One of the most important phenomena of the latter half of the 20th century in international business was the emergence of the multinational corporation (MNC). The many different definitions of MNCs usually rest on one of the following common characteristics: (a) company headquarters far removed from the country where the activity occurs, (b) foreign sales representing a high proportion of total sales, and (c) stock ownership and management that are multinational in character. Perhaps the most common definition of a MNC, however, is that it is a company that manages and controls facilities in at least two countries.
MNCs diversify their operations along vertical, horizontal, and conglomerate lines within the host and home countries. Vertically integrated MNCs produce intermediate goods in a subsidiary that are later used for the production of final goods in other countries. For example, the General Motors plant in Tonawanda, New York, produces engines to supply GM auto plants worldwide. Horizontally integrated MNCs produce basically the same or similar goods in several countries. One example is the auto manufacturer Toyota, which produces automobiles in both Japan and the United States. Conglomerated MNCs produce different or even totally unrelated goods in various countries. For example, in the 1980s the U.S. oil company ExxonMobil acquired a foreign copper-mining subsidiary in Chile in response to anticipated declines of future investment opportunities in oil and gas.
From the Past to the Present
The phenomenon of MNCs is not new, instead tracing back to the late 18th century when firms like the British, Dutch, and French East Indian companies sought raw materials overseas. The modern-day counterparts of these raw material-seeking firms are the multinational oil and mining companies, as recent advances in transportation and communications technology increased the feasibility of global production, enabling MNCs to grow rapidly over the past 60 years.
Direct foreign investment usually allows the formation of MNCs, although their existence does not necessarily reflect a net capital flow from one country to another. MNCs can raise money for the expansion of their subsidiaries in the host country rather than in the home country. Furthermore, a good deal of two-way foreign direct investment occurs among industrial countries: U.S. firms expand their European subsidiaries and at the same time European firms expand their U.S. subsidiaries.
Among the major factors that influence firms’ decisions to go global are (a) appropriation of raw materials, (b) reduction in costs, mainly labor costs, (c) search for new markets and consequently for demand, (d) circumventing trade restrictions such as import tariff barriers, and (e) taking advantage of government policies offered by the host country, particularly relatively lower taxes.
The three largest MNCs worldwide in 2006 were ExxonMobil, with headquarters in the United States and revenue of $339.9 billion; Wal-Mart, with headquarters in the United States and revenue of $315.6 billion; and Royal Dutch Shell, with headquarters in the Netherlands and revenue of $306.7 billion.
Impact of Multinational Corporations
MNCs can create several problems in the home country. Among these the most important are reduction in potential production and employment; transfer of technology to other nations, which might undermine the current and future technological superiority of the home nation; and reduction of potential tax revenue of the home country.
MNCs can positively affect the host country by increasing production and employment (number of employees and skills), and promoting technical progress. However, MNCs often come under attack in the host country for several reasons, one of which is loss of national sovereignty. MNCs may dominate the economies of the host countries and consequently influence political decisions. For example, MNCs may resist government attempts to redistribute national income through taxation. One example of political influence is in the case of Chile. When Salvatore Allende, the president of Chile, was in the process of winning the presidency, U.S. businesses opposed him, fearing that his government would expropriate their Chilean operations. Specifically, International Telephone and Telegraph (ITT) tried to prevent his election and subsequently attempted to foment civil disturbances that would lead to his fall from power. Another example is the case of United Brands (now Chiquita, producing mainly bananas), which in 1974 paid a $1.5 million bribe to the president of Honduras in return for an export tax reduction. When the bribe was discovered, the president was removed from office.
A second criticism is MNC utilization of inappropriate technologies. In many developing countries, MNCs use capital intensive production techniques that are inappropriate for labor abundant nations, where they would increase unemployment. In addition, the technology transfer usually has very limited linkages with the other sectors of the host country and consequently “the spillover effects” are very limited.
A third criticism is MNC exploitation of domestic resources. MNCs use minerals, raw materials, unskilled labor, and entrepreneurial talent acquired from the host country for production. They obtain these resources at a very low price, which results in high profits for the multinational firm, profits usually not reinvested in the host country or shared with the country yielding its natural resources and human capital.
Regulation of Multinational Corporations
In order to mitigate the harmful effect of MNCs and increase the possible benefits in the host country, several nations have attempted to regulate their conduct. Some developing nations now allow only joint ventures (i.e., local equity participation and set rules for the transfer of technology and the training of domestic labor); impose limits on the use of imported inputs and the remission of profits; set environmental regulations; and so on. In addition, the EU (European Union), OECD (Organization for Economic Co-operation and Development), UN (United Nations), WTO (World Trade Organization), and UNCTAD (United Nations Conference on Trade and Development) elaborated codes of conduct for MNCs.
Increasing evidence indicates that some MNCs engage in illegal activities, such as using child labor, discriminating against women, and suppressing trade unions. However, the governments in developing countries are often unable or unwilling to prosecute these violations because they are desperate to promote exports and attract investors. Rendering MNCs accountable for abusive conduct constitutes a major world order challenge, particularly because the codes of conduct provided by international organizations are still on a voluntary basis. While there are no magic bullets here, naming and shaming coupled with consumer boycott can at times produce the desired effect.
- Brooks, Stephen G. 2007. Producing Security: Multinational Corporations, Globalization, and the Changing Calculus of Conflict. Princeton, NJ: Princeton University Press.
- Chandler, Alfred D. and Bruce Mazlish, eds. 2005. Leviathans: Multinational Corporations and the New Global History. Cambridge, England: Cambridge University Press.
- Feldstein, Martin, James R. Hines, Jr., and R. Glenn Hubbard. 1995. Taxing Multinational Corporations. Chicago: University of Chicago Press.
- Jensen, Nathan M. 2006. Nation-States and the Multinational Corporation: A Political Economy of Foreign Direct Investment. Princeton, NJ: Princeton University Press.
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