June 23, 2024
Characteristics of a Multinational Corporation
Characteristic Description Benefits Challenges Examples
Global Reach Operates and has a significant market presence in multiple countries. Access to diverse markets Navigating different regulations Coca-Cola, operating in over 200 countries and territories.
Diverse Operations Engages in a wide range of business activities across different industries and sectors. Diversification of risk and new markets Potential overextension Samsung Electronics Co., Ltd. (SSNLF), involved in electronics, construction, shipbuilding, and financial services.
Intricate Business Structure Maintains a complicated business model and organizational structure to manage global operations. Efficient management of diverse operations Coordination and communication complexity Proctor & Gamble Co. (PG), which combines global business units and selling and market operations.
Foreign Direct Investment Invests directly in foreign countries, establishing subsidiaries and production facilities. Control over foreign operations High initial investment, political risks Toyota Motor Corporation (TM) has established numerous production plants and research centers across the globe.
Breadth of scale Typically giant enterprises with significant financial resources and market power. Cost efficiencies, diversification of risk, market power Complexity and bureaucracy Apple, with a market capitalization of about $3 trillion.
Brand Recognition Typically have strong brand recognition and global marketing strategies. Enables MNCs to command premium prices and foster customer loyalty Maintaining a consistent and positive brand image across different cultures and regulatory environments can be challenging and costly McDonald’s Corp. (MCD), with its iconic golden arches recognized worldwide.
International Taxation Pays taxes in multiple countries, navigating different statutory tax rates. Potential tax savings through optimization Complex tax compliance, risk of penalties Starbucks Corp. (SBUX) has faced scrutiny controversy for using complex tax structures to shift profits to low-tax jurisdictions.
Financial Reporting Standards Reports financial information according to International Financial Reporting Standards. Transparency, comparability across borders Adhering to different accounting standards Siemens AG (SIEGY), the German conglomerate, must adhere to diverse financial reporting standards across across jurisdictions.

Types of Multinational Corporations

  • Decentralized corporation: This type of MNC maintains a presence in its home country and has autonomous offices and other facilities globally. Each office manages the local business itself, making its own decisions.
  • Centralized global corporation: A central headquarters is located in the home country. Executive officers and management manage the overseas offices and operations, as well as domestic operations. The subsidiaries must get approval from headquarters for significant activities.
  • International division of a corporation: This is the part of an MNC responsible for all global operations. They can function independently of domestic operations, which can pose problems when overall corporate consensus and action are required.
  • Transnational corporation: A parent-subsidiary structure in which the parent company oversees the operations of subsidiaries in foreign countries and the home country. Subsidiaries can use the parent’s assets, such as research and development data. Subsidiaries may be different brands. Though differentiated in the past, the term is now virtually synonymous with MNCs.

Multinational Corporations and Foreign Direct Investments

The post-World War II era saw a significant acceleration in the growth of MNCs, fueled by advances in transportation, shipping, communication, and trade liberalization. The rise of global brands like Coca-Cola, International Business Machines Corporation (IBM), and McDonald’s exhibited the growing reach and influence of MNCs.

These global entities had the power to shape economies, industries, and societies across borders, making them a force to be reckoned with in the modern world. For critics, it seemed that as the armies of Europe receded from their colonies, MNCs stepped in to take their place.

The Contributions of MNCs

Spanning continents and with the ability to mobilize resources larger than many nations’ annual revenues, MNCs can drive economic growth and development for millions. Multinationals have attracted praise for their benefits to economic growth and criticism for their potential to exert undue influence over so-called “host” countries—those nations where their subsidiaries set up shop. International Monetary Fund (IMF) and other economists generally credit MNCs’ positive contributions to global development. Among the most significant is their ability to attract foreign direct investment (FDI), which can inject much-needed capital, technology, and expertise into an economy.

The most common method of FDI is when a multinational acquires a local firm, but it can include foreign joint ventures, constructing new plants, and reinvesting earnings in a foreign subsidiary. Given the natural involvement of MNCs in these investments, it’s an indirect measure of their spread into new markets. According to the World Bank, total FDI inflows to developing countries were $1.37 trillion in 2023.

