“The globalization of markets is at hand. With that, the multinational commercial world nears its end, and so does the multinational corporation…The multinational corporation operates in a number of countries, and adjusts its products and processes in each, at high relative cost. The global corporation operates with resolute constancy…it sells the same things in the same way everywhere” (Levitt, 1983). Levitt’s quote indicates that the role of the organisation is being pressured to change as a result of globalisation. The globalised market has the opportunity to measure efficiency, and the market will implore businesses to make changes to reduce costs to increase the profits it is able to make on its final products. At the same time, multiple companies are competing to accomplish this. This effect drives the logistical evolution of competition that globalisation allows as a result of the technological developments and partnerships that make these business interactions possible. This research will offer a critical analysis of Levitt’s view of global strategy demonstrating that it is true that businesses are being pressured to change and this favours globalisation in some cases, but this does not eliminate the role associated with the multinational corporation. It is possible for companies to be competitive at a range of levels and established multinational corporations are able to maintain their positioning in the market.
Analysis of Literature
The Relevance of Multinational Organisations
In spite of the increasingly globalised conditions that surround the business setting, it is reasonable to consider that the multinational organisation remains relevant to modern business. In particular, it is important because approximately 80% of global trade has been conducted by organisations that fall into this classification (Ruggie, 2017). As such, globalisation strategies that involve maximising reach to diverse consumers is a reasonable option for some organisations but focusing on achieving dominance in several related countries it also advantageous for other firms. Thus, Levitt’s insistence that the multinational commercial world is near its end is not correct since this is still considered to be a significant money maker, and it appears that there is benefit in this specialised approach in terms of competition. Therefore, it is likely that multinational organisations will continue to be present for the foreseeable future.
Furthermore, it is necessary to consider that multinational organisations are strong, and they continue to maintain this power (Yamin and Forsgren, 2006). They do not necessarily need to improve upon their territorial holdings for this to happen since there is opportunity for heightening business within existing areas. There are a range of complexities that are associated with building a multinational organisation, but if demand is able to meet expansion, the organisation is able to meet the needs of its customers by meeting expected demand and quality. As such, there are some advantages to operating as multinational organisations.
There are several advantages that are associated with the implementation of the multinational corporation in practice, with comparison to the global corporation approach. In particular, multinational corporations are able to gain access to cheaper labour, but in a manner that allows for greater oversight regarding the process of production, including the conditions that direct employees or contracted employees work under (Suwandi and Foster, 2016). However, since the organisation is large, it is also able to balance labour cost with these corporate social responsibility factors. In addition, the multinational corporation approach allows for a broader, yet manageable client base. This offers the organisations the chance to reach out to customers from several different countries, and the existence of regional offices promotes the trust that the communities have in these products. This enables the multinational organisations to tailor their products in a manner that is deemed to be desirable in other countries based on individual cultural preferences.
In a stark contrast, the globalised corporation operates in a more one-size-fits all manner, creating products for people who want them, and in a manner that could be mass produced. This effort results in a lesser need to spend time on personalising items, but personalisation has the potential to contribute to quality. As such, multinational organisations have the potential to offer products and services that are considered to be higher end and quality compared to the products and services produced by global corporations (Vasudevan, 2017).
Multinational organisations likewise experience the benefits that are associated with lower taxes for being located in nations that do not have high taxes or offer these organisations tax breaks to promote business (Davies et al., 2018). Since not all countries are able to lower tariffs, multinational organisations are able to form relationships with nations that already have lowered tariffs. A focus on partnerships with several nations rather than global nations could contribute to stronger business relationships, and this could favour multinational corporations in a more favourable manner when these nations pass policy related to trade.
The Disadvantages of Multinational Organisations
It is likewise necessary to define the disadvantages that are associated with the use of multinational organisations as a business approach. One of the concerns that is present in all large organisations is the potential for worker abuse to occur (Leszczyńska and Pruchnicki, 2015). While this is possible in multinational organisations, it is valuable to consider that this risk increases when operating as a global corporation. When organisations form in areas of the world in which there are insufficient workers protections and human rights protections in general, then there is the potential for worker abuse to occur. It is difficult for multinational organisations to manage this, and the complexity of addressing worker abuse increases as the size of the organisation and the partnerships that it forms expands.
