MNCs: Exploiting Culture and Regulation; State Response Analysis

This essay explores how multinational companies (MNCs) exploit national and regional differences in culture and regulations, and how states respond to this. It critically analyzes location advantages of host countries for different types of inward investments and the effects of various regulations on MNCs. The essay evaluates whether MNCs maintain international uniformity in their organizational policies or pursue different approaches in different host countries. It also investigates whether MNCs should prioritize maximizing Foreign Direct Investments (FDI) or adopt alternative strategies in overseas businesses, considering factors such as resource availability, market conditions, and governmental regulations. The analysis includes discussions on employment practices, technological benefits, and the impact of governmental policies on MNC operations, ultimately aiming to determine the optimal strategies for MNCs in a globalized environment. Desklib provides a platform to access similar solved assignments and resources for students.

International businesses

Introduction
International businesses include the exchange of goods and services among individuals
and companies in multiple countries (Dongkun, 2011; Collings, 2014). Furthermore, it is also
associated with the trade of products, technologies, services, knowledge across national borders
or at the global level. In this context, the current essay is based on section question on how
multinational companies exploit national and regional differences in culture and regulations and
how the state's responses to this situation. For this purpose, location advantages of host countries
have been critically analyzed for different types of inward investments as well as effects on the
Multinational Corporations (MNCs) by various forms of regulations. Moreover, it has also been
evaluated that MNCs possess international uniformity in organizations or pursue different
organizational policies in different host countries. At the end, for the achievement of purpose, it
has been critically investigated that MNCs should seek to maximize Foreign Direct Investments
(FDI) or another kind of strategies in overseas businesses.
Location advantages of different host countries for different types of inward investments
MNCs plays a critical role in the international economy because it helps to generate
revenue for home and host countries (Wadhwa and Reddy, 2011). MNCs provides an extensive
range of employment outside the home and attracts skilled talent from outsiders. In this context,
Edwards, Marginson and Ferner (2013) asserted that MNCs are the emerging organizations that
build own-intra organizational fields which helps to lead effective employment practices in the
host countries cultural environments. Additionally, MNCs prepare the different human resource
policies for the operations across countries to fill the gaps of cultural differences which further
helps to deal with the shortcomings related to the workforce (Edwards, Jalette and Tregaskis,
2012). Therefore, it reflects that MNCs faces the issues to operate businesses in host countries
although it focuses on the implementation of own regulations and employment practices to deal
with the differences.
According to Edwards, Jalette and Tregaskis (2012, p.2468), host countries provide the
different types of FDI facilities including resources, efficiencies, market seeking etc. to offer
locational advantages to MNCs. Here, host countries provide benefits to investment companies
in the form of the market seeking factors such as market size, structure and market growth which
1

supports to penetrate the developments of host countries (Edwards, Jalette and Tregaskis, 2012).
Similarly, Ramasamy, Yeung hand Laforet (2012) examined that different resource investments
facilities are provided by host countries which extends the location advantage in term of cheap
raw material, a range of skilled workforce and labor, infrastructural facilities etc. Moreover,
Wadhwa and Reddy (2011) stated that the availability of technological excellence in host
countries develops the potential benefits for MNCs by participating in technological activities
through reverse technology flows. However, use the technical advantages of host countries is not
easy for MNCs because the higher cost is charged to use those services (Wadhwa and Reddy,
2011). On the contrary, Mhlanga, Blalock and Christy (2010) notified that MNCs get the
relatively cheap production factors through strong locational advantages of host countries.
Additionally, it is expected by the MNCs to enhance the profitability of host as well as home
host countries by using the specific locational benefits. Hence, it shows that MNCs get the
locational advantages from host countries and also focuses on the developments of host countries
by investments. Moreover, MNCs get the gains of technological aspects, market growth and
infrastructure on low cost which further supports to grow the economy of host countries.
MNCs or investors possess the ownership advantages which further motivates the outside
investors (Ramasamy, Yeung and Laforet, 2012). Additionally, MNCs get the advantages to
compete with competitors in the local market of host countries by using ownership benefits at
host countries. It also includes taking a right to use technical and management skills, copyrights,
patents etc. Moreover, Kang and Jiang (2012) argued that locational benefits of host countries
depend on the economic conditions such as developing or developed country, markets are
emerging or mature, competitive or monopolistic, big or small etc. Additionally, strong
economic conditions of host countries support to improve the financial positions of MNCs at
overseas and enough capital is invested for the best use of overseas resources for MNCs.
However, Wadhwa and Reddy (2011) stated that host countries provide the locational benefits to
outsiders in the terms to directly perform trade in the local market of host countries.. For
instances, MNCs get the advantages as lower risks, least transportation as well as production
cost, acceptable markets, lower tax rates etc. Thus, it indicates that MNCs get the locational
supports from the host countries in the form of resources and market intensives. But these all
advantages depend on the conditions of the host country.
2

