Multinational corporation

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Replica of an East Indiaman of the Dutch East India Company/United East India Company (VOC). The VOC was the world's first formally listed public company and the first historical model of the multinational corporation. Vereenigde Oostindische Compagnie spiegelretourschip Amsterdam replica.jpg
Replica of an East Indiaman of the Dutch East India Company/United East India Company (VOC). The VOC was the world's first formally listed public company and the first historical model of the multinational corporation.

A multinational company (MNC) [lower-alpha 1] [10] is a corporate organization that owns or controls the production of goods or services in at least one country other than its home country. [11] [12] Black's Law Dictionary suggests that a company or group should be considered a multinational corporation if it derives 25% or more of its revenue from out-of-home-country operations. [13] A multinational corporation can also be referred to as a multinational enterprise (MNE), a transnational enterprise (TNE), a transnational corporation (TNC), an international corporation, or a stateless corporation. [14] There are subtle but real differences between these terms.

Contents

Most of the largest and most influential companies of the modern age are publicly traded multinational corporations, including Forbes Global 2000 companies. Multinational corporations are subject to criticisms for lacking ethical standards. They have also become associated with multinational tax havens and base erosion and profit shifting tax avoidance activities.

History

Colonialism

The United East India Company (VOC) was an early pioneering model of the multinational/transnational corporation, in its modern sense, [lower-alpha 2] at the dawn of modern capitalism. [15] [16] [17] [18] [19] [20] [21] [22] [23]
Gravure van het Oost Indisch Huis (17e eeuw).jpg
17th-century etching of the Oost-Indisch Huis (Dutch for "East India House"), the global headquarters of the United East India Company (VOC) in Amsterdam.
Andries Beeckman - The Castle of Batavia.jpg
The Fort Batavia, seen from West Kali Besar (Andries Beeckman, c. 1656). In Batavia in 1610 the VOC established its overseas administrative centre, as the second headquarters, with a Governor-General in charge, as the Company's de facto chief executive. The Company also had important operations elsewhere.

According to Murray Sayle:

The Netherlands United East Indies Company (Verenigde Oostindische Compagnie, or VOC), founded in 1602, was the world's first multinational, joint-stock, limited liability corporation – as well as its first government-backed trading cartel....[the Brtitish] East India Company, founded in 1600, remained a coffee-house clique until 1657, when it, too, began selling shares, not in individual voyages, but in John Company itself, by which time its Dutch rival was by far the biggest commercial enterprise the world had known.

The history of multinational corporations began with the history of colonialism, the first multinational corporations being founded to undertake colonial expeditions at the behest of their European monarchical patrons. In addition to carrying on trade between the mother country in the colonies, the East India Company became a quasi-government in its own right, late with local officials and its own army in India . [24] [25] the two main examples were the British East India Company, and the Dutch East India Company. Others included the Swedish Africa Company, and the Hudson's Bay Company. [26] These early corporations engaged in international trade and exploration, and set up trading posts. [27]

During the 19th century, the governments increasingly took over the private companies, most notable in British India. [28] During the process of decolonization, the European colonial charter companies were disbanded,with the final colonial corporation, the Mozambique Company, dissolving in 1972. [27]

Mining

Mining of gold, silver, copper and especially oil became major activities early on and remain so today. International mining companies became prominent in Britain in the 19th century, such as the Rio Tinto company founded in 1873, which started with the purchase of sulfur and copper mines from the Spanish government. Rio Tinto, now based in London and Melbourne Australia, has made many acquisitions and expanded globally to mine aluminium, iron ore, copper, uranium, and diamonds. [29] European mines in South Africa began opening in the late 19th century, producing gold and other minerals for the world market, jobs for the locals, and business and profits for the companies. [30] Cecil Rhodes (1853–1902) was one of the few businessmen in the era who became Prime Minister (of South Africa 1890-1896 ). His mining enterprises included the British South Africa Company and De Beers. The latter company practically controlled the global diamond market from his base in southern Africa. [31]

Manufacturing

Down through the 1930s about 4/5 of the international investments by the multinational corporations was concentrated in the primary sector, especially mining (especially oil) and agriculture (rubber, tobacco, sugar, palm oil, coffee, cocoa, tropical fruits). Most went to the Third World colonies. That change dramatically after 1945 as the investors turn to industrialized countries, and invested in manufacturing (especially high tech electronics, chemicals, drugs and vehicles) as well as trade. [32]

Current status

Toyota is one of the world's largest multinational corporations with its headquarters in Toyota City, Japan. Toyota Headquarter Toyota City.jpg
Toyota is one of the world's largest multinational corporations with its headquarters in Toyota City, Japan.