An additional concern associated with multinational organisations is that they may serve a threat to local businesses (Wai-chung Yeung, 1998). In particular, this means that an organisation from a foreign country could enter a new market and outcompete the businesses that were present before its entry. This is an ethical concern because this type of interventions has the potential to change the cultural landscape of an area. In spite of this, multinational corporations have the potential to serve as a threat when they are producing products that are thought to be higher quality and/or more cost effective than the products that were traditionally available. Ultimately, multinational organisations are able to offer lower prices to their customers because they have more financial resources available to them. As such, they buy in bulk and this reduction in cost associated with the raw materials enables them to offer the final product at a lower cost.
A final disadvantage that is associated with multinational corporations is that there is a loss of jobs that occurs (Tippmann et al., 2018). This contributes to less jobs for people living in developed countries, and more jobs in developing nations. This is a problem that is heightened by the globalised corporation. In the example of China, businesses were able to discover adequately priced labour within the borders of the nation. Now, however, since China has globalised and it is utilising this approach in most of the business it conducts, China has partnered with nations in the Southeast sea to serve as bottom-line employment for the production of goods that China depends on to support the strength of its business practices.
The Problem of “High Relative Cost”
In Levitt’s argument, he reports that “The multinational corporation operates in a number of countries, and adjusts its products and processes in each, at high relative cost” (Levitt, 1983). As such, it is important to determine whether there truly is a high relative cost associated with the operations of multinational corporations. While multinational organisations do operate at a high relative cost compared to global corporations, it is necessary to consider that a high cost is only problematic when the profits that an organisation is able to bring in is sufficiently higher than the costs associated with production (Keller and Yeaple, 2003). As such, it would be advantageous to evaluate a company’s financials to determine if the high relative cost is problematic for them in actuality. In some cases, this could cause multinational organisations to shut their doors. In additional situations, however, this could just be the cost that is needed to employ a successful business model.
Furthermore, while Levitt has argued that the high relative cost of multinational organisations is problematic, it is important to consider the challenges that are associated with forming a global corporation. In particular, success as a multinational corporation does not transfer to success as a global corporation (Clark, 1993). Multinational corporations have several products or versions of products that are viewed as attractive by shoppers around the world because these products are customised to meet their cultural needs. Global corporations have taken a standardised approach and keep business simplistic by focusing its operations on producing one product that is meant to meet the needs of everyone (Levitt, 1983). As such, it is important for these organisations to determine how to manage its logistics and production so that it is able to lower its costs. The multinational corporation is able to charge differential fees to its partners throughout the world, and this means that it has the potential to make back what it has spent on high relative costs. Both global and multinational organisations make use of a large staff to communicate ideas effectively, and it does take more skill to accomplish this in multinational organisations because there is a need to form strong ties with people from diverse cultural backgrounds (Rieley, 2014). However, many believe that in spite of the additional work required, multinational organisations allow for a business strategy that will maximise profits (Plakhotnik et al., 2014). As such, not all multinational corporations strive to become global corporations since there are still advantages that are associated with the multinational model.
The Risks Associated with Global Corporations
One of the greatest disadvantages of global corporate strategy is the high level of risk that is associated with this practice. While the global corporation strategy aims to respond to consumer needs by keeping its products consistently available, it is important for an organisation to determine how it could successfully mitigate the risk associated with its practice (Krishnamurti, Shams and Velayutham, 2018). For example, global corporations are highly susceptible to political or economic shifts. Since a change like this has the potential to alter the profitability of business, such as when tariffs are dramatically increased, it is difficult for global corporations to make sudden adjustments to practice that will help mitigate the risk. On the other hand, multinational corporations tend to be more aware of the political, economic, and social situations that are present within the countries that it does business with. It would be more challenging for a global corporation to track and use this information in a meaningful way, and it would require a significant amount of time and financial resources in order for the global corporation to accomplish this in practice.