Impact on MNCs by different forms of regulations
According to Kolstad and Wiig (2012), MNCs get affected by the rules of host countries
because of differences in governance. For instance, Chinese MNCs are predominantly state-
owned and regulated by the strict laws of government which affects the businesses and increases
the chances of higher risk as well as least profits in investments. Moreover, Gammeltoft, Pradhan
and Goldstein (2010) stated that foreign countries have their own rules and regulations regarding
the expenditures and FDI in host countries which helps to reduce mis happening and corruptions
in the country. On the contrary, locational advantages for MNCs from host countries affected by
the quality of country governance which frames the positive relationships between host and
home countries (Oh and Oetzel, 2011). Nonetheless, MNCs are restricted to the regulations of
host countries in the context of sales and export volume conditions (Doz and Prahalad, 2019).
Additionally, MNCs focuses on entering into joint ventures with local companies after getting
the permission of the government of host counties. Thus, it reflects that MNCs has to follow the
governmental regulations of host countries to continue the businesses. The multinationals get the
benefits of quality of government and accordingly remains restricted towards sales and further
exports.
MNCs focuses on the enjoyment of the ownership advantages of host countries but
affected by the interference of governmental policies which reduces the effectiveness of the
available sources (Gammeltoft, Pradhan and Goldstein, 2010). However, Mhlanga, Blalock and
Christy (2010) argued that governmental interferences in foreign investments reduce the chances
of disadvantages of entering into international markets; therefore, it minimizes the ratio of higher
risks and legal territories. Besides this, Ramasamy, Yeung and Laforet (2012) notified that
asymmetry information develops the disadvantages for MNCs because the market of
intermediate goods is highly imperfect with information asymmetry. Apart from this, MNCs get
affected by the labor rules which are formulated by different host countries in a different ratio
that harms the MNCs (Kang and Jiang, 2012). In this context, Collings (2014) identified that
workforce at various locations which are associated with MNCs demands for the employee
developments, empowerment and learning aspects to work in overseas regions. Moreover, as per
the foreign rules and laws, MNCs has to pay higher tax rates, costly labor and considerable
investments in infrastructural facilities. Therefore, it shows that governmental policies and
3

asymmetric information affects the advantages of MNCs in host countries which enhances the
chances of issues in expansion and development of countries
MNC’s pursue international uniformity in organizational policies in different host
countries
MNCs perform businesses in different outside countries and face issues related to
employment practices in host countries (Boxenbaum and Jonsson, 2017). In this context,
Collings (2014) asserted that international businesses focus on the recruitment of a skilled
workforce in host countries for the smooth running of the businesses but deal with the issues
related to recruitment policies. Additionally, they are likely to rely on the uniformity in
employment standards at the international level to keep effective relation with labors. However,
Romero, Dijkman, Grefen and van Weele (2015) argued that multinational companies pursue the
different organizational policies regarding employment in different host countries which depends
on the availability of human resources in a particular country. Apart from this, Ryan and
Gibbons (2011) mentioned that MNCs pursue the uniformity in standards and policies in the
least developed countries because it helps to maintain a balance of skills at all locations of the
company. Thus, it indicates that international uniformity is maintained by MNCs by following
same employment policies in different locations. Furthermore, it supports to keep adequate
employee-employer relationships with host countries.
According to Edwards, Marginson and Ferner (2013), business process standardization is
the activity which helps to maintain uniformity in the businesses. However, Doz and Prahalad
(2019) argued that changing global business trends are pulling MNCs extensively towards local
responsiveness instead of pushing the comprehensive integration of HR practices. Apart from
this, MNCs continue to pursue different organizational policies to overcome the effects of
cultural differences. Additionally, HR policies according to the diverse cultural environment help
to motivate the workforce to engage with particular MNCs. Nonetheless, lack of uniformity in
the organizational standards affects the image of the company at international level which further
reduces the attractiveness of overseas employees towards the company (Boxenbaum and
Jonsson, 2017). In this context, standardization in policies supports to improve the grade of
MNCs at international level. On the contrary, Rugman and Verbeke (2003) notified that rich
diversity in global human resource roles as well as influencing factors arise from complexity in
4