A multinational corporation (MNC) is usually a large corporation incorporated in one country which produces or sells goods or services in various countries. [33] Two common characteristics shared by MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies. [34]

MNCs may gain from their global presence in a variety of ways. First of all, MNCs can benefit from the economy of scale by spreading R&D expenditures and advertising costs over their global sales, pooling global purchasing power over suppliers, and utilizing their technological and managerial know-how globally with minimal additional costs. Furthermore, MNCs can use their global presence to take advantage of underpriced labor services available in certain developing countries, and gain access to special R&D capabilities residing in advanced foreign countries. [35]

The problem of moral and legal constraints upon the behavior of multinational corporations, given that they are effectively "stateless" actors, is one of several urgent global socioeconomic problems that emerged during the late twentieth century. [36]

Potentially, the best concept for analyzing society's governance limitations over modern corporations is the concept of "stateless corporations". Coined at least as early as 1991 in Business Week , the conception was theoretically clarified in 1993: that an empirical strategy for defining a stateless corporation is with analytical tools at the intersection between demographic analysis and transportation research. This intersection is known as logistics management, and it describes the importance of rapidly increasing global mobility of resources. In a long history of analysis of multinational corporations we are some quarter century into an era of stateless corporations - corporations which meet the realities of the needs of source materials on a worldwide basis and to produce and customize products for individual countries. [37]

One of the first multinational business organizations, the East India Company, was established in 1601. [38] After the East India Company, came the Dutch East India Company, founded March 20, 1603, which would become the largest company in the world for nearly 200 years. [39]

The main characteristics of multinational companies are:

Foreign direct investment

As an early model of the multinational corporation in its modern sense, the United East India Company (VOC) was also an early corporate pioneer of outward foreign direct investment at the dawn of modern capitalism. [40] [41]
Atlas Blaeu-Van der Hem - Taioan.jpg
Overview of Fort Zeelandia in Dutch Formosa (in the 17th-century). It was in the Dutch rule period of Taiwan that the VOC began to encourage large-scale mainland Chinese immigration. [42] The VOC's economic activities changed significantly the demographic and economic history of the island. [43] [44]
Vignoble de Groot Constantia Afrique du Sud.jpg
Groot Constantia, the oldest wine estate in South Africa. The South African wine industry (New World wine) is among the lasting legacy of the VOC era. [45] [46] Like native economy of Taiwan in pre-VOC era, [47] pre-1652 South Africa was virtually undeveloped or was in almost primitive state. In other words, the recorded economic history of South Africa and Taiwan both began with the VOC period.

When a corporation invests in the country which it is not domiciled, it is called foreign direct investment (FDI). [48] Countries may place restrictions on direct investment; for example, China has historically required partnerships with local firms or special approval for certain types of investments by foreigners, [49] although some of these restrictions were eased in 2019. [50] Similarly, the United States Committee on Foreign Investment in the United States scrutinizes foreign investments.

In addition, corporations may be prohibited from various business transactions by international sanctions or domestic laws. For example, Chinese domestic corporations or citizens have limitations on their ability to make foreign investments outside of China, in part to reduce capital outflow. [51] Countries can impose extraterritorial sanctions on foreign corporations even for doing business with other foreign corporations, which occurred in 2019 with the United States sanctions against Iran; European companies faced with the possibility of losing access to the US market by trading with Iran. [52]

International investment agreements also facilitate direct investment between two countries, such as the North American Free Trade Agreement and most favored nation status.

Raymond Vernon reported in 1977 that of the largest multinationals focused on manufacturing, 250 were headquartered in the United States, 115 in Western Europe, 70 in Japan, and 20 in the rest of the world . The multinationals in banking numbered 20 headquartered in the United States, 13 in Europe, nine in Japan and three in Canada. [53] Today multinationals can select from a variety of jurisdictions for various subsidiaries, but the ultimate parent company can select a single legal domicile; The Economist suggests that the Netherlands has become a popular choice, as its company laws have fewer requirements for meetings, compensation, and audit committees, [54] and Great Britain had advantages due to laws on withholding dividends and a double-taxation treaty with the United States. [54]

Corporations can legally engage in tax avoidance through their choice of jurisdiction, but must be careful to avoid illegal tax evasion.

