Multinational companies

Introduction

Multinational is made out of two words Multi and national . So Multinationals means
a company which operates in more than one country or which has access to International
markets . Such companies has branches , Factories , Workshops , headquarters in
different countries which are operated or are under control of the headquarters in the
home country. Multinational corporations are called by different names such as
TRANSNATIONAL CORPORATION , GLOBAL ENTERPRISE OR
INTERNATIONAL ENTERPRISE . Examples of MNCs are : PEPSI , HYUNDAI ,
NIKE , REEBOK , LG , SAMSUNG and many more.

Meaning of Multinational Companies (MNCs):

A multinational company is one which is incorporated in one country (called the home
country); but whose operations extend beyond the home country and which carries on
business in other countries (called the host countries) in addition to the home country.It
must be emphasized that the headquarters of a multinational company are located in the
home country.

Neil H. Jacoby defines a multinational company as follows:

A multinational corporation owns and manages business in two or more countries.

Features of Multinational Corporations (MNCs):

Following are the salient features of MNCs:

(i) Huge Assets and Turnover:

Because of operations on a global basis, MNCs have huge physical and financial assets.
This also results in huge turnover (sales) of MNCs. In fact, in terms of assets and
turnover, many MNCs are bigger than national economies of several countries.

(ii) International Operations Through a Network of Branches:

MNCs have production and marketing operations in several countries; operating through
a network of branches, subsidiaries and affiliates in host countries.

(iii) Unity of Control:

MNCs are characterized by unity of control. MNCs control business activities of their
branches in foreign countries through head office located in the home country.
Managements of branches operate within the policy framework of the parent corporation.

(iv) Mighty Economic Power:

MNCs are powerful economic entities. They keep on adding to their economic power
through constant mergers and acquisitions of companies, in host countries.

(v) Advanced and Sophisticated Technology:

Generally, a MNC has at its command advanced and sophisticated technology. It employs
capital intensive technology in manufacturing and marketing.

(vi) Professional Management:

A MNC employs professionally trained managers to handle huge funds, advanced

technology and international business operations.

(vii)Aggressive Advertising and Marketing:

MNCs spend huge sums of money on advertising and marketing to secure international
business. This is, perhaps, the biggest strategy of success of MNCs. Because of this
strategy, they are able to sell whatever products/services, they produce/generate.

(viii) Better Quality of Products:

A MNC has to compete on the world level. It, therefore, has to pay special attention to the
quality of its products.

Advantages of MNCs from the Viewpoint of Host Country:

We propose to examine the advantages and limitations of MNCs from the viewpoint of
the host country. In fact, advantages of MNCs make for the case in favour of MNCs;
while limitations of MNCs become the case against MNCs.

(i) Employment Generation:

MNCs create large scale employment opportunities in host countries. This is a big
advantage of MNCs for countries; where there is a lot of unemployment.

(ii) Automatic Inflow of Foreign Capital:

MNCs bring in much needed capital for the rapid development of developing countries.
In fact, with the entry of MNCs, inflow of foreign capital is automatic. As a result of the
entry of MNCs, India e.g. has attracted foreign investment with several million dollars.

(iii) Proper Use of Idle Resources:

Because of their advanced technical knowledge, MNCs are in a position to properly

utilise idle physical and human resources of the host country. This results in an increase
in the National Income of the host country.

(iv) Improvement in Balance of Payment Position:

MNCs help the host countries to increase their exports. As such, they help the host
country to improve upon its Balance of Payment position.

(vi) Technical Development:

MNCs carry the advantages of technical development 10 host countries. In fact, MNCs
are a vehicle for transference of technical development from one country to another.
Because of MNCs poor host countries also begin to develop technically.

(vii) Managerial Development:

MNCs employ latest management techniques. People employed by MNCs do a lot of

research in management. In a way, they help to professionalize management along latest
lines of management theory and practice. This leads to managerial development in host
countries.
(viii) End of Local Monopolies:

The entry of MNCs leads to competition in the host countries. Local monopolies of host
countries either start improving their products or reduce their prices. Thus MNCs put an
end to exploitative practices of local monopolists. As a matter of fact, MNCs compel
domestic companies to improve their efficiency and quality.

