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Definition of Multinational


Multinational Business Enterprises: A New Category of International Organizations (Part #2)


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There is a graduation from organizations undertaking international trade to international business enterprises. A summary of the methods by which a national manufacturing organization could operate internationally illustrates the problem of definition. A company can. according to Roy Blough :

  • solicit purchases by foreign buyers in one or more countries and ship to them in wholesale lots, leaving the further distribution of the goods to them;
  • market and distribute the goods to their final users in the foreign country. In which case it may make arrangements with local distributors or establish a distribution network of its own;
  • establish a factory in the country in which it is selling or plans to sell and produce for sale in third countries and also in the home country;
  • contact with foreign producers to purchase from them goods which the company distributes whether in the country of production, third countries, or the home country;
  • sell its patents, technical know-how, and/or trademarks to a company in a foreign country or license their use for a term of years in exchange for periodic royalty payments;
  • undertake to supply management, at a fee, for a foreign manufacturing enterprise which it does not own or in which it has only a minority interest;
  • combine any of the above methods, depending on the market with which it deals.

These operational differences are complicated by the forms which the relationship between the parent and the daughter companies can take under differing national legislations with different degrees of financial commitment on the part of the parent company. Examples are :

  • Branch office : a foreign local office of the parent company having no independent or corporate status.
  • Subsidiary: a foreign firm established under national law of the country, whose capital stock is 50 % or more controlled by the parent company.
  • Joint company : a foreign firm in which the parent company financial interest and foreign financial interest are equally divided.
  • Affiliate : a foreign firm in which the capital Interest of the participating parent company is less than 50 %.
  • Sub-subsidiary: a subsidiary or affiliate not established directly by the parent company (or sub-affiliate) but by another subsidiary or affiliate of the latter. This situation can be further complicated since the subsidiary can Itself be In the home country or in a foreign country.

These definitions are not universally accepted. In the remainder of this note, affiliate will be used as a general term to describe all daughter and associated companies. The definition of a multinational corporation Is made more difficult since there is no international corporate law. The parent and foreign daughter companies are established on equal footing in terms of their respective national legislation. From an international legal point of view a multinational corporation is merely an agglomeration of corporate entities loosely linked by a network of non-resident shareholdings, of which the majority happens to be in hands of the parent company. A multinational corporation is not a legal entity. This is also true of the other group of international organizations not established by intergovernmental agreement, namely non-profit non-governmental organizations.

Efforts have been made within the European Economic Community since 1960 to establish a legal basis for a European corporation. This is considered essential to permit an integration of economic strength to meet American competition. It has been suggested that the existence of European corporations would lead to the standardization of corporate legislation and become the instrument of effective long-term economic integration.

In the course of the lengthy discussions on a European corporation a number of criteria have been suggested. It has been proposed that only the larger corporations in the Common Market with a ' European outlook ' should be allowed to take on this new form. A counter proposal suggests that no barrier should be raised to corporations wishing to take on the new form. Another suggestion is that a minimum capital should be fixed [possibly $250.000 - 500,000). To avoid these somewhat arbitrary distinctions, a further proposal attempted to define a European corpora- tion as one with any of the following characteristics : branches in at least one country other than the parent country; financial interests in corporations in at least one country other than the parent country; financial control of at least one corporation in a country other than the parent country; quotation of shares of the corporation on stock exchanges of at least two countries.

Another set of criteria has been proposed by Jacques Maisonrouge, President of the IBM World Trade Corporation, namely: basic policies of the corporation must be applied to all its subsidiaries In order to create a world- wide image; the company must operate in a great number of countries at different stages of economic development; several of the subsidiaries must be complete industrial organizations (i.e. their activities must include research and development, manufacturing, sales and service); the subsidiaries must preferably be managed by nationals so that men of various nationalities can be trained for top jobs particularly at headquarters; stocks of the company should be quoted on the exchanges of the countries in which the company is active so that the capital is in effect multinational; the company must be a good citizen in every country in which it operates.

A more indirect approach has been made by Professor J Houssiaux of the Université de Nancy. He attempted to develop criteria to describe a national corporation and from this deduced criteria for a ' plurinational ' corporation. The criteria are : capital spread throughout the world through the intermediary of a variety of financial markets; ability to function in any region of the globe under the direction of a team of executives of a number of nationalities, within an organization conceived independently of the management techniques of a particular economy; activities oriented in terms of the world breakdown of the factors of production, whilst taking into account the long term evolution of this breakdown, as compared with the anticipated evolution of income and demand throughout the world.

Professor Houssiaux notes three conditions as essential for the establishment and development of such enterprises. These are : unity of management policy and organization as a guide to the major decisions governing the growth of the enterprise (including : consolidated balance sheet for the entire group; reinvestment of profits from individual subsidiaries based on needs of corporation as a whole; continual modifications and extensions to group structure; organization of transfers and collective services on a global basis within the group); global conception of development and trade relations; and an environment with institutions based on internationalism.

Attention so far has been concentrated on the better known types of profit corporation which are owned by private shareholders. There is however a large group of mixed government-private corporations, cooperatives, ' associations ', ' societies ', and other organizations which may not use terms in their titles which have any connection with profit-making operations, although this represents a principal aim.

The fundamental question which must be answered in order to establish criteria is which groups are to be considered as members of any such organization. Studies to date have generally assumed that an organization Is multinational because it operates in a number of countries, i.e. the subsidiaries are treated as a type of member. To be consistent with the other forms of organization listed in this Yearbook, the logical requirement is that the stockholders should be considered as members. These are the persons who vote according to the rules of the organization to elect the directors, etc.. in nearly the same fashion as do the members of other international organizations. Logically it is therefore the nationality of these members which qualifies the organization as an international one.


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