Chapter Five

MNCs
Multinational
Companies
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MNCs-Multinational corporations
Multinational corporation – FDI It has a
Significant operations and marketing activities
outside its home country
Examples: General Electric, Siemens, Mitsubishi
Important changes since 1960
Multinationals no longer think of their foreign
operations as mere outsourcing appendages

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 Conti…
Employ large foreign workforces
It reflects interdependence of world
economies, growth of international
competition, and globalization of world
markets

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 MNCs (MULTINATIONAL CORPORATIONS)

Cons
- Exploitation
- Erosion of a Nation's Sovereignty
Pros
- Power and Prestige
- Social Responsibility
- Market Performance
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 Characteristics of MNCs

Definition by Size
- Sales
- Profits
- Assets
- Number of employees
- Market value

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 Characteristics of MNCs

Definition by Structure
- Number of countries in which the firm
does business
- Citizenship of corporate owners and top
managers

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 Characteristics of MNCs

Definition by Performance
- Commitment of corporate resources to
foreign operations
- Amount of rewards from that
commitment

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 Characteristics of MNCs

Definition by Behavior
- Ethnocentricity
- Polycentricity
- Geocentricity

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Stakeholders of MNCs
The two major groups of stakeholders are
primary and secondary stakeholders.
Primary stakeholders have direct relationships,
are major determinant for a company’s
objectives achievement, can be engaged in
economic transactions with the company and
are more important to the company’s long term
survival than others;
They include shareholders, employees,
customers, suppliers, and local communities

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Sources of ethics for MNCs
-Scholars George Steiner and John Steiner (1980)
identified the six primary sources of ethics in the
American business arena:
Philosophical systems;
Codes of conduct;
Legal systems;
Religious system;
cultural practices and;
Genetic inheritance
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Code of ethics for MNCs
Ethics can vary across cultures, legal,
political and social differences; thus, an
ethical decision lies in “the point where the
accepted ethical standard no longer serves
for all nations, companies and all situations.
Therefore, the functional business ethics
standards and principles framework must
be developed for each nation and MNC
However, there are common ethical
guides that can serve to all MNCs
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 MULTINATIONAL COMPANIES COMMON CODE
OF ETHICS
The main business ethics principles that can guide the
multinational companies’ business behavior.

 CODE OF ETHICS- to Market place/Customers

i. Provide Quality, Healthy and Safety products
ii. Provide Adequate and truthful information
iii. Provide Equal opportunity and treatment
iv. Respect the customers’ dignity, values, privacy, and
interest
v. Practice Fair and Reasonable market price
vi. Adequate and accessible products’ supplies and
mixes
vii. Address the customer’s complaints and dispute
resolution
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CODE OF ETHICS- to Workplace/Employee

i. Provide Equal and equity compensation

ii. provide Equal opportunity and treatment
iii. Recognize and resolve the workers’ personal and
social problem
iv. Respect the workers’ values, norms, interest,
dignity and privacy
v. Access Adequate and truthful information
vi. Provide Freedom of work as to join, leave, and
association
vii. Create Conducive (healthy, safety, and dignity)
working environment
viii. Refrain from child employment and exploitation
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CODE OF ETHICS- to Local
Community
i. Respect the communities’ dignity, values,
norms, and interest
ii. Preserve and enhancing the local
environment
iii. Access Adequate and truthful information
iv. Build the capacity of local community
v. Re-invest and Charitable donation
vi. Provide work opportunities and fair workforce
diversity
vii. Address the communities complaints
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 CODE OF ETHICS- to Suppliers
i. Give Fair price and on time payment
ii. practice Utmost good faith, and
honesty
iii. Address the suppliers’ complaints,
dispute resolution
iv. provide Equal opportunity and
treatment
v. Respect the suppliers’ dignity, values,
privacy, and interest
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 Quality System
 Quality system is based on:
 Quality management system ISO 9001
 Environmental management system ISO 14001
 ISO 9001 – International Standard for quality management & it is:
 A family of standards and guidelines, that sets the requirements, for
the assurance of quality and management’s involvement in an
organization. To ensure products and services are consistent with
their intended purpose.
 Achieve customer satisfaction
 Continual improvement of performance and
competitiveness
 Continual improvement of processes, products and services
 Comply with regulatory requirements
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 Origin of ISO

 ISO the world wide federation developed to

harmonize national and international standards.