Stateless or transnational

Corporations that are broadly active across the world without a concentration in one area have been called stateless or "transnational" (although "transnational corporation" is also used synonymously with "multinational corporation" [55] ), but as of 1992, a corporation must be legally domiciled in a particular country and engage in other countries through foreign direct investment and the creation of foreign subsidiaries. [56] :115 Geographic diversification can be measured across various domains, including ownership and control, workforce, sales, and regulation and taxation. [56]

Regulation and taxation

Multinational corporations may be subject to the laws and regulations of both their domicile and the additional jurisdictions where they are engaged in business. [57] In some cases, the jurisdiction can help to avoid burdensome laws, but regulatory statutes often target the "enterprise" with statutory language around "control". [57]

as of 1992, the United States and most OECD countries have legal authority to tax a domiciled parent corporation on its worldwide revenue, including subsidiaries; [56] :117as of 2019, the US applies its corporate taxation "extraterritorially", [58] which has motivated tax inversions to change the home state. By 2019, most OECD nations, with the notable exception of the US, had moved to territorial tax in which only revenue inside the border was taxed; however, these nations typically scrutinize foreign income with controlled foreign corporation (CFC) rules to avoid base erosion and profit shifting. [58]

In practice, even under an extraterritorial system taxes may be deferred until remittance, with possible repatriation tax holidays, and subject to foreign tax credits. [56] :117 Countries generally cannot tax the worldwide revenue of a foreign subsidiary, and taxation is complicated by transfer pricing arrangements with parent corporations. [56] :117

Alternatives and arrangements

For small corporations, registering a foreign subsidiary can be expensive and complex, involving fees, signatures, and forms; [59] a professional employer organization (PEO) is sometimes advertised as a cheaper and simpler alternative, [59] but not all jurisdictions have laws accepting these types of arrangements. [60]

Dispute resolution and arbitration

Disputes between corporations in different nations is often handled through international arbitration.

Theoretical background

The actions of multinational corporations are strongly supported by economic liberalism and free market system in a globalized international society. According to the economic realist view, individuals act in rational ways to maximize their self-interest and therefore, when individuals act rationally, markets are created and they function best in free market system where there is little government interference. As a result, international wealth is maximized with free exchange of goods and services. [61]

To many economic liberals, multinational corporations are the vanguard of the liberal order. [62] They are the embodiment par excellence of the liberal ideal of an interdependent world economy. They have taken the integration of national economies beyond trade and money to the internationalization of production. For the first time in history, production, marketing, and investment are being organized on a global scale rather than in terms of isolated national economies. [63]

International business is also a specialist field of academic research. Economic theories of the multinational corporation include internalization theory and the eclectic paradigm. The latter is also known as the OLI framework.

The other theoretical dimension of the role of multinational corporations concerns the relationship between the globalization of economic engagement and the culture of national and local responses. This has a history of self-conscious cultural management going back at least to the 60s. For example:

Ernest Dichter, architect, of Exxon's international campaign, writing in the Harvard Business Review in 1963, was fully aware that the means to overcoming cultural resistance depended on an "understanding" of the countries in which a corporation operated. He observed that companies with "foresight to capitalize on international opportunities" must recognize that "cultural anthropology will be an important tool for competitive marketing". However, the projected outcome of this was not the assimilation of international firms into national cultures, but the creation of a "world customer". The idea of a global corporate village entailed the management and reconstitution of parochial attachments to one's nation. It involved not a denial of the naturalness of national attachments, but an internationalization of the way a nation defines itself. [64]

Multinational enterprise

"Multinational enterprise" (MNE) is the term used by international economist and similarly defined with the multinational corporation (MNC) as an enterprise that controls and manages production establishments, known as plants located in at least two countries. [65] The multinational enterprise (MNE) will engage in foreign direct investment (FDI) as the firm makes direct investments in host country plants for equity ownership and managerial control to avoid some transaction costs. [66]

Criticism

Sanjaya Lall in 1974 proposed a spectrum of scholarly analysis of multinational corporations, from the political right to the left. He put the business school how-to-do-it writers at the extreme right, followed by the liberal laissez-faire economists, and the neoliberals (they remain right of center but do allow for occasional mistakes of the marketplace such as externalities). Moving to the left side of the line are nationalists, who prioritize national interests over corporate profits, then the "dependencia" school in Latin America that focuses on the evils of imperialism, and on the far left the Marxists. The range is so broad that scholarly consensus is hard to discern. [67]

Anti-corporate advocates criticize multinational corporations for being without a basis in a national ethos, being ultimately without a specific nationhood, and that this lack of an ethos appears in their ways of operating as they enter into contracts with countries that have low human rights or environmental standards. [68] In the world economy facilitated by multinational corporations, capital will increasingly be able to play workers, communities, and nations off against one another as they demand tax, regulation and wage concessions while threatening to move. In other words, increased mobility of multinational corporations benefit capital while workers and communities lose. Some negative outcomes generated by multinational corporations include increased inequality, unemployment, and wage stagnation. [69] For the debate from a neo-liberal perspective see Raymond Vernon, Storm over the Multinationals (1977).</ref>

