October 20th 2005
Differences of Global Companies and Multinational Enterprises
The profitability of international trade has already been established. Once a company decides to do business abroad, however, two paths become available. Should the company become global, or multinational? A compare and contrast -analysis of the two options will be informative for anyone interested in international business. How are the concepts similar, and more importantly, how do they differ?
Starting with the common ground, it can be safely stated that most companies, enterprises and corporations doing international business tend to be very large, regardless of their strategic orientation. They all face the same challenges that await businesses when entering any new market, while the ways they deal with these challenges are very different. And naturally, both global and multinational corporations do significant amounts of business outside their countries of origin.
The main differences between the two strategies are the amount of the company's operations that is run outside the company's home country, and the degree of adaptation to local conditions in target countries. Global companies mainly do everything in their home country, and export the products elsewhere. Conversely, multinationals have a significant amount of their production in locations abroad. Global products are marketed with a single strategy, one-size-fits-all. Multinational companies customize and localize the products according to national segments, often organizing their activity by using a central business strategy that is modified to fit each target country. One is a unipolar approach, the other multipolar.
What kind of impacts do these two differences entail? Running a global company means you save lots of resources not having to adapt plans and invest in production facilities abroad. With a highly concentrated, centralized production system economies of scale are easier to reach, allowing low pricing. However, since most companies of this size are located in highly industrialized countries where wage levels are high, moving concentrated production to poorer countries might be even more economic after the initial investment cost. Another major impact for using a global strategy is losing lots of potential sales due to various trade barriers inhibiting your ability to export economically. These sales are often grabbed by multinational enterprises, thanks to their investments in offices, factories, franchisees and branch plants abroad, because most trade barriers are aimed to hurt your exports and encourage local production. This also allows large-scale centralized production and distribution within free trade zones such as the EU. A multinational often also has a better image worldwide, due to providing employment in countries. The downside of trying to be multinational is that you must invest much more, and therefore need to plan very carefully to avoid business failures in foreign markets. If everything works out, the potential profits may be astronomical.
Company structure is related to the location of production sites and other facilities. When all your major facilities are grouped close by in your home country, they are easier to keep under full control. Global companies thus tend to be very hierarchical, with a clear distinction of who the boss is. For reasons of efficiency, multinationals tend to have more localized decision-making, and often employ a form of matrix management. The larger a company gets, the unwieldier a strict hierarchy will become.
Other differences generally continue in the same vein: global companies tend to have ethnocentric staffing policies, research and development confined to the home country, and a strong home-country identity. Multinational enterprises use more human resources in other countries and might not even have a legal nationality, even if the company image relates to a certain country and culture.
The decision on which strategy to pick depends on the resources you are willing to invest, your tolerance for risk, and your confidence in the company's ability to adapt. Perhaps the gentlest route to take would be to first make use of existing facilities and export; gradually invest in the most promising markets as your confidence rises; spread all over the world and transcend to the coveted status of a supranational company. Sound like a good corporate vision? Off to get started, then.
The essay is mainly based on p.22 of International Business: The Challenge of Global Competition, 6th edition, by D.A. Ball and W.H. McCulloch, Jr., published in 1996 by Irwin/McGraw-Hill.