the international environment. It highlights that standardization in organizational practices helps
to maintain uniformity of MNCs in overseas and develops the chances of effective integration of
resources at different locations. However, it shows that the lack of uniformity in policies reflects
the image of MNCs in the international competitive environment.
Erdogmus, Bodur and Yilmaz (2010) asserted that the degree of uniformity is expected to
maintain in different locations in the same ways is difficult because the existence of the
differences in languages, diversity of ethnicities and religions. In this context, Almond (2011)
examined that MNCs are supposed to possess different organizational practices to grab the talent
pool from diversified territories. However, the management of ununified policies of MNCs are
not pursuable; as they need to develop a skilled strategic workforce to succeed in the
complicated global market place (Nigam and Su, 2010). On the contrary, Romero et al. (2015)
stated that host countries government impose restrictions on MNCs to operate the businesses
which create the challenges for the effective operational flow. Nonetheless, Gammeltoft, Pradhan
and Goldstein (2010) mentioned that reduction in restrictions is possible by standardization of
policies at the global level which automatically influences the business activities. Thus, it shows
that uniformity in organizational policies helps to maintain standardization of MNCs in different
countries. Moreover, companies focus on grabbing pool of talent from the diversified culture
which reflects a high degree of uniformity.
Tilcsik (2010) stated that adaptation in organization policies as per the cultural
environment and nature of employee’s engagement supports to reduce the gap between adopted
policies and actual organizational behavior. However, Kolstad and Wiig (2012) asserted that
involvement of a wide variety of policies at MNCs in overseas areas demands for the conflict
management because differentiations in practices increases the chances of conflicts. Apart from
this, MNCs frame the organizational policies as per the external environment of countries which
are coherent for the internal influences (Boxenbaum and Jonsson, 2017). Besides this, Tilcsik
(2010) mentioned that standardization in organizational policies facilitates to escalations and
increases the chances of sustainable survival of organizations. In this manner, it reflects that
standardizations and adaptations are beneficial aspects for the MNCs to exist in a competitive
environment. Moreover, lack of uniformity in organizational policies of MNCs determines the
level of conflicts which reduces by conflict management in overseas.
5

Uniformity in environmental policies and practices has a strong influence on international
image and legitimacy of MNCs (Almond, 2011). In this context, Aguilera-Caracuel, Aragón-
Correa, Hurtado-Torres and Rugman (2012) asserted that environmental policies included in the
organizational regulations which help to motivate the workforce the stay same corporations..
However, Oh and Oetzel (2011) argued that MNCs has to keep the differences in the
organizational systems due to differentiation in governmental regulations of different host
countries. Besides this, as per the legal rules, multinational organizations set the benchmarks to
track the resources for present and future (Cole, Branson and Breesch, 2012). Uniformity is
required to keep the cooperation between host countries and MNCs because differentiations
increases the chances of the inconsistency of business operations. Therefore, it indicates that
MNCs possesses standardized organizational policies to reduce the pressure of industries.
Moreover, distinction in governmental policies and regulations demands the implementation of
different organizational policies in host countries.
Maximization of FDI for states
FDI plays a vital role in the development of MNCs because it provides economic
developments to companies as well as multinational corporations (Saqib, Masnoon and Rafique,
2013). MNCs occupy a central position within the process of globalization as evidenced by
global FDI. In this context, Žilinskė (2010) asserted that FDI has a positive impact on the
development of countries from technology-intensive industries than in labor-intensive industries.
Most of the states prefer the MNCs to enter into the foreign market and develops the countries as
well as companies by investing in a particular ratio (News and Media ltd., 2018). In this regard,
Shaha and Shinde (2013) asserted that states pursue the maximization of FDI because it offers a
wide range of employment opportunities for host countries. For example, the UPA government
announced a policy for inviting multinational retailers to invest in the Indian market and take
over the retail consumer markets (News and Media ltd., 2018). However, Zaman et al. (2011)
asserted in favor of FDI in retail because it offers the facilities to bring cash flows in the MNCs,
reduces the chances of the deficit of the companies and increases earning from FDI. However,
Reiter and Steensma (2010) asserted that FDI has extensive support in the enhancement of export
and import within the countries as well as maximize the foreign trade volumes of the states. For
instance, Romania is taking the inclusion of FDI in the import and export as 70% of the
6