The aggressive use of tax avoidance schemes, and multinational tax havens, allows multinational corporations to gain competitive advantages over small and medium-sized enterprises. [70] Organizations such as the Tax Justice Network criticize governments for allowing multinational organizations to escape tax, particularly by using base erosion and profit shifting (BEPS) tax tools, since less money can be spent for public services. [71]

See also

Notes

  1. It is important to note the difference between a "corporation" and a "company" in general, hence the difference between a "multinational corporation" and a "multinational company" in its modern sense.
  2. Note the difference between a "multinational/transnational company" in general and a "multinational/transnational corporation" in particular.

Related Research Articles

Corporation Separate legal entity that has been incorporated through a legislative or registration process

A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity and recognized as such in law for certain purposes. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration. Corporations come in many different types but are usually divided by the law of the jurisdiction where they are chartered based on two aspects: by whether they can issue stock, or by whether they are formed to make a profit. Depending on the number of owners, a corporation can be classified as aggregate or sole.

Stock exchange Organization that provides services for stock brokers and traders to trade securities

A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds, and other financial instruments. Stock exchanges may also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income and dividends. Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. Stock exchanges often function as "continuous auction" markets with buyers and sellers consummating transactions via open outcry at a central location such as the floor of the exchange or by using an electronic trading platform.

Dutch East India Company 17th-century Dutch trading company

The Dutch East India Company, officially the United East India Company, was a megacorporation founded by a government-directed consolidation of several rival Dutch trading companies in the early 17th century. It is believed to be the largest company to ever have existed in recorded history. It was established on March 20, 1602, as a chartered company to trade with Mughal India in the early modern period, from which 50% of textiles and 80% of silks were imported, chiefly from its most developed region known as Bengal Subah. In addition, the company traded with Indianised Southeast Asian countries when the Dutch government granted it a 21-year monopoly on the Dutch spice trade.

Conglomerate (company) Large company involved in many industries

A conglomerate is a multi-industry company – i.e., a combination of multiple business entities operating in entirely different industries under one corporate group, usually involving a parent company and many subsidiaries. Conglomerates are always large and multinational.

A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country's national borders, and their aims include increasing trade balance, employment, increased investment, job creation and effective administration. To encourage businesses to set up in the zone, financial policies are introduced. These policies typically encompass investing, taxation, trading, quotas, customs and labour regulations. Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

Foreign direct investment Foreign ownership of a controlling stake of a business

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.

Megacorporation A corporation (normally fictional) that is a massive conglomerate, holding monopolistic control over multiple markets

Megacorporation, mega-corporation, or megacorp, a term originally coined by Alfred Eichner but popularized by William Gibson, derives from the combination of the prefix mega- with the word corporation. It has become widespread in cyberpunk literature. It is synonymous with syndicate, globalist- or transnational capital. It refers to a corporation that is a massive conglomerate, holding monopolistic or near-monopolistic control over multiple markets. Megacorps are so powerful that they are above the government laws, possess their own heavily armed private armies, be the operator of a privatized police force, hold "sovereign" territory, and even act as outright governments. They often exercise a large degree of control over their employees, taking the idea of "corporate culture" to an extreme. Such organizations as a staple of science fiction long predate cyberpunk, appearing in the works of writers such as Philip K. Dick, Thea von Harbou, Robert A. Heinlein, Robert Asprin, and Andre Norton. The explicit use of the term in the Traveller science fiction roleplaying game from 1977 predates Gibson's use of it.

Double taxation is the levying of tax by two or more jurisdictions on the same income, asset, or financial transaction.

The history of capitalism is diverse. The concept of capitalism has many debated roots, but fully fledged capitalism is generally thought by scholars to have emerged in Northwestern Europe, especially in Great Britain and the Netherlands, in the 16th to 17th centuries. Over the following centuries, capital accumulated by a variety of methods, at a variety of scales, and became associated with much variation in the concentration of wealth and economic power. Capitalism gradually became the dominant economic system throughout the world. Much of the history of the past 500 years is concerned with the development of capitalism in its various forms.

International business refers to the trade of goods, services, technology, capital and/or knowledge across national borders and at a global or transnational scale.

A corporate republic is a theoretical form of government run primarily like a business, involving a board of directors and executives, in which all aspects of society are privatized by a single, or small groups of companies. The ultimate goal of this state is to increase the wealth of its shareholders, and the government acknowledges its status as a corporation. Utilities, including hospitals, schools, the military, and the police force, would be privatized. Social welfare is carried out by corporations in the form of pensions and benefits to employees, instead of the state.

