships yield more profit. Another benefit is diversification. As a direct result of teamwork, corporations can better diversify their revenue streams and investment portfolios. Diversifying revenue streams improves returns and contributes positively to the firm's longevity (Oladimeji et al., 2019).
In conclusion, MNCs face various challenges when entering a new market. They can employ several strategies, such as tax competition and market withdrawal, to create favorable business environments by placing pressure on local government. However, partnerships represent indirect and successful means of gaining a foothold in foreign markets with little exposure to sociocultural challenges or government restrictions.
References
Cueto, M., & Lopes, G. (2019). AIDS, antiretrovirals, Brazil and the international politics of global health, 1996–2008. Social History of Medicine .
Oladimeji, M. S., & Udosen, I. (2019). The Effect of diversification strategy on organizational performance. Journal of Competitiveness , 11 (4), 120.
Ouyang, C., Liu, M., Chen, Y., Li, J., & Qin, W. (2019). Overcoming liabilities of origin: Human resource management localization of Chinese multinational corporations in developed markets. Human Resource Management. doi:10.1002/hrm.21984
Perkins, R. L. (2019). The Need for a New Political Playbook Which Mitigates the Public Harm Caused by Tax Incentives. Miss. CL Rev. , 38 , 1.
Piening, E. P., Salge, T. O., & Schäfer, S. (2016). Innovating across boundaries: A portfolio perspective on innovation partnerships of multinational corporations. Journal of World Business , 51 (3), 474-485.
