The explanations for the existence of multinationals assume the capability to build effective organizations. If multinationals exist to overcome transactions costs, their organization must offer advantages over markets. If the rationale of multinationals is that they provide superior means to transfer knowledge across borders, then their organizations must be capable of performing such a function.
The challenges posed by distance meant that building such effective cross-border organizations was not easy. They needed to be effective in different political, legal and cultural environments separated by geographical distance. There needed to be cohesion in overall corporate strategy yet a firm needed to be responsive to its local environment. The potential benefits of operating across borders had to be translated into commercial realities. People from different languages and cultures had to be managed. The difficulties of limiting opportunism were made more difficult because bounded rationality and asymmetric information were magnified by distance and culture. Organizational design had also to fit the prevailing environment, including the state of technology and the political context, and also change as that environment evolves.
An influential study by Bartlett and Ghoshal (1989) argued that the organization of a multinational needed to 'fit' the dominant strategic requirements of an industry in terms of efficiency, responsiveness to local conditions, and transfer of knowledge and competencies. The relative importance of these characteristics for competitive success varied by industry. The authors illustrated their argument by examining nine companies in three industries: branded packaged goods, which traditionally demanded a high degree of national responsiveness; consumer electronics, where there was a need for global efficiency; and telecommunications switching, where the ability to develop innovations and transfer them around the world was essential.
Bartlett and Ghoshal identified three types of organizational form which 'fitted' these strategic requirements. In the multinational model, companies managed a portfolio of national entities which had considerable autonomy. This provided a high level of local responsiveness. Philips in electronics, Unilever in packaged goods, and ITT in telecommunications, were taken as examples in this study. The international model was a coordinated federation in which a parent company transferred knowledge and expertise to foreign affiliates, and exercised quite tight control. General Electric, P&G, and Ericsson fitted into that category. Thirdly, there was a global model based on scale economies in which most decisions were centralized. This produced a high level of global efficiency.