In India, many Indian companies acquired ISO-9000 quality certificates, due to fear of
competition posed by MNCs.

(ix) Improvement in Standard of Living:

By providing super quality products and services, MNCs help to improve the standard of
living of people of host countries.

(x) Promotion of international brotherhood and culture:

MNCs integrate economies of various nations with the world economy. Through their
international dealings, MNCs promote international brotherhood and culture; and pave
way for world peace and prosperity.

Limitations of MNCs from the Viewpoint of Host Country:

(i) Danger for Domestic Industries:

MNCs, because of their vast economic power, pose a danger to domestic industries;
which are still in the process of development. Domestic industries cannot face challenges
posed by MNCs. Many domestic industries have to wind up, as a result of threat from
MNCs. Thus MNCs give a setback to the economic growth of host countries.

(ii) Repatriation of Profits:

(Repatriation of profits means sending profits to their country).

MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign
exchange reserves of the host country; which means that a large amount of foreign
exchange goes out of the host country.
(iii) No Benefit to Poor People:

MNCs produce only those things, which are used by the rich. Therefore, poor people of
host countries do not get, generally, any benefit, out of MNCs.

(iv) Danger to Independence:

Initially MNCs help the Government of the host country, in a number of ways; and then
gradually start interfering in the political affairs of the host country. There is, then, an
implicit danger to the independence of the host country, in the long-run.

(v) Disregard of the National Interests of the Host Country:

MNCs invest in most profitable sectors; and disregard the national goals and priorities of
the host country. They do not care for the development of backward regions; and never
care to solve chronic problems of the host country like unemployment and poverty.

(vi) Misuse of Mighty Status:

MNCs are powerful economic entities. They can afford to bear losses for a long while, in
the hope of earning huge profits-once they have ended local competition and achieved
monopoly. This may be the dirties strategy of MNCs to wipe off local competitors from
the host country.

(vii) Careless Exploitation of Natural Resources:

MNCs tend to use the natural resources of the host country carelessly. They cause rapid
depletion of some of the non-renewable natural resources of the host country. In this way,
MNCs cause a permanent damage to the economic development of the host country.

(viii) Selfish Promotion of Alien Culture:

MNCs tend to promote alien culture in host country to sell their products. They make
people forget about their own cultural heritage. In India, e.g. MNCs have created a taste
for synthetic food, soft drinks etc. This promotion of foreign culture by MNCs is
injurious to the health of people also.
(ix) Exploitation of People, in a Systematic Manner:

MNCs join hands with big business houses of host country and emerge as powerful
monopolies. This leads to concentration of economic power only in a few hands.
Gradually these monopolies make it their birth right to exploit poor people and enrich
themselves at the cost of the poor working class.

Advantages from the Viewpoint of the Home Country:

Some of the advantages of the MNCs from the viewpoint of the home country are:

(i) MNCs usually get raw-materials and labour supplies from host countries at lower
prices; specially when host countries are backward or developing economies.

(ii) MNCs can widen their market for goods by selling in host countries; and increase
their profits. They usually have good earnings by way of dividends earned from
operations in host countries.

(iii) Through operating in many countries and providing quality services, MNCs add to
their international goodwill on which they can capitalize, in the long-run.

Limitations from the Viewpoint of the Home Country:

Some of the limitations of MNCs from the viewpoint of home country may be:

(i) There may be loss of employment in the home country, due to spreading
manufacturing and marketing operations in other countries.

(ii) MNCs face severe problems of managing cultural diversity. This might distract
managements attention from main business issues, causing loss to the home country.

(iii) MNCs may face severe competition from bigger MNCs in international markets.
Their attention and finances might be more devoted to wasteful counter and competitive
advertising; resulting in higher marketing costs and lesser profits for the home country.

Factors affecting multinational companies

Political Factors

Political factors concern government policies, laws and administrative orientations of

different countries and regional economic blocks. The political factors form the basis for
regulating international trade with respect to tariffs, quotas and technical standards. For
example, the European Union has regulations that guarantee preferential trade treatment
for member countries. Political stability is also an important aspect of the international
business environment. Frequent political unrest and military coups could force a
multinational cooperation to suspend or close operations.

