Multinational corporation

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A multi-national corporation (MNC; also called a multi-national enterprise (MNE), trans-national enterprise (TNE), trans-national corporation (TNC), international corporation, or state less corporation, [1] ) is a corporate organization that owns and controls the production of goods or services in at least one country other than its home country. [2] [3] Control is considered an important aspect of an MNC to distinguish it from international portfolio investment organizations, such as some international mutual funds that invest in corporations abroad solely to diversify financial risks. Black's Law Dictionary suggests that a company or group should be considered a multi-national corporation "if it derives 25% or more of its revenue from out-of-home-country operations". [4]

Contents

Most of the current largest and most influential companies are publicly traded multinational corporations, including Forbes Global 2000 companies.

History

Colonialism

The history of multinational corporations began with the history of colonialism. The first multi-national corporations were founded to set up colonial "factories" or port cities. [5] The two main examples were the British East India Company founded in 1600 and the Dutch East India Company (VOC) founded in 1602. In addition to carrying on trade between Great Britain and its colonies, the British East India Company became a quasi-government in its own right, with local government officials and its own army in India. [6] [7] Other examples include the Swedish Africa Company founded in 1649 and the Hudson's Bay Company founded in 1670. [8] These early corporations engaged in international trade and exploration and set up trading posts. [9]

The Dutch government took over the VOC in 1799, and during the 19th century, other governments increasingly took over private companies, most notably in British India. [10] During the process of decolonization, the European colonial charter companies were disbanded, with the final colonial corporation, the Mozambique Company, dissolving in 1972. [9]

Mining

Mining of gold, silver, copper, and oil was a major activity early on and remains 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 aluminum, iron ore, copper, uranium, and diamonds. [11] European mines in South Africa began opening in the late 19th century, producing gold and other minerals for the world market, jobs for locals, and business and profits for companies. [12] 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 its base in southern Africa. [13]

Oil

In 1945, the United States was the world's largest oil producer. However, their reserves were declining due to high demand. Therefore, the United States turned to foreign oil sources, which had a significant impact on the recovery of the West after World War II. Most of the world's oil was found in Latin America and the Middle East, particularly in the Arab states of the Persian Gulf. This increase in non-American production was enabled by multinational corporations known as the 'Seven Sisters'. [14]

The "Seven Sisters" was a common term for the seven multinational companies that dominated the global petroleum industry from the mid-1940s to the mid-1970s. [15]

The nationalization of the Iranian oil industry in 1951 by Iranian Prime Minister Mohammad Mosaddegh and the subsequent boycott of Iranian oil by all companies had dramatic consequences for Iran and the international oil market. Iran was unable to sell any of its oil. In August 1953, the then-prime minister was overthrown by a pro-American dictatorship led by the Shah, and in October 1954, the Iranian industry was denationalized.

Worldwide oil consumption increased rapidly between 1949 and 1970, a period known as the 'golden age of oil'. This increase in consumption was caused not only by the growth of production by multinational oil companies but also by the strong influence of the United States on the global oil market. [14]

In 1959, companies lowered the price of oil due to a surplus in the market. This reduction dealt a significant blow to the finances of producers. Saudi oil minister Abdullah Tariki and Venezuela’s Juan Perez Alfonso entered into a secret agreement (the Mahdi Pact), promising that if the price of oil was lowered a second time, they would take collective action against the companies. This occurred in 1960. [14] Prior to the 1973 oil crisis, the Seven Sisters controlled around 85 percent of the world's petroleum reserves. In the 1970s, most countries with large reserves nationalized their reserves that had been owned by major oil companies. Since then, industry dominance has shifted to the OPEC cartel and state-owned oil and gas companies, such as Saudi Aramco, Gazprom (Russia), China National Petroleum Corporation, National Iranian Oil Company, PDVSA (Venezuela), Petrobras (Brazil), and Petronas (Malaysia).

