An Introduction to International Business and Multinational Corporations
Introduction
Welcome to the first session of the International Socio-Economic Context Course. This Chapter titled An Introduction to International Business and Multinational Corporations will present the historical context of international business and establish the role of multinational corporations in the current business environment.
This is important because for a future/present business professional, it is key to understand the evolution of organizations to manage them in the best possible way, considering not only the economics but also the social consequences of the decisions made. Although the increasingly globalized world, frequently, basic concepts of what is an international business or the definition of a Multinational Corporations (MNC) are misunderstood.
The latter constitutes a problem because if you are trying to understand the context of operation of the enterprises, you must correctly identify the most important stakeholders and eventually, those are either an international business or a MNC despite the analysis level that you are intending to perform.
So, by the end of this class you will be able to distinguish both concepts and identify some of the biggest MNC in different sectors. This will help you to understand why they are so relevant when trying to configure the complex business environment and why even for a domestic Small and Medium Enterprise (SME) the consideration of those actors are relevant. For sure you are familiar with the names of some of those brands but you will know more about their first origin that reflects in their organizational culture. So, with no further delay, let’s start the explanation.
Content developement
What is International Business?
As established by Ajami & Goddard (2015), in its purest definition, international business is described as any business activity that crosses national boundaries. The entities involved in business can be private, governmental, or a mixture of the two. International business can be broken down into four types: foreign trade, trade in services, portfolio investments, and direct investments.
- In foreign trade visible physical goods or commodities move between countries as exports or imports. Exports consist of merchandise that leaves a country. Imports are those items brought across national borders into a country.
- Trade in services, such as insurance, banking, hotels, consulting, and travel and transportation. The international firm is paid for services it renders in another country.
- Portfolio investments are financial investments made in foreign countries. The investor purchases debt or equity in the expectation of nothing more than a financial return on the investment. Resources such as equipment, time, or personnel are not contributed to the overseas venture.
- Direct investments are differentiated by much greater levels of control over the project or enterprise by the investor. The level of control can vary from full control, when a firm owns a foreign subsidiary entirely, to partial control, as in arrangements such as joint ventures with other domestic or foreign firms or a foreign government.
History of International Business
International business is not new, having been practiced around the world for thousands of years, although its forms, methods, and importance are constantly evolving. In ancient times, the Phoenicians, Mesopotamians, and Greeks traded along routes established in the Mediterranean.
The Industrial Revolution further encouraged the growth of international business by providing methods of production for mass markets and more efficient methods of utilizing raw materials.
By the 1880s the Industrial Revolution was in full swing in Europe and the United States, and production grew to unprecedented levels, abetted by scientific inventions, the development of new sources of energy, efficiencies achieved in production, and new forms of transportation, such as domestic and international railroad systems. Growth continued in an upward spiral as mass production met and surpassed domestic demand, pushing manufacturers to seek enlarged, foreign markets for their products. It led ultimately to the emergence of the multinational corporation (MNC) as a new organizational entity in the international business world.
In more modern times, the creation of the internet as an electronic commerce platform and the ever-expanding capacity of telecommunications and technology have contributed to an increased expectation for product and service quality and availability throughout the world.
In more modern times, the creation of the internet as an electronic commerce platform and the ever-expanding capacity of telecommunications and technology have contributed to an increased expectation for product and service quality and availability throughout the world.
Definition of a Multinational Corporation
There is no formal definition of a multinational corporation, although various definitions have been proposed using different criteria.
Some believe that a multinational firm is one that is structured so that business is conducted or ownership is held across a number of countries or one that is organized into global product divisions.
Others look to specific ratios of foreign business activities or assets to total firm activities or assets. Under these criteria, a multinational firm is one in which a certain percentage of its earnings, assets, sales, or personnel come from or are deployed in foreign locations.
A third definition is based on the perspective of the corporation, that is, its behavior and its thinking. According to this definition, if the management of a corporation holds the perception and the attitude that the parameters of its sphere of operations and markets are multinational, then the firm is indeed a multinational corporation.
In his study of the topic, Howard V. Perlmutter looked at the attitude held by the decision-makers of an organization and differentiated between ethnocentric, polycentric, and geocentric organizational types.
Ethnocentric organizations are those that are focused in a home or domestic environment and therefore exclude MNCs.
Polycentric organizations have investments, operations, or markets in several countries, but do not integrate the management of these international functions.
Geocentric organizations, on the other hand, are integrated and have a world perspective regarding the breadth and reach of possible organizational operations.
A Look At Present-Day Multinationals
In order to understand the complexities of operations pursued by multinational firms, it is helpful to look at the nature of 10 biggest multinational business organizations.
Conclusion
In this session the historical context of international business and established the role of multinational corporations in the current business environment was presented.
As mentioned previously, this is important for a future/present business professional to manage them in the best possible way. The basic concepts of what is an international business and the definition of a Multinational Corporations (MNC) were presented considering different perspectives.
Now, you can successfully face the problem of misunderstanding the context of operation of the enterprises, by identifying the most important stakeholders which eventually are either an international business or a MNC despite the analysis or action that you are intending to perform.
So, now you are able to distinguish both concepts and identify some of the biggest MNC in different sectors. This will help you to configure the complex business environment and why even for a domestic SME those considerations are important.
Information sources
- Ajami R., & Goddard J. G. (2015). International Business: Theory and Practice. Routledge (1-9)
- International Hub (october 30th, 2014). Why International Business. [Video File]. Youtube. https://www.youtube.com/watch?v=lMdhfBQUhtI
- Tyagi, N. (2022). 10 World’s Largest Trillion Dollar Companies by 2022. Analytics Steps. https://www.analyticssteps.com/blogs/10-worlds-largest-trillion-dollar-companies-2022