Economic Factors

Rates of economic growth influence the levels of demand for your goods or services in
international markets. However, economic growth rates may be high in some countries
and low in others. For example, the 2010-2012 Eurozone debt crisis slowed down
economic growth in many European countries at a time when countries in other regions
were experiencing an economic boom. Consider such disparities of economic growth in
the operational and planning activities of a multinational corporation.

Technological Factors

The availability of technological infrastructure and technical capacities determine the

prosperity of a multinational corporation in host countries. Factors such as broadband
connectivity and technical training have become essential ingredients of successful
operations in the modern business world. Moreover, the levels of technological
developments in a given country determine the scope of technical understanding among
its population. While it may be easier to establish and maintain technical operations in
high-technology countries, the same cannot be said of low-technology countries.

Social Factors

Demographic factors such as religion and culture affect the types, quality, functional
features and demand levels of your products in international markets. Cultures attach
different meanings to time, objects, names, color and attitudes. For example, General
Motors suffered low sales when it introduced the Nova car in Latin American markets
because the car name translated to it does not move in Spanish. Therefore, a
multinational corporation must have the ability to interpret and understand varying
cultural cues and patterns that are characteristic of the international business
environment.

WALMART

Introduction

Wal-Mart's history is one of innovation, leadership and success. Wal-Mart was founded
by Sam Walton in 1962, it was incorporated on October 31, 1969, and listed on the New
York Stock Exchange in 1972. It started with a single store in Rogers, Arkansas in 1962
and has grown to what is now the world's largest and arguably, the most emulated retailer.
Some researchers refer to Wal-Mart as the industry trendsetter. Today, this retailing
pioneer has annual revenues of over $100 billion, 3,000 stores and more than 750,000
employees worldwide. Wal-Mart operates each store, from the products it stocks, to the
front-end equipment that helps speed checkout, with the same philosophy: provide
everyday low prices and superior customer service. Lower prices also eliminate the
expense of frequent sales promotions and sales are more predictable. Wal-Mart has
invested heavily in its unique cross-docking inventory system. Cross docking has enabled
Wal-Mart to achieve economies of scale which reduce its costs of sales. With this system,
goods are continuously delivered to stores within 48 hours and often without having to
stock them. This allows Wal-Mart to replenish the shelves 4 times faster than its
competition. Wal-Mart's ability to replenish theirs shelves four times faster than its
competition is just another advantage they have over competition. Wal-Mart leverages its
buying power through purchasing in bulks and distributing the goods on it' own. Wal-
Mart guarantees everyday low prices and considers them the one stop shop.

Wal-Mart operates in Mexico as Walmex, in the UK as ASDA, and in Japan as Seiyu. It

has wholly owned operations in Argentina, Brazil, Canada, and Puertorico. Wal-Mart's
investments outside North America have had mixed results: its operations in South
America and China are highly successful, while it was forced to pull out of Germany and
South Korea when ventures there were unsuccessful. Consumers can also shop Wal-Mart
through their easily accessable website on the internet by visiting
http://www.walmart.com

Walmart Multinational Corporation

Walmart is an American multinational corporation. It has over eight thousand department

stores and warehouses across the globe. Walmart offers products in nine different retail
divisions. This means that Walmart offers almost all the products ranging from hardware
equipment to household goods in all their departmental stores across the globe. In
addition, the company is divided into three different divisions that run the company daily
business. The first department is the Walmart Stores Division that manages American
division. The second department is the Sams club division that manages department
stores that have memberships for their clients across the globe. Finally, the Walmart
international division is the other division that manages all the international departmental
stores.

The company main strategy is to provide their customers with a variety of products at
their convenience. In this case, they are continuing to attract a wide range of customers
increasing their customer base leading to high profitability levels. Since Walmart is a
multinational corporation, it faces stiff competition from different competitors based on
their location. In America, Kmart among others is their principal competitor. In Canada,
Real Canadian superstores are their main competitors among others. Across the globe,
other different competitors exist. Walmarts main objectives are to increase returns, grow
in the American market and expand their stores across the globe. Walmart main strategies
are to conduct customer research, improve shareholders value and increase employee
value.

