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The Multinational Corporation At Crossroads

By H. H. Makhlouf, Ph.D.

Guyana Journal, December 2008

For more than half a century, multinational firms and globally oriented banks have roamed the world, looking for new opportunities to increase their revenues and profits. Companies like General Electric, General Motors, Coca Cola, Proctor and Gamble, and Colgate Palmolive have benefited from the removal of trade and investment barriers, and the movement away from protectionist trade policies. As they expanded their geographic reach, multinationals have gained the reputation of being resourceful, dynamic, innovative, and “can do” type of organizations. Some of them have grown to the extent that their annual revenues and assets now exceed the gross domestic product of many sovereign nations.

Those companies have been viewed both by their admirers who thought they could do no wrong, and their critics who sometimes described them as the rich countries’ beasts, as the most powerful players on the world economic scene. They managed to influence public policies to serve their business interests, stayed ahead of their weaker competitors, created demand for products where demand was non-existent, gained global consumer loyalty and confidence, and skillfully managed business and political risks in their chosen host countries, using corporate diplomacy as well as the power and influence of their parent country governments. Their brands and trademarks have gained broad recognition even in remote towns and small island nations, thousands of miles away from their home countries.

Free traders, who associate world prosperity with the free flow of trade and investment, have viewed multinational firms as global economic growth engines that can lift the world’s poor out of poverty, and improve everybody’s quality of life. By creating new ventures wherever gainful opportunities arose and by moving capital, technology, and other resources from where they happen to exist in abundance to where they are in short supply, multinationals have been given the descriptive name of “borderless corporations”. This label meant that they would view themselves as global corporate citizens that don’t differentiate between their home country markets and other markets in investment decisions, the location or re-location of plants, and the choice of strategic partners. To their parent countries, that encouraged them to proceed along this path, the long term benefits from those companies’ global activities exceed the costs despite the collateral damage of exporting some jobs, and transferring valuable managerial and technological know-how.

Although they encountered political risk in the 1960s, which resulted in their loss of some assets and business opportunities, particularly in newly independent nations, either due to economic nationalism or the experimentation with varying forms of socialism, multinational firms found themselves in the 1980s, 90s, and certainly in the 21st Century, being enticed by a business friendly political environment in the overwhelming majority of nations. Governments, which have become more interested in job creation and economic development than socialist or nationalistic ideologies, started to compete for foreign investment dollars by rolling out the red carpet to multinational firms. As a result, many companies nowadays receive invitations, with promises of protection against political risk, from governments that were once opposed to dealing with foreign-based companies that they couldn’t fully control so that their markets would not be left out of those same companies’ global plans. In his book, “The World is Flat”, Thomas Friedman of the New York Times described how this friendly global environment has allowed multinationals to continue to grow saying that those “companies have never had more freedom, and less friction, in the way of assigning research, low-end manufacturing, and high-end manufacturing anywhere in the world.”

Looking at the condition of some multinational enterprises like General Motors, Ford Motor Company, and global financial institutions like Citigroup in 2008, one can’t help but ask: What has happened to them? Why have their financial and market positions deteriorated to the extent that their ability to survive without government support or bailout is being questioned. These are the same companies that were once universally admired and respected. Have they really become the dinosaurs of the 21st Century?

As one examines the recent history of some of these and other ailing multinational firms and financial institutions, it is difficult not to remember the rise and fall of ancient empires, like the Roman Empire. Those empires rose when they had a sense of mission and purpose, possessed competitive advantage, and were motivated to prevail using whatever powers they managed to muster. They declined when they lost those qualities, while their rivals gained confidence and strength. What we see happening with a company like General Motors is not dissimilar to what happened back then, though on a much smaller scale. This company lost its predominant share of the market over the last two decades to Japanese and European rivals, and failed to adopt effective counter-strategies. It lost its competitive advantage, and the steps it took to stop the hemorrhaging were grossly inadequate.

Nevertheless, neither General Motors, Ford, or Chrysler has become so hopelessly helpless that they cannot rejuvenate themselves through restructuring, downsizing, acceleration of product innovations, and better alignment of corporate priorities with consumer expectations. They may also learn from their stronger competitors in Europe and Asia, and from the new multinationals in the emerging economies that the Economist magazine once described as “globalization’s offspring”. If those old multinationals are too big to be allowed to fail or go under, they are not too old to learn from past mistakes, and from the achievements of other businesses, regardless of their sizes and countries of origin. Their survival would ultimately depend on re-inventing themselves in order to regain their old glory, and retooling for a future in which competition and regulatory challenges would be more rather than less demanding.

Dr. H. H. Makhlouf is a professor and chairman of the Department of Management, Hospitality, and Graduate Studies at the University of the District of Columbia, Washington, D.C.

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