international trade which helps to grow the ratio of export and import to and from Romania
(Zaman et al., 2011). Therefore, it shows that FDI has major positive aspects in the overall
development of the states by investing in technology, resources, labor and employment
opportunities etc.
Žilinskė (2010) mentioned that higher exports and the lower ratio of imports through FDI
creates the issues related to the balance of payments which further affects the foreign trading
transactions. Besides this, FDI in India was restricted in the retail sector but in 2006 the
government of India formulated a policy to allow FDI by 51% by the single brand retail (Legal
service India.com, 2018). On the contrary, Shaha and Shinde (2013) argued that FDI has taken a
considerable market share in the retail sector and dominated the home countries organizations
which affect the economic developments. Further, FDI determines economic growth because it
brings the technological advancements in the states which further improve the skill performance
of the people and remains more engaged with multinationals (Reiter and Steensma, 2010). Thus,
it reflects that the involvement of FDI in states is beneficial for both host and home countries
because it increases the employment opportunities as well as enhances economic development.
However, more emphasis on the FDI facilitates the demolition of home companies which further
increases the coverage area of MNCs in overseas market.
According to Shaha and Shinde (2013), many developing countries are focusing on the
inclusion of FDI instead of pursuing other strategies because developing countries get the
benefits of financial support and technological advancements in the home countries. Apart from
this, UNCTAD has shown that FDI inflows grew year by year to $1.45tn in 2013 and further
expects to increase to $1.6tn in 2014, $1.75tn in 2015 and gradually $1.85tn in the year of 2016
(News and Media ltd., 2018). Further, the ratio of FDI has changed in developing and developed
countries from 2011 to 2013 (refer figure 1). Hence, it reflects that the inclusion of FDI in states
supports to grow the economic conditions and creates a competitive position in the world. Apart
from this, Zaman et al. (2011) argued that FDI up to 100% for cash and carry wholesale trading
and export trading allowed under the automatic route which helps to enhance the scenario of
retail organizations. On the contrary, Shaha and Shinde (2013) argued that profit distribution and
investment ratios are not fixed in FDI in retail which demotivates the host countries to perform
trade with MNCs through FDI. In this regard, Žilinskė (2010) notified that higher inclusion of
7

FDI maximizes the chances of substantial losses to retailers in a case on employment and profits.
Nonetheless, Reiter and Steensma (2010) examined that FDI provides better options and
facilities to consumers with innovations in products and services. Therefore, it indicates that the
allowance of FDI is supportive for the development of the countries because it increases the ratio
of profitability, reduces the issues of cash availability. Further, it is not appropriate for small
retailers because it reduces their profitability ratio.
Figure 1: The ratio of FDI in developing, developed countries
(Source: News and Media ltd., 2018)
Conclusion
On the basis of the essay, it has been concluded that different host countries provide the
location advantages to inward investors in the form of ownership, material availability, low-cost
labor etc. However, to some extent host countries charge higher cost on the availability of skilled
labor to MNCs to get the benefits of the economic developments of the states. Furthermore,
MNCs get affected by the host countries government regulations in different aspects such as
employment practices, investment in local companies etc. Furthermore, it has been concluded
that MNCs pursue international uniformity throughout the world in employment practices in a
8

different location to keep effective employee-employer relationships with host countries.
However, the lack of uniformity in standards and practices affect the image of the MNCs in the
international competitive market. Apart from this, it has been found that states should possess the
FDI to improve the employment opportunities which further contribute to economic
developments of host and home countries.
9

