Multinational Corporations Adaptability to Host Environments

All Multinational Corporations (MNCs) are not equally likely to cause friction and tension in their host economies. Some adapt with relative ease and become closely integrated with their host environment, both economically and socio-culturally; others remain isolated and insulated, often forming alien enclaves in the host society. There appears to be a causal relationship between the MNC’s organizational structure that is, its organizational design as well as its underlying objectives and strategies and its capacity for social adaptation to host country conditions. In terms of inducement to social conflict, MNCs fall into three categories: home dominated, host dominated, and internationally integrated.

Home or Parent Dominated MNCs

These enterprises are organized and managed in such a way that the foreign based subsidiaries and other affiliates, whatever their specific legal form, serve primarily in a complementary support role. Their function is to help the parent company achieve its business objectives in the headquarters country. The subsidiaries have an entirely dependent role. Their local interests and needs, including social adjustment, are subordinated to and, if necessary, sacrificed for the parent company’s home operations. Highly centralized, run by absentee decision makers, and serving purposes external to the host countries, the home dominated MNC is very likely to cause host country conflict. Its insensitivity toward host nation needs is compounded by its ethnocentric managerial behavior. This type of MNC has been particularly, but not exclusively, characteristic of extractive industries and notice entrants into multinational operations. Increasing self-assertion of host country governments has put home dominated MNCs under increasing pressure to reform or divest.

Federated or Host Dominated MNCs

In its pure form this model is an MNC whose headquarters is set up more like a holding company than a management center. The actual management authority, except for general policy guidelines, is delegated to individual subsidiaries. The company is highly decentralized; the subsidiaries are managerially autonomous or very nearly so. Each subsidiary is run by executives who are local nationals, who rely on local methods and decision-making processes, whose leadership style derives from the indigenous social norms, and whose personal standards and loyalties are identified with the host society. In brief, there is a tight integration of each affiliate with its host country. The federated MNCs are the least susceptible to social conflict – they seem to be a sociologist’s ideal. From an economic perspective they are far less perfect. The high degree of autonomy that each affiliate enjoys severely limits the MNC’s ability to utilize its capacities as effectively as a more closely coordinated structure.

Internationally Integrated MNCs

These firms are organized to pursue objectives and activities that are worldwide in scope and concept. Their primary interests are not identified with the headquarters country or with any other particular nation. They are apolitical and anational institutions. To be sure, they must have nationality for the purposes of meeting statutory requirements as legal entities to be licensed to do business, but this is nationality only in form; in substance they are transnational or perhaps even supranational. Their primary loyalty is to the company itself rather than to any nation. Their purposes, behavior, vales, and operational incentives all derive from their own multinational structure, not from home country or host county policies or patriotisms.

The substantive essence of such companies lies in international specialization and managerial integration, a process often called international rationalization. These MNCs specialize production according to the principle of comparative advantage: acquiring inputs from countries with lowest relative costs, that is, locating production facilities for each component in the country best endowed with the necessary resources, and distributing outputs in the markets where the rewards are greatest. Thus, they possess a competitive advantage, a productive superiority, over domestic or uninational firms in both developed or developing countries. This productive superiority derives from the wider range of strategic choices; they are always able to choose the least costly production alternative and to combine it with the most profitable marketing alternative.

Because of their greater productive efficiency and profitability, the globally integrated MNCs represent the fastest growing segment of international business. The growth is propelled in part by the expansion of these companies themselves and in an increasing part by the adoption of the globally integrated model by other companies. The process of conversion from other structural forms of international business to the globally integrated mode is only beginning. Much further growth is certain to take place in the next several years. Only a return to ultra protectionist trade barriers could thwart this trend. Consequently, the integrated MNC is the most likely to demand attention in any search for solutions to the problems of social responsibility of multinational firms.

Conflicts between the globally integrated MNCs and host nations arise from the fundamental fact that the inner logic of such transnational enterprises is violated if identification of corporate interest with the national interest of any particular host state is imposed. The violation is interference with the international optimalization process of the company, which tends to destroy its productive superiority, not to mention profitability.