Multinational Companies and their Performance

In 1963, the term “multinational corporation” became a household term after a cover story about
the institution in Business Week. Ever since, international business guided by MNCs has prospered
as a result of the need for poor countries to develop, the end of the Cold War, privatiza-
10 INTRODUCTION
tion of state-owned businesses and banks, and the growing economic power of the global triad
– Asia, the USA, and Europe (Baker 1997). There are approximately 60,000 multinational companies
in the world with 500,000 foreign affiliates. These multinational companies and their
foreign affiliates account for roughly 25 percent of global output, one third of it in host countries
(The Economic Report of the President to Congress 2004). In the twenty-first century, these
MNCs are expected to play an even greater role in international business, because they have the
know-how, money, and experience.
The World Book Encyclopedia defines a multinational corporation (MNC) as “a business organization
that produces a product, sells a product, and provides a service in two or more countries.”
The US Department of Commerce defines an American MNC as “the US parent and all
of its foreign affiliates.” A US parent is a person, resident in the USA, who owns or controls a
minimum of 10 percent voting equity in a foreign firm. “Person” is broadly defined to include
any individual, branch, partnership, associated group, association, estate, trust, corporation, other
organization, or any government entity. A foreign affiliate is a foreign business enterprise in
which a US person owns or controls a minimum of 10 percent voting equity. A majority-owned
foreign affiliate is a foreign affiliate in which the combined ownership of all US parents exceeds
50 percent.
Donald Lessard (1991), a professor of international finance at MIT, classifies all MNCs into
three groups: (1) international opportunists – companies that focus on their domestic markets
but engage in some international transactions; (2) multi-domestic competitors – companies committed
to a number of national markets with substantial value added in each country, but with
little cross-border integration of activities; and (3) global competitors – companies that focus on
a series of national and supranational markets, with substantial cross-border integration of activities.
From multinational company to global company
What Lessard called “a global competitor” has come to be known as a global company, a generic
term used to describe an organization that attempts to standardize and integrate operations worldwide
in all functional areas. Here are three possible definitions of a global company – an organization
that attempts to:
1 Have a worldwide presence in its market.
2 Integrate its operations worldwide.
3 Standardize operations in one or more of the company’s functional areas.
For example, if a company designs a product with a global market segment in mind and/or
depends on many countries for the production of a product, it qualifies as a global company. In
this type of company, the development of capabilities and the decisions to diffuse them globally
are essentially made in the company’s home office. Some people believe that a global company
must possess all these three characteristics. Critics of this definition say that there is no global
company by that definition
Evidence indicates that US MNCs earn more money as they boost their presence in foreign
markets. In 1974, for example, Business International reported that 90 percent of 140 Fortune
500 companies surveyed achieved higher profitability on foreign assets. This trend continued into
the 1990s, but the percentage of those companies with higher profitability on foreign assets has
declined in recent years (Ball et al. 2004). The US Department of Commerce found that the
return on assets for nonfinancial US MNCs has exceeded the return on assets for all US nonfinancial
companies from 1989 to 2003, but that the excess of the return on assets for US MNCs
over the return on assets for US domestic companies has declined since 1991. Apparently, the
cost and competition drivers to globalization have reduced the differences between overseas and
home-country profits, but all analysts predict that US MNCs will earn more money than US
domestic companies for years to come.
Foreign-based companies with a higher degree of international business have also experienced
superior performance in recent years. Foreign-owned companies in the world’s most highly developed
countries are generally more productive and pay their workers more than comparable locally
owned businesses, according to the Organization for Economic Cooperation and Development
(OECD). The Paris-based organization also says that the proportion of the manufacturing sector
under foreign ownership in European Union countries rose substantially during the 1990s, a sign
of increasing economic integration. The finding underlines the increasing importance in the
world economy of large companies with bases scattered across the globe. Gross output per
employee, a measure of productivity, in most OECD countries, tends to be greater in multinational
companies than in locally owned companies (Marsh 2002). Why do multinational companies
perform better than domestic companies? In the following section, we attempt to answer
this important question