Multinational corporation

A multinational corporation (MNC) or transnational corporation (TNC), also called multinational enterprise (MNE),^[1] is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation. The International Labour Organization (ILO) has defined an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries.

The first modern multinational corporation is generally thought to be the East India Company.^[2] Many corporations have offices, branches or manufacturing plants in different countries from where their original and main headquarters is located.

Some multinational corporations are very big, with budgets that exceed some nations' GDPs. Multinational corporations can have a powerful influence in local economies, and even the world economy, and play an important role in international relations and globalization.

Contents 1 Market imperfections 2 International power 2.1 Tax competition 2.2 Market withdrawal 2.3 Lobbying 2.4 Patents 2.5 Government power 3 Micro-multinationals 4 Criticism of multinationals 5 Largest 6 See also 7 References 8 External links

Market imperfections

It may seem strange that a corporation can decide to do business in a different country, where it does not know the laws, local customs or business practices.^[1] Why is it not more efficient to combine assets of value overseas with local factors of production at lower costs by renting or selling them to local investors?^[1]

One reason is that the use of the market for coordinating the behaviour of agents located in different countries is less efficient than coordinating them by a multinational enterprise as an institution.^[1] The additional costs caused by the entrance in foreign markets are of less the local enterprise.^[1] According to Hymer, Kindleberger and Caves, the existence of MNEs is reasoned by structural market imperfections for final products.^[3] In Hymer's example, there are considered two firms as monopolists in their own market and isolated from competition by transportation costs and other tariff and non-tariff barriers. If these costs decrease, both are forced to competition; which will reduce their profits.^[3] The firms can maximize their joint income by a merger or acquisition. which will lower the competition in the shared market.^[3] Due to the transformation of two separated companies into one MNE the pecuniary externalities are going to be internalized.^[3] However, this doesn't mean that there is an improvement for the society.^[3]

This could also be the case if there are few substitutes or limited licenses in a foreign market.^[4] The consolidation is often established by acquisition, merger or the vertical integration of the potential licensee into overseas manufacturing.^[4] This makes it easy for the MNE to enforce price discrimination schemes in various countries.^[4] Therefore Humyer considered the emergence of multinational firms as "an (negative) instrument for restraining competition between firms of different nations".^[5]

Market imperfections had been considered by Hymer as structural and caused by the deviations from perfect competition in the final product markets.^[6] Further reasons are originated from the control of proprietary technology and distribution systems, scale economies, privileged access to inputs and product differentiation.^[6] In the absence of these factors, market are fully efficient.^[1] The transaction costs theories of MNEs had been developed simultaneously and independently by McManus (1972), Buckley & Casson (1976) Brown (1976) and Hennart (1977, 1982).^[1] All these authors claimed that market imperfections are inherent conditions in markets and MNEs are institutions that try to bypass these imperfections.^[1] The imperfections in markets are natural as the neoclassical assumptions like full knowledge and enforcement don't exist in real markets.^[7]

International power

Tax competition

Multinational corporations have played an important role in globalization. Countries and sometimes subnational regions must compete against one another for the establishment of MNC facilities, and the subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts sometimes offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labor standards enforcement. This process of becoming more attractive to foreign investment can be characterized as a race to the bottom, a push towards greater autonomy for corporate bodies, or both.

However, some scholars for instance the Columbia economist Jagdish Bhagwati, have argued that multinationals are engaged in a 'race to the top.' While multinationals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of lax environmental regulation or poor labour standards. As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to tailor production processes in all of their operations in conformity to those jurisdictions where they operate (which will almost always include one or more of the US, Japan or EU) that has the most rigorous standards. As for labor costs, while MNCs clearly pay workers in, e.g. Vietnam, much less than they would in the US (though it is worth noting that higher American productivity—linked to technology—means that any comparison is tricky, since in America the same company would probably hire far fewer people and automate whatever process they performed in Vietnam with manual labour), it is also the case that they tend to pay a premium of between 10% and 100% on local labor rates.^[8] Finally, depending on the nature of the MNC, investment in any country reflects a desire for a long-term return. Costs associated with establishing plant, training workers, etc., can be very high; once established in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as, e.g., expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of unnecessary 'licenses,' etc. Thus, both the negotiating power of MNCs and the supposed 'race to the bottom' may be overstated, while the substantial benefits that MNCs bring (tax revenues aside) are often understated.

Market withdrawal

Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal.^[9] For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force MNCs to make their intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil, which have viable indigenous market competitors.

Lobbying

Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations. There is no unified multinational perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries. For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones. Says Ely Oliveira, Manager Director of the MCT/IR: This is very serious and is very hard and takes a lot of work for the owner.pk

Multinational corporations such as Wal-mart and McDonald's benefit from government zoning laws, to create barriers to entry.

Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly.^[10]

Patents

Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefits from software patents.^[11] The pharmaceutical companies lobby international agreements to enforce patent laws on others.

Government power

In addition to efforts by multinational corporations to affect governments, there is much government action intended to affect corporate behavior. The threat of nationalization (forcing a company to sell its local assets to the government or to other local nationals) or changes in local business laws and regulations can limit a multinational's power. These issues become of increasing importance because of the emergence of MNCs in developing countries.^[12]

Micro-multinationals

Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers.("How startups go global". CNN. 2006-06-29. http://money.cnn.com/2006/06/28/magazines/business2/startupsgoglobal.biz2/index.htm. Retrieved 2010-05-13. ) These multinationals start operating in different countries from the very early stages. These companies are being called micro-multinationals. (Varian, Hal R. (2005-08-25). "Technology Levels the Business Playing Field". The New York Times. http://www.nytimes.com/2005/08/25/business/25scene.html. Retrieved 2010-05-13. ) What differentiates micro-multinationals from the large MNCs is the fact that they are small businesses. Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries. Internet tools like Google, Yahoo, MSN, Ebay and Amazon make it easier for the micro-multinationals to reach potential customers in other countries.

Service sector micro-multinationals, like Facebook, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities.

Low cost SaaS (Software As A Service) suites make it easier for these companies to operate without a physical office.

Hal Varian, Chief Economist at Google and a professor of information economics at U.C. Berkeley, said in April 2010, "Immigration today, thanks to the Web, means something very different than it used to mean. There's no longer a brain drain but brain circulation. People now doing startups understand what opportunities are available to them around the world and work to harness it from a distance rather than move people from one place to another."

Criticism of multinationals

The rapid rise of multinational corporations has been a topic of concern among intellectuals, activists and laypersons who have seen it as a threat of such basic civil rights as privacy. They have pointed out that multinationals create false needs in consumers and have had a long history of interference in the policies of sovereign nation states. Evidence supporting this belief includes invasive advertising (such as billboards, television ads, adware, spam, telemarketing, child-targeted advertising, guerrilla marketing), massive corporate campaign contributions in democratic elections, and endless global news stories about corporate corruption (Martha Stewart and Enron, for example). Anti-corporate protesters suggest that corporations answer only to shareholders, giving human rights and other issues almost no consideration.^[13] Films and books critical of multinationals include Surplus: Terrorized into Being Consumers, The Corporation, The Shock Doctrine, Downsize This and others.

Largest

The Economist ranks the largest transnational corporations by the dollar amount of assets they hold outside of the country that they are incorporated in. IN 2010 they were:

• General Electric

See also

References

External links

• Data on transnational corporations
• CorpWatch
• UNCTAD publications on multinational corporations
• UNCTAD—Lists of largest TNCs
• ILO—Multinational Corporations
• List of multinational companies