The true multi-nationalism involves more than the movements of investment capital, or export of goods. In involves a free flow of capital, technology, goods and services, information and managerial talent.
In addition to export and import of goods and services, the international business transactions may be conducted in any of the following ways.
a) Licensing agreement:
In this type of agreement, a company in another country (known as the host country) may enter into a binding agreement with a particular organization in its own country (known as the home country), by which the host country organization can produce and sell products under licensing granted by the home country organization for a fee or a royalty. In addition to the products, the other assets that can be included in the licensing agreements are expertise, patents, and copyrights and so on.
b) Management contracts:
Management contracts involve simply providing managerial talents, including technical expertise to the operating foreign companies.
c) Turn-key projects:
This means that an organization provides all services to the organization of the host country to start a project from the very beginning of the design stage to the operational level. This means designing, building, operating and training personnel to take over the project. This is done for mutually agreed upon fees.
d) Joint ventures:
These involve collaborations with local partners or the government of a foreign country in order to establish operations for producing a product or a service jointly. This means sharing of management and manufacturing capabilities and expertise with the foreign company. This also means sharing of risks as well as rewards.
Most often, the host country organizations hold the majority interest but one of the advantages of joint ventures in that they can provide a means of gaining access to countries where full equity is not permitted.
It also lowers the risk of introducing new products because most of the risk is borne by the host country organization and if the product is successful, then it can be marketed elsewhere.
e) Wholly-owned subsidiaries:
These are wholly-owned branches of a parent company operating in foreign countries. The parent company has the sole management authority to operate the subsidiary within the laws of the country where it is located.
In makes the total investment and reaps the profits. The disadvantage of course is the political changes which can result in changes in laws that can be detrimental to the subsidiaries.
A multi-national company can enter into any of the above agreements to gain entry into the host country. In general, a multinational corporation (MNC) is defined as an organization that “engages in production or service activities through its own affiliates in several countries, maintains control over the policies of those affiliates, and manages from global perspective.
A more specific definition of a multinational corporation is provided by Rue and Byars. According to them, a multinational corporation (MNC) is a business that:
i. Maintains a production, assembly, sales or service presence in two or more countries.
ii. Has a reasonable portion of its assets invested in other countries? A suggested figure is 20 percent.
iii. Derives a considerable portion of its sales and profits from its international activities. A figure of 35 per cent has been suggested.
iv. Considers opportunities throughout the world even though its activities may be limited to some countries.
v. Has a worldwide perspective and orientation in managerial decision making.
For a multinational company which has headquarters in the home country and branches or subsidiaries in other host countries, most major policy decisions are made at the headquarters, while the operations of the branches or subsidiaries are locally conducted in a fairly independent manner.