In Walmart Company, certain areas pose an immense risk while performing audits.
Henceforth, they require a lot of time and controls to ensure effective auditing in the
company. The first area that might pose a significant risk is the implementation of the
new system in the company. According to the market environment, companies need to
change their technology constantly in order to gain competitive advantage. For this
reason, Walmart has already automated their system. In this case, it is an immense risk
since there might be loopholes in the new system causing irregularities. Therefore,
professionalism and time are necessary for this area.

The second area that posses an enormous risk is the acquisition of new companies. One
of Walmart objectives, through acquisitions help in expansion of the company both
locally and internationally. In this case, new companies that Walmart is acquiring often
have different policies. As a result, they might affect the companys financial health.
Moreover, financial statements might start to post misstatements in the end of the
financial year. In addition, international acquisitions mean that they face different
economies, taxation, laws and cultures. This will be difficult since Walmart has to make
changes for the different policies to be compatible. Additionally, Walmart needs to adapt
to the new laws and cultures of the newly acquired company. For this reason, this will
undoubtedly affect Walmart financial figures. Therefore, while auditing, this area will
require due diligence on the part of auditing team.

Liquidity is another area posing a significant threat on Walmart Company. Although

Walmart has excellent disclosure controls and procedures in financial reporting, liquidity
is posing a significant threat. According to their financial reports, Walmart has been
acquiring new companies to expand their business. As a result, this has led to difficulties
in liquidity. This is because most of the numerous assets they have been acquiring. In
addition, this tends to create inaccuracies in the financial reports. For instance, during the
financial crisis, Walmart was also hit by the crisis facing liquidity risks. In this case, there
might be difficulties in financial reporting. For this reason, this area needs due diligence
from the part of the auditing team.

According to the previous financial reporting and audits at Walmart, management has
been coming up with several opinions. The management opinion on financial reporting is
that their disclosure controls and procedures have been consistence. This means that there
are no changes in the procedures. In addition, the management and the auditors have been
saying that Walmart Company has excellent financial procedures. According to form 10-
k, Walmart has been providing timely disclosures of the financial statements to the
relevant parties for timely decision-making. For this reason, they have excellent
disclosure controls that lead to tactical decisions.
According to the analysis, certain amount of expertise is going to be needed to audit
Walmart Company. First, information technology audit experts are going to be needed in
auditing the new automated system implemented by Walmart. This is because the existing
auditors might not have knowledge of the new automated system. In addition, the new
system posses a significant amount of risk since it might present errors in the preparation
of financial statements. In this case, the expert will take time to learn how the new system
works for purposes of effective auditing.

Secondly, an auditing team will be required to travel to the newly acquired companies
and other international branches of Walmart. Currently, Walmart has been acquiring new
companies for the expanding the company both locally and internationally. The auditors
will take time trying to learn the different procedures and policies of the new companies
and branches. In this situation, they are going to see whether the new companies have
loopholes or compatibility with the Walmart. Additionally, they are going to conduct an
audit of these companies to eliminate risks.

The first financial statements to be audited would be the consolidated statement of

income and the consolidated statement of equity. This is because they will provide the
bases of financial health or process of Walmart. Additionally, consolidated statement of
cash flows will be audited. In this case, the auditors will be assessing the liquidity risks of
the company. Therefore, they will be able to establish any misstatements from the
information in reports. For this reason, they will be able to work back tracing the different
transactions.

The key policies to be audited relate to the acquisition of the new companies. The
auditors will try to evaluate the policy Walmart uses when they are acquiring new
companies. In this case, the auditors will try to assess whether there are any issues that
will result to misstatements. Another key policy the auditors will be interested in
checking is how the company acquires and disposes assets. This is because the
management can be tempted to perform unscrupulous deals. As a result, it might result to
misstatements in the financial statements.

The first additional information that will be required from the management is a list of
senior employees who are assigned critical roles in the company. This is because they are
prone to risks that might affect the financial statements. In this case, either they might be
tempted to commit fraud or they might be working under undue influence. For this
reason, this might be of significant help to the auditors.

Secondly, information about the company structure will be of significant help to the
auditors. This is because they will be able to trace how different transactions flow in
Walmart. Additionally, auditors will be able to know how financial and other relevant
information move in the organizations. As a result, they will be able to assess where the
misstatements or mistakes are might be originating from. This will be extremely helpful
to the auditors.