An additional concern that arises as a part of business practices is that multinational corporations play a key role in the changing global-geopolitical landscape. Political risk is defined as the risk that is incurred to a business as a result of legal actions. For example, during times of war, it is reasonable for countries to prevent their seas from being accessed by anyone, or certain groups. As such, this could have a negative impact on trade, since this could mean that the corporation will have to cease business with a nation for a period of time, or it will be required to invest additional funds to find another suitable travel route and to become involved in the logistical and legal processes that would be needed to enact this alteration (Christensen et al., 2014). Overall, the political risk could be assessed based on knowledge about the stability of a government and its relationship with other nations. However, in some cases, these behaviours are challenging to predict and could therefore have a negative influence on the business plan.
Global corporations likewise encounter legal, financial, and societal risks as a part of their practices. To assess this, global corporations must aim to gain an understanding of the nation’s legal system. If laws are properly enforced, there will be a reduced legal risk associated with conducting business in the nation (Arena and Ferris, 2018). For example, if businesses in partner nations are not upholding their contracts, it is important for the business to be certain that there is a legal venue that could be followed to resolve this concern, or this could result in a significant waste of company funds.
Financial risk is related to the operating risk that would be posed for a domestic business. It is important for the global corporation to make itself aware of the volatility of the nation’s macroeconomic performance and its ability to meet financial obligations (Davidson, Dey and Smith, 2011). Weaknesses in this area can pose a potential risk for the organisation. When these figures are stable, furthermore, this is also indicative that the political risk is likely to be low as well. Information about how well the economy is managed could help a global corporation ultimately determine how to estimate the financial or economic risk associated with business practice.
Finally, societal or cultural risk could be considered. This is related to operations in different sociocultural environments. As such, the global corporation will be interacting with highly diverse people on the basis of their ethnic, nationalistic, and religious values. In addition, it is important to comprehend how the nation might aim to cope with the changes that problems that it has experienced. Global corporations should consider these factors in addition to other lifestyle variables, such as quality of life, to create an improved image of what the nation is like and whether it would be advantageous for the organisation to conduct business based on these factors (Pan, Siegel and Wang, 2016).
Recommendations in Favour of Multinational Corporations
While Levitt criticises multinational corporations, it is important for business professionals to consider that there are many assets associated with this type of business. In particular, it is valuable to note that the main difference that exists between multinational corporations and global corporations is that members of multinational corporations aim to conduct business by creating products that meet the specialised needs of people from different cultures, and global corporations focus more exclusively on singular versions of their products. As such, multinational corporations do offer something valuable to the business world. These individuals have the potential that is needed to form stronger business relationships with its partner (Forsgren, 2016)s. People generally appreciate cultural consideration as a part of the business practice and when these considerations are utilised to create a product that meets the needs of consumers, this creates a demand for more of the same product as well as additional products that were tailored to meet the cultural needs of customers in the same way. This demonstrates that there is some potential benefit in working slowly and in a personalised manner. It is not likely that multinational corporations will be able to sell the same amount of products that are sold by global corporations, and it is not likely that their production levels will be highly competitive either (Kim, Hoskisson and Lee, 2014). However, the personalisation of products achieved by multinational organisations allows them to sell these products at a higher value. Aside from considering productivity and profitably as measures that reflect the success of an organisation, customer satisfaction and societal value are helpful concepts to consider. Multinational organisations are able to achieve customer satisfaction more readily a natural extension of their business practices. When customer satisfaction grows into cultural acceptance and societal change, this will create a significant demand for products in a manner that will support the success of the multinational organisation.