Financial centre Locations which are centres of financial activity

A financial centre, financial center, or financial hub is a location with a concentration of participants in banking, asset management, insurance or financial markets with venues and supporting services for these activities to take place. Participants can include financial intermediaries, institutional investors, and issuers. Trading activity can take place on venues such as exchanges and involve clearing houses, although many transactions take place over-the-counter (OTC), that is directly between participants. Financial centres usually host companies that offer a wide range of financial services, for example relating to mergers and acquisitions, public offerings, or corporate actions; or which participate in other areas of finance, such as private equity and reinsurance. Ancillary financial services include rating agencies, as well as provision of related professional services, particularly legal advice and accounting services.

Corporate headquarters Part of a corporate structure that deals with important tasks

Corporate headquarters is the part of a corporate structure that deals with important tasks such as strategic planning, corporate communications, taxes, law, books of record, marketing, finance, human resources, and information technology. Corporate headquarters takes responsibility for the overall success of the corporation and ensures corporate governance. It is sometimes referred to as the head office, which is the location where the executives of a business work and where many of the key business decisions are made. Generally, corporate headquarters acts as a core when the business is operating. The corporate headquarters includes: the CEO as a key person and their support staff such as the CEO office and other CEO related functions; the "corporate policy making" functions: Include all corporate functions necessary to steer the firm by defining and establishing corporate policies; the corporate services: Activities that combine or consolidate certain enterprise-wide needed support services, provided based on specialized knowledge, best practices, and technology to serve internal customers and business partners; the interface: Reporting line and bi-directional link between corporate headquarters and business units. Most other divisions and branches report to the corporate headquarters and staff may visit there periodically for training or other instructions". The corporate services are often relocated into a separate legal entity called shared services center. Research shows that the city in which a company is headquartered has a significant influence on the company's activities, including its business practices and its corporate philanthropic giving.

A transnational corporation is an enterprise that is involved with the international production of goods or services, foreign investments, or income and asset management in more than one country. It sets up factories in developing countries as land and labor are cheaper there.

Sylvain Plasschaert is a former Belgian professor in law. He was a member of the Coudenberg group, a Belgian federalist think tank.

Economic history of the Netherlands (1500–1815) Aspect of history

The economic history of the Netherlands (1500–1815) is the history of an economy that American-Dutch scholar and economist Jan de Vries calls the first "modern" economy. It covers the Netherlands as the Habsburg Netherlands, through the era of the Dutch Republic, the Batavian Republic and the Kingdom of Holland.

Financial history of the Dutch Republic

The financial history of the Dutch Republic involves the interrelated development of financial institutions in the Dutch Republic. The rapid economic development of the country after the Dutch Revolt in the years 1585–1620 accompanied by an equally rapid accumulation of a large fund of savings, created the need to invest those savings profitably. The Dutch financial sector, both in its public and private components, came to provide a wide range of modern investment products beside the possibility of (re-)investment in trade and industry, and in infrastructure projects. Such products were the public bonds, floated by the Dutch governments on a national, provincial, and municipal level; acceptance credit and commission trade; marine and other insurance products; and shares of publicly traded companies like the Dutch East India Company (VOC), and their derivatives. Institutions like the Amsterdam stock exchange, the Bank of Amsterdam, and the merchant bankers helped to mediate this investment. In the course of time the invested capital stock generated its own income stream that caused the capital stock to assume enormous proportions. As by the end of the 17th century structural problems in the Dutch economy precluded profitable investment of this capital in domestic Dutch sectors, the stream of investments was redirected more and more to investment abroad, both in sovereign debt and foreign stocks, bonds and infrastructure. The Netherlands came to dominate the international capital market up to the crises of the end of the 18th century that caused the demise of the Dutch Republic.

Financial innovation is the act of creating new financial instruments as well as new financial technologies, institutions, and markets. Recent financial innovations include hedge funds, private equity, weather derivatives, retail-structured products, exchange-traded funds, multi-family offices, and Islamic bonds (Sukuk). The shadow banking system has spawned an array of financial innovations including mortgage-backed securities products and collateralized debt obligations (CDOs).

Economic history of Indonesia Aspect of history

The economic history of Indonesia is shaped by its geographic location, its natural resources, as well as its people that inhabited the archipelago that today formed the modern nation-state of the Republic of Indonesia. The foreign contact and international trade with foreign counterparts had also shaped and sealed the fate of Indonesian archipelago, as Indians, Chinese, Arabs, and eventually European traders reached the archipelago during the Age of Exploration and participated in the spice trade, war and conquest.

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Further reading

Corporate histories

Historiography