Multinational corporation

A multinational company (MNC)[a][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.

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.

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 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]

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 chemicals, drugs, processed foods and beverages, tobacco, machinery, and clothing) as well as trade.[32]

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]

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 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.

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]

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]: 117  as 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 

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]

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

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" (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]

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]