Replica of an East Indiaman of the Dutch East India Company/United East India Company (VOC). The VOC is often considered by many to be the world's first formally listed public company and the first historical model of the multinational corporation (or transnational corporation) in its modern sense.
A multinational corporation (MNC) or worldwide enterprise is a corporate organization that owns or controls production of goods or services in at least one country other than its home country. 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. However, a firm that owns and controls
51% of a foreign subsidiary also controls production of goods or
services in at least one country other than its home country and
therefore would also meet the criterion, even if that foreign affiliate
generates only a few percent of its revenue. 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.
There are subtle but real differences between these three labels, as
well as multinational corporation and worldwide enterprise.
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.
Overview
Toyota is one of the world's largest multinational corporations with their 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.
The two main characteristics of MNCs are their large size and the fact
that their worldwide activities are centrally controlled by the parent
companies.
- Importing and exporting goods and services
- Making significant investments in a foreign country
- Buying and selling licenses in foreign markets
- Engaging in contract manufacturing — permitting a local manufacturer in a foreign country to produce their products
- Opening manufacturing facilities or assembly operations in foreign countries
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.
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.
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.
One of the first multinational business organizations, the East India Company, was established in 1601. 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.
The main characteristics of multinational companies are:
- In general, there is a national strength of large companies as the main body, in the way of foreign direct investment or acquire local enterprises, established subsidiaries or branches in many countries;
- It usually has a complete decision-making system and the highest decision-making centre, each subsidiary or branch has its own decision-making body, according to their different features and operations to make decisions, but its decision must be subordinated to the highest decision-making centre;
- MNCs seek markets in worldwide and rational production layout, professional fixed-point production, fixed-point sales products, in order to achieve maximum profit;
- Due to strong economic and technical strength, with fast information transmission, as well as funding for rapid cross-border transfers, the multinational has stronger competitiveness in the world;
- Many large multinational companies have varying degrees of monopoly in some area, due to economic and technical strength or production advantages.
Foreign direct investment
When a corporation invests in the country which it is not domiciled, it is called foreign direct investment (FDI).
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 although some of these restrictions were eased in 2019. 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.
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.
International investment agreements also facilitate direct investment between two countries, such as the North American Free Trade Agreement and most favored nation status.
Legal domicile
Multinational
corporations 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, and Great Britain had advantages due to laws on withholding dividends and a double-taxation treaty with the United States.
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"),
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.
Geographic diversification can be measured across various domains,
including ownership and control, workforce, sales, and regulation and
taxation.
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.
In some cases, the jurisdiction can help to avoid burdensome laws, but
regulatory statutes often target the "enterprise" with statutory
language around "control".
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; as of 2019, the US applies its corporate taxation "extraterritorially", 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.
In practice, even under an extraterritorial system taxes may be deferred until remittance, with possible repatriation tax holidays, and subject to foreign tax credits. Countries generally cannot tax the worldwide revenue of a foreign subsidiary, and taxation is complicated by transfer pricing arrangements with parent corporations.
Alternatives and arrangements
For small corporations, registering a foreign subsidiary can be expensive and complex, involving fees, signatures, and forms; a professional employer organization (PEO) is sometimes advertised as a cheaper and simpler alternative, but not all jurisdictions have laws accepting these types of arrangements.
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 the 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.
To many economic liberals, multinational corporations are the vanguard of the liberal order.
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.
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.
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. 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.
Colonialism
The
United East India Company (VOC) was a pioneering early model of the
multinational/transnational corporation at the dawn of modern
capitalism.
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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.
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.
The history of multinational corporations is closely intertwined with the history of colonialism,
the first multinational corporations being founded to undertake
colonial expeditions at the behest of their European monarchical
patrons. Prior to the era of New Imperialism,
a majority European colonies not held by the Spanish and Portuguese
crowns were administered by chartered multinational corporations. Examples of such corporations include the British East India Company, the Swedish Africa Company, and the Hudson's Bay Company. These early corporations facilitated colonialism by engaging in international trade and exploration, and creating colonial trading posts. Many of these corporations, such as the South Australia Company and the Virginia Company, played a direct role in formal colonization by creating and maintaining settler colonies.
Without exception these early corporations created differential
economic outcomes between their home country and their colonies via a
process of exploiting colonial resources and labour, and investing the resultant profits and net gain in the home country. The end result of this process was the enrichment of the colonizer and the impoverishment of the colonized. Some multinational corporations, such as the Royal African Company, were also responsible for the logistical component of the Atlantic slave trade,
maintaining the ships and ports required for this vast enterprise.
During the 19th century, formal corporate rule over colonial holdings
largely gave way to state-controlled colonies, however corporate control over colonial economic affairs persisted in a majority of colonies.
During the process of decolonization, the European colonial charter companies were disbanded, with the final colonial corporation, the Mozambique Company, dissolving in 1972. However the economic impact of corporate colonial exploitation has proved to be lasting and far reaching, with some commentators asserting that this impact is among the chief causes of contemporary global income inequality.
Contemporary critics of multinational corporations have charged
that some present day multinational corporations follow the pattern of
exploitation and differential wealth distribution established by the now
defunct colonial charter corporations, particularly with regards to
corporations based in the developed world that operate resource
extraction enterprises in the developing world, such as Royal Dutch Shell, and Barrick Gold.
Some of these critics argue that the operations of multinational
corporations in the developing world take place within the broader
context of neocolonialism. However, as of 2015, multinational corporations from emerging markets are playing an ever-greater role, increasingly impacting the global economy.
Criticism
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.
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.
The aggressive use of tax avoidance schemes, and multinational tax havens, allows multinational corporations to gain competitive advantages over small and medium-sized enterprises. 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.