References
Aguilera-Caracuel, J., Aragón-Correa, J.A., Hurtado-Torres, N.E. and Rugman, A.M., 2012. The
effects of institutional distance and headquarters’ financial performance on the generation of
environmental standards in multinational companies. Journal of Business Ethics, 105(4), pp.461-
474.
Almond, P., 2011. Re‐visiting ‘country of origin’effects on HRM in multinational
corporations. Human Resource Management Journal, 21(3), pp.258-271.
Boxenbaum, E. and Jonsson, S., 2017. Isomorphism, diffusion and decoupling: Concept
evolution and theoretical challenges. The Sage handbook of organizational institutionalism, 2,
pp.79-104.
Cole, V., Branson, J. and Breesch, D., 2012. The uniformity-flexibility dilemma when
comparing financial statements: Views of auditors, analysts and other users. International
Journal of Accounting & Information Management, 20(2), pp.114-141.
Collings, D.G., 2014. Integrating global mobility and global talent management: Exploring the
challenges and strategic opportunities. Journal of World Business, 49(2), pp.253-261.
Dongkun, L., 2011. Relationship Between Productivity Service and Economic Growth. Trade
Unions' Tribune (Journal of Shandong Institute of Trade Unions' Administration Cadres), 5.
Doz, Y. and Prahalad, C.K., 2019. How MNCs cope with host government interventions.
(Online). Available at: < https://hbr.org/1980/03/how-mncs-cope-with-host-government-
intervention>. [Accessed on 1 April 2019]
Edwards, T., Jalette, P. and Tregaskis, O., 2012. To what extent is there a regional logic in the
management of labour in multinational companies? Evidence from Europe and North
America. The International Journal of Human Resource Management, 23(12), pp.2468-2490.
Edwards, T., Marginson, P. and Ferner, A., 2013. Multinational Companies in Cross-National
Context: Integration, Differentiation, and the Interactions between MNCS and Nation States:
Introduction to a Special Issue of the ILRReview. ILR Review, 66(3), pp.547-587..
10

Erdogmus, I.E., Bodur, M. and Yilmaz, C., 2010. International strategies of emerging market
firms: Standardization in brand management revisited. European Journal of Marketing, 44(9-
10), pp.1410-1436.
Gammeltoft, P., Pradhan, J.P. and Goldstein, A., 2010. Emerging multinationals: home and host
country determinants and outcomes. International Journal of Emerging Markets, 5(3/4), pp.254-
265.
Kang, Y. and Jiang, F., 2012. FDI location choice of Chinese multinationals in East and
Southeast Asia: Traditional economic factors and institutional perspective. Journal of world
business, 47(1), pp.45-53.
Kolstad, I. and Wiig, A., 2012. What determines Chinese outward FDI?. Journal of World
Business, 47(1), pp.26-34.
Legal service India.com, 2018. FDI in retail sector. (Online). Available at:
<http://www.legalservicesindia.com/article/1473/FDI-in-Retail-Sector.html>. [Accessed on 2
April 2019]
Mhlanga, N., Blalock, G. and Christy, R., 2010. Understanding foreign direct investment in the
southern African development community: an analysis based on project‐level data. Agricultural
Economics, 41(3‐4), pp.337-347.
News and Media ltd, 2018. Foreign direct investment: which countries get the most?. (Online).
Available at: < https://www.theguardian.com/news/datablog/2014/jun/24/foreign-direct-
investment-which-countries-get-the-mostl>. [Accessed on 2 April 2019]
Nigam, R. and Su, Z., 2010. Climbing up the performance ladder: A conceptual framework for
emerging country multinationals. International Journal of Business and Management, 5(4), p.13.
Oh, C.H. and Oetzel, J., 2011. Multinationals' response to major disasters: how does subsidiary
investment vary in response to the type of disaster and the quality of country
governance?. Strategic Management Journal, 32(6), pp.658-681.
Ramasamy, B., Yeung, M. and Laforet, S., 2012. China's outward foreign direct investment:
Location choice and firm ownership. Journal of world business, 47(1), pp.17-25.
11