The idea of a multinational company headquartered in one country with operations and investments in two or more host countries has been practiced for thousands of years, beginning with the Phoenicians, Mesopotamians and Greeks. It was spurred on by the Industrial Revolution and the resultant increased flow and mobility of capital.
Defining Feature of a Multinational
Today, the core businesses of leading American multinationals, such as Walmart, Kimberly Clark and Google, are quite different than those of the Phoenicians and Mesopotamians. But all multinationals share one defining characteristic: the company establishes its central headquarters in its home country, but operates or has subsidiaries or investments in two or more additional countries. For example, Walmart, a multinational that earned more than $458 billion in the twelve months ending April 30, 2015, originated in the United States but has facilities on other continents including Europe and Asia. Companies large and small may operate multinationally. For instance, Illumina, a “mini-multinational” -- a company with revenues from $200 million to $1 billion -- operates in China and other countries.
Advantages of Operating Multinationally
Operating as a multinational grants businesses access to new markets and fresh opportunities to increase their revenue streams. Also, establishing facilities in markets with extremely high rates of revenue growth for a large number of product lines is an effective way to offset declining sales in other markets. In this way, operating internationally decreases a company’s reliance on its home market, which decreases cash flow risk.
In addition, by operating in multiple countries, companies might also gain access to local resources, such as steel or grain. These companies also may experience other benefits from operating locally, such as lower labor costs, access to the production facilities of suppliers and the more efficient distribution of products to local markets, which can lower product unit costs by a significant amount.
Disadvantages of Multinational Operations
Establishing facilities or subsidiaries in foreign countries is not without risk. For instance, multinationals must attempt to counter the cultural differences that can lead to problems in communication, negotiation and, ultimately, product standardization.
Also, a multinational company is vulnerable to currency rate fluctuations that can erode profits earned in other countries. In addition, regulatory changes, including import restrictions pertaining to much needed supplies, might negatively affect the operational and financial feasibility of operating in a host country.
By pursuing revenue growth through international investment, a company also exposes itself to the risk that it will be costly to modify its operations to adhere to host-country regulations. These costs can be magnified by increasing competition for local labor and supplies by other multinationals or local companies.