Dealing with OPEC (1973–1991)

A unilateral increase in oil prices was labeled as "the largest nonviolent transfer of wealth in human history." The OPEC sought immediate discussions regarding participation in national oil industries. Companies were not inclined to object as the price hike benefited both them and OPEC members. In 1980, the Seven Sisters were entirely displaced and replaced by national oil companies (NOCs).

The rise in oil prices burdened developing countries with balance of payments deficits, leading to an energy crisis. OPEC members had to abandon their plan of redistributing wealth from the West to the post-colonial South and invest either in foreign expenditures or ostentatious economic development projects. After 1974, most of the money from OPEC members ceased as payments for goods and services or investments in Western industry.

In February 1974, the first Washington Energy Conference was convened. The most significant contribution of this conference was the establishment of the International Energy Agency (IEA), enabling states to coordinate policy, gather data, and monitor global oil reserves.

In the 1970s, OPEC gradually nationalized the Seven Sisters. The Kingdom of Saudi Arabia, as the only largest world oil producer, could leverage this. However, Saudi Arabia opted for the correct approach and maintained consistent oil prices throughout the 1970s.

In 1979, the "second oil shock" came from the collapse of the Shah's regime in Iran. Iran became a regional power due to oil money and American weapons. The Shah eventually abdicated and fled the country. This prompted a strike by thousands of Iranian oil workers, significantly reducing oil production in Iran. Saudi Arabia tried to cope with the crisis by increasing production, but oil prices still soared, leading to the "second oil shock."

Saudi Arabia significantly reduced oil production, losing most of its revenues. In 1986, Riyadh changed course, and oil production in Saudi Arabia sharply increased, flooding the market with cheap oil. This caused a worldwide drop in oil prices, hence the "third oil shock" or "counter-shock." However, this shock represented something much bigger—the end of OPEC's dominance and its control over oil prices.

Iraqi President Saddam Hussein decided to attack Kuwait. The invasion sparked a crisis in the Middle East, prompting Saudi Arabia to request assistance from the United States. The United States sent a million troops to help, and by February 1991, Iraqi forces were expelled from Kuwait. Due to the oil boycott from Kuwait and Iran, oil prices rose and quickly recovered. Saudi Arabia once again led OPEC, and thanks to assistance in defending Kuwait, new relations emerged between the USA and OPEC. Operation "Desert Storm" brought mutual dependence among the main oil producers. OPEC continued to influence global oil prices but recognized the United States as the largest consumer and guarantor of the existing oil security order. [14]

The new normal (1991–2018)

Since the Iraq War, OPEC has had only a minor influence on oil prices, but it has expanded to 11 members, accounting for about 40 percent of total global oil production, although this is a decline from nearly 50 percent in 1974. Oil has practically become a common commodity, leading to much more volatile prices. Most OPEC members are wealthy, and most remain dependent on oil revenues, which has serious consequences, such as when OPEC members were pressured by the price collapse in 1998–1999.

The United States still maintains close relations with Saudi Arabia. In 2003, U.S. forces invaded Iraq with the aim of removing the dictatorship and gaining access to Iraqi oil reserves, giving the United States greater strategic importance from 2000 to 2008. During this period, there was a constant shortage of oil, but its consumption continued to rise, maintaining high prices and leading to concerns about "peak oil".

From 2005 to 2012, there were advances in oil and gas extraction, leading to increased production in the United States from 2010. The USA became the leading oil producer, creating tension with OPEC. In 2014, Saudi Arabia increased production to push new American producers out of the market, leading to lower prices. OPEC then reduced production in 2016 to raise prices, further worsening relations with the United States. [14]

By 2012, only 7% of the world's known oil reserves were in countries that allowed private international companies free rein; 65% were in the hands of state-owned companies that operated in one country and sold oil to multinationals such as BP, Shell, ExxonMobil and Chevron. [16]

Manufacturing

Down through the 1930s, about 80% of the international investments by multinational corporations were concentrated in the primary sector, especially mining (especially oil) and agriculture (rubber, tobacco, sugar, palm oil, coffee, cocoa, and tropical fruits). Most went to the Third World colonies. That changed dramatically after 1945 as investors turned to industrialized countries and invested in manufacturing (especially high-tech electronics, chemicals, drugs, and vehicles) as well as trade. [17]