 Developed by American National Standards

Institute (ANSI) and American Society for Quality
(ASQ) in 1987 after 35 years

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 ISO 9001 and ISO 14001

ISO 9001 and ISO 14001 are among ISO's most well
known standards ever.

They are implemented by more than a million

organizations in some 175 countries.

ISO 14001 helps organizations to implement

environmental management

While ISO 9001 helps organizations to implement

quality management

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 ISO 9001 and ISO 14001

ISO 14001 is for environmental management.

This means what the organization does to:
o minimize harmful effects on the environment
caused by its activities,
o to conform to applicable regulatory requirements,
and to
o achieve continual improvement of its
environmental performance.

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 Quality Management Systems: ISO 9000
 Developed by the International Organization for Standardization,
Geneva, in 1987 - the best known symbol of quality in the world
-Initially a quality accreditation process, but evolved into a system for

quality management, ISO 9000:2000, reviewed regularly

 Replaced in Nov 2008 by ISO 9001: – no new requirements but

clarifies the requirements of ISO 9001 and improves consistency
with the environmental management system standard
IS14001:2004.
 Based on eight quality management principles:
1. Systems approach to management
2. Leadership
3. People involvement
4. Continuous improvement
5. Customer focus
6. Sound supplier relationships
7. Process approach
8. Decisions based on facts
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 Risks and Uncertainties to MNCs
Definition:
The level of exposure to uncertainties that the
MNCs must understand and effectively manage
as it executes its strategies to achieve its
business objectives and create value
(Deloach, 2000)

 It is a negative deviation from our expectation.

If the future is 100% certain, there is no risk

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 Quantifying Risk
Risk = Probability (of the event) X
Business impact (severity of the event)
-frequency X severity
Difference between risks and uncertainties:
risks can be calculated with probability,
uncertainties are genuinely unknown.
Uncertainty refers to a state of mind
characterized by doubt, based on a lock of
knowledge
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Risk Factors
The risks of doing business in a
(different) country are determined by a
number of political, economic, and legal
factors.
Therefore, generally, there are 4 types
of risks for MNCs: political risks,
economic risks, legal risks, and Natural
risks
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 Political risks
The likelihood that political forces will cause drastic
changes in a country’s business environment that
adversely affect the profit and other goals of a
particular business enterprise
Therefore, political risks tend to be greater in
countries experiencing social unrest and disorder,
or
In countries where the underlying nature of society
increases the likelihood of social unrest

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Economic Risks
The likelihood that economic mismanagement will
cause drastic changes in a country’s business
environment that adversely effect the profit and
other goals of a particular business enterprise
Economic risks arise from economic
mismanagement by the government of a country
Usually interrelated to political risks
A visible indicator to economic mismanagement
tends to be a country’s inflation rate, and/or
level of business and government debt.

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Legal Risks
The likelihood that a trading partner will
opportunistically break a contract or
expropriate property rights.

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Natural (Disaster) Risks
The likelihood that natural disaster will cause severe damage
to the company’s assets/ cause major business interruptions
2 types:
Nature
Man-made
Nature:
Avalanche/slide, blizzards/snow, droughts/extreme heat,
earthquake/tsunami, floods, fires (forest fires), hurricanes,
tornadoes etc.
Man-made:
Severe environmental pollution, severe building collapse,
explosions, etc.
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OTHER SOURCES OF RISKS

Physical environment
Social environment
Operational environment

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MNCs’ RESOURCES EXPOSED TO RISKS

Physical resource exposures

Human resource exposures
Financial resource exposures

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Risk Management

The process whereby decisions are

made to accept a known or assessed
risk and/or the implementation of
actions to reduce the consequences or
probability of occurrence.

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Risk management major components

4 major components:
Risk identification
Risk analysis
Risk reducing measures/Tools
Risk monitoring

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The Conditions to MNCs Economy

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I. States influence the global economy by
regulating economic transactions

The state remains a most significant force in shaping the

world economy. It has played, and continues to play, a
fundamental role in the economic development of all
countries. Every government, whatever its political
complexion, intervenes to varying degrees in the
operation of the market.