In conclusion, Levitt is correct in that the globalisation of markets will occur with increasing frequency. However, many organisations will continue to act as multinational corporations because they believe that this organisation type enables them to promote close relationships with organisations in international countries of their choosing. In addition, problems that Levitt identified with this model compared to global corporations, such as the issue of high relative cost, is not problematic when considering the data that would be needed to determine if the high relative cost was associated with a business risk. Ultimately, this has the potential to vary from organisation to organisation. The “absolute consistency” with global corporations operate could be valuable to the company, or it can be a disadvantage. Thus, Levitt is not intrinsically incorrect in his statement, but he appears to have favour for global corporations over multinational corporations, but there is presently a role for both types of these organisations in a globalised world.
Arena, M. and Ferris, S. (2018). A global analysis of corporate litigation risk and costs. International Review of Law and Economics, 56, pp.28-41.
Christensen, D., Dhaliwal, D., Boivie, S. and Graffin, S. (2014). Top management conservatism and corporate risk strategies: Evidence from managers’ personal political orientation and corporate tax avoidance. Strategic Management Journal, 36(12), pp.1918-1938.
Clark, G. (1993). Global Interdependence and Regional Development: Business Linkages and Corporate Governance in a World of Financial Risk. Transactions of the Institute of British Geographers, 18(3), p.309.
Davidson, R., Dey, A. and Smith, A. (2011). Executives’ ‘Off-the-Job’ Behavior, Corporate Culture, and Financial Reporting Risk. SSRN Electronic Journal.
Davies, R., Martin, J., Parenti, M. and Toubal, F. (2018). Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing. The Review of Economics and Statistics, 100(1), pp.120-134.
Forsgren, M. (2016). A note on the revisited Uppsala internationalization process model – the implications of business networks and entrepreneurship. Journal of International Business Studies, 47(9), pp.1135-1144.
Keller, W. and Yeaple, S. (2003). Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States. SSRN Electronic Journal.
Kim, H., Hoskisson, R. and Lee, S. (2014). Why strategic factor markets matter: “New” multinationals’ geographic diversification and firm profitability. Strategic Management Journal, 36(4), pp.518-536.
Krishnamurti, C., Shams, S. and Velayutham, E. (2018). Corporate social responsibility and corruption risk: A global perspective. Journal of Contemporary Accounting & Economics, 14(1), pp.1-21.
Leszczyńska, D. and Pruchnicki, E. (2015). The evolution of knowledge transfer and the location of a multinational corporation. Multinational Business Review, 23(2), pp.111-129.
Levitt, T. (1983). The globalization of markets. [online] Harvard Business Review. Available at: https://hbr.org/1983/05/the-globalization-of-markets [Accessed 23 Jan. 2019].
Pan, Y., Siegel, S. and Wang, T. (2016). Corporate Risk Culture. SSRN Electronic Journal.
Plakhotnik, M., Rocco, T., Collins, J. and Landorf, H. (2014). Connection, value, and growth: how employees with different national identities experience a geocentric organizational culture of a global corporation. Human Resource Development International, 18(1), pp.39-57.
Rieley, J. (2014). Overcoming the Barriers to Effective Collaboration. Global Business and Organizational Excellence, 33(3), pp.37-45.
Ruggie, J. (2017). Multinationals as global institution: Power, authority and relative autonomy. Regulation & Governance, 12(3), pp.317-333.
Suwandi, I. and Foster, J. (2016). Multinational Corporations and the Globalization of Monopoly Capital: From the 1960s to the Present. Monthly Review, 68(3), p.114.
Tippmann, E., Sharkey Scott, P., Reilly, M. and O’Brien, D. (2018). Subsidiary coopetition competence: Navigating subsidiary evolution in the multinational corporation. Journal of World Business, 53(4), pp.540-554.
Vasudevan, R. (2017). The Rise of the Global Corporation and the Polarization of the Managerial Class in the US. Review of Political Economy, 29(4), pp.539-565.
Wai-chung Yeung, H. (1998). The political economy of transnational corporations: a study of the regionalization of Singaporean firms. Political Geography, 17(4), pp.389-416.
Yamin, M. and Forsgren, M. (2006). Hymer’s analysis of the multinational organization: Power retention and the demise of the federative MNE. International Business Review, 15(2), pp.166-179.