Sweden's leading manufacturing concern was SKF, a leading maker of bearings for machinery. In order to expand its international business, it decided in 1966 it needed to use the English language. Senior officials, although mostly still Swedish, all learned English and all major internal documents were in English, the lingua franca of multinational corporations. [18]

After World War II

After the war, the number of businesses having at least one foreign country operation rose drastically from a few thousand to 78,411 in 2007. Meanwhile, 74% of parent companies are located in economically advanced countries. Developing and former communist countries such as China, India, and Brazil are the largest recipients. However, 70% of foreign direct investment went into developed countries in the form of stocks and cash flows. The rise in the number of multinational companies could be due to a stable political environment that encourages cooperation, advances in technology that enable management of faraway regions, and favorable organizational development that encourages business expansion into other countries. [19]

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 that produces or sells goods or services in various countries. [20] Two common characteristics shared by MNCs are their large size and centrally controlled worldwide activities. [21]

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 experience 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. [22]

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 has emerged during the late twentieth century. [23]

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 that meet the realities of the needs of source materials on a worldwide basis and to produce and customize products for individual countries. [24]

One of the first multinational business organizations, the East India Company, was established in 1601. [25] After the East India Company came the Dutch East India Company, founded on March 20, 1603, which would become the largest company in the world for nearly 200 years.

The main characteristics of multinational companies are:

Foreign direct investment

When a corporation invests in a country in which it is not domiciled, it is called foreign direct investment (FDI). [26] 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, [27] although some of these restrictions were eased in 2019. [28] 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 China, in part to reduce capital outflow. [29] 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 U.S. market by trading with Iran. [30]

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. [31] 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, [32] and Great Britain had advantages due to laws on withholding dividends and a double-taxation treaty with the United States. [32]

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" [33] ), 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. [34] Geographic diversification can be measured across various domains, including ownership and control, workforce, sales, and regulation and taxation. [34]

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. [35] In some cases, the jurisdiction can help to avoid burdensome laws, but regulatory statutes often target the "enterprise" with statutory language around "control". [35]

As of 1992, the United States and most OECD countries have the donot legal authority to tax a domiciled parent corporation on its worldwide revenue, including subsidiaries. [34] : 117 As of 2019, the U.S. applies its corporate taxation "extraterritorially", [36] which has motivated tax inversions to change the home state. By 2019, most OECD nations, with the notable exception of the U.S., 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. [36]

In practice, even under an extraterritorial system, taxes may be deferred until remittance, with possible repatriation tax holidays, and subject to foreign tax credits. [34] : 117  Countries generally cannot tax the worldwide revenue of a foreign subsidiary, and taxation is complicated by transfer pricing arrangements with parent corporations. [34] : 117 

Alternatives and arrangements

For small corporations, registering a foreign subsidiary can be expensive and complex, involving fees, signatures, and forms; [37] a professional employer organization (PEO) is sometimes advertised as a cheaper and simpler alternative, [37] but not all jurisdictions have laws accepting these types of arrangements. [38]

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 a free market system where there is little government interference. As a result, international wealth is maximized with free exchange of goods and services. [39]

To many economic liberals, multinational corporations are the vanguard of the liberal order. [40] 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. [41]

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. [42]

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. [43] 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. [44]

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. [45]

Anti-corporate advocates criticize multinational corporations for being without a basis in a national ethos, being ultimate 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. [46] 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 benefits capital while workers and communities lose. Some negative outcomes generated by multinational corporations include increased inequality, unemployment, and wage stagnation. [47] Raymond Vernon presents the debate from a neo-liberal perspective in Storm over the Multinationals (1977).[ citation needed ]

The aggressive use of tax avoidance schemes, and multinational tax havens, allows multinational corporations to gain competitive advantages over small and medium-sized enterprises. [48] 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. [49]

See also

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