Four key roles of nation-states

A) as containers of distinctive institutions and practices
B) as regulators of economic activities and transactions
C) as competitors with other states
D) as collaborators with other states 33
II. Trade Interdependence
Who Trades with Whom?
Why countries trade so much with other countries? Let’s look at the
factors that, in practice, determine who trades with whom?

Size Matters: The Gravity Model

There is a strong empirical relationship between the size of a
country’s economy and the volume of both its imports and its
exports. The gravity model explains that the attraction between two
objects is proportional to the product of their masses and diminishes
with distance, the trade between any two countries is, other things
being equal, proportional to the GDPs and diminishes with distance.

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 III. Multi polar World
A multi-polar world is one in which customers, resources, employees,
and sources of capital, innovation and ideas become more
geographically dispersed. As such it forces a fundamental
reappraisal of assumptions about leadership, organizational
structures, geographic strategy, operating models, people and values.

A multi-polar world also adds new degrees of complexity to policy-

making, for essentially two reasons: First, the existence of more
countries with economic power means that there are more countries
looking for a say in international policy-making. Second, greater
economic interdependence implies that global problems can not be
resolved purely within the context of national policy – making.

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 Five key dimensions of the multi-polar world
Five interrelated dimensions that make up the multi-polar world:
winning talent, multi-directional capital flows, new consumer
markets, the battle for resources and the new map of innovation.

A) Winning talent
Talent is no longer the exclusive preserve of the Western world. It is a
global commodity, fought over by multiple competitors and economies
from both the developed and the emerging world. The barriers that
used to prevent the free flow of labor are disappearing and the
concept of a national labor force is becoming a thing of the past. The
pure size of emerging market workforce is amazing: both China and
India’s individual workforces are larger than those of Europe, the
United states and Japan combined.
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B) Multi-directional capital flows

In the past, capital flows were characterized by two clear patterns. First,
developed economies were the only major outward investors of foreign direct
investment (FDI) investing initially in each other’s economies and then, over
time, in emerging economies. On the other hand, developing economies
tended to be net exporters of portfolio capital – the purchase of stocks, bonds
and other securities-as investors there sought better and more secure returns
in the more sophisticated capital markets of industrialized economies.

Today, however, global capital markets are characterized by greater

interdependence where flows are becoming larger, more numerous and multi-
directional in nature.

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C) The Battle for Resources

Demand for energy is higher than ever before-in the decade to 2005, world energy
consumption increased by 23 percent. Whereas in the past, it would have been the
industrialized economies of the developed world that accounted for the majority of
this demand, emerging economies are actually responsible for 85 percent of this
increase. At the same time, it is emerging economies that are typically becoming
the suppliers of primary commodities to meet these global energy demands. For
energy supply to match global demand, new sources are being tapped and the
battle for resources is intensifying. Many of the world’s major energy reserves are
located in some of the world’s most unstable countries, making the issue
increasingly political. And the battle is no longer limited to just energy and power-
but also shifted to include water, minerals and land resources. According to the
world Economic Forum, a quarter of recent armed conflicts have involved some
struggle over natural resources

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 D) The new consumer markets of the emerging world

Consumer spending has traditionally been concentrated in the

developed countries of the west. Indeed, in 2005, the G6
economies accounted for close to half of global consumption,
despite being home to just one-tenth of the world’s population. In
contrast, emerging consumer markets have flattered to deceive.

However, as emerging markets become more developed, the

influence of the spending power of their populations is increasing,
bringing about a fundamental shift in the balance of global be
boosted by rising levels of employment.

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E) The New Map of Innovation
Emerging economies were viewed almost solely as sources of low-
cost and low value activity. However, this view is now shifting.
Emerging economies such as India and China are aggressively
pursing policies to move up the value chain, developing from
technological imitators to genuine innovators.

This new map of innovation is characterized by geographically-

diffused centers of R & D excellence, particularly in China and
India, but also in locations such as the Czech Republic and Brazil.
This is attracting the attention of developed-world multinationals,
these economies has often depleted the talent pool of rapidly
developing economies.

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