Typically, economists analyze inflows for specific nations to see if MNCs and others are finding a country a good place to invest. The more FDI coming into a country, the more jobs it can produce and the more taxes it can collect. FDI inflows don’t include portfolio investments like buying bonds, stocks, and other assets in a foreign country without gaining ownership control.

For decades, the IMF argued for countries to increase their FDI inflows through lower taxes and less regulation (hence shrinking the size of the state), which its economists typically couch in the moral language of “macroeconomic discipline.” As such, for much of the post-colonial period, the IMF and other multinational organizations have been pushing developing economies to attract MNCs to set up shop there, making FDI the most capital flows into less-developed countries for the decades after decolonization.

Critiques of MNCs

However, this push for increased FDI has not been without its critics, particularly those in developing countries. MNC influence has raised complex questions about the role of foreign investment, the distribution of benefits, and popular and local sovereignty. Once an MNC moves into an area, it can often sideline local industries and then use its monopolistic hold to gain significant political influence in the country. Then, in moves reminiscent, for some, of the flows of capital during the era of state colonialism, the profits might be repatriated by MNCs to their home country, limiting the benefits of FDI for host countries. These issues have led to various responses from host governments, including protests, restrictions, exclusion, and even expropriation of MNCs.

Meanwhile, it’s become clear that many MNCs aren’t returning their funds to where they’re headquartered. As a percentage of GDP, the highest FDI inflows aren’t into the U.S. or newly opened markets but tax havens like the Cayman Islands, which have no corporate income, capital gains, or payroll taxes. This makes it an attractive destination for multinational corporations to park funds to minimize their taxes to the countries where that wealth was earned.

Critiques of MNCs tend to fall under the following categories:

  • Environmental devastation: MNCs have been accused of prioritizing profits over environmental protection, leading to deforestation, pollution, and unsustainable resource extraction in the pursuit of cheap inputs.
  • Labor exploitation: Critics point to poor working conditions, low wages, and lack of worker rights in many places where MNCs operate, amounting to a race to the bottom in labor standards among the countries competing for FDI inflows.
  • Tax avoidance: Countries worldwide lose billions in tax revenues due to aggressive tax planning strategies MNCs use to shift profits to low-tax jurisdictions.
  • Crowding out local businesses: The market power and economies of scale of large MNCs make it difficult for local firms to compete, stifling local entrepreneurs.
  • Political blackmail: Some argue that the IMF and World Bank’s policy prescriptions to attract FDI, such as deregulation and austerity, undermine governments’ ability to invest in public services and protect national interests. However, giving up FDI would mean turning away funds needed for local development, leading to Faustian bargains for many developing countries.

The Slowdown in FDI Flows

Below is a chart of the global FDI inflows as a percentage of gross domestic product (GDP) in recent decades. As you can see, the percentage spikes at the turn of the millennium, during the financial crisis, and then immediately after. This indicates a substantial increase in the flow of foreign capital into economies worldwide, reflecting a growing interest from multinational corporations and investors in expanding their operations and investments abroad. It could also, of course, suggest moments when capital flowed abroad, when there was significant volatility in the home markets. The largest FDI inflows occur into the U.S. and other developed economies.

Developing countries have encouraged FDI—that is, the expansion of MNCs—to finance infrastructure and create new jobs for local workers. For their part, the MNCs gain from FDI by expanding further into international markets.

Several factors are said to drive increases in FDI inflows, a measure of MNC expansion beyond their home countries’ borders:

  • Economic liberalization: Many countries have opened up their economies to foreign investment by reducing trade barriers, easing restrictions on capital flows, and creating more favorable investment climates.
  • Technological advances: Improvements in communication and transportation have made it easier for companies to operate across borders and manage global supply chains.
  • Emerging markets: The rapid growth of emerging markets has created new prospects for foreign investors seeking higher returns in relatively untapped markets.
  • Financial globalization: The increasing integration of financial markets has made cross-border capital flows possible and made it easier for investors to invest in foreign projects.

Global FDI flows have declined significantly as a share of GDP from around 3.3% in the 2000s to only 1.5% or so in recent years, and this drop has disproportionately affected emerging markets. While FDI flows to developed countries like the U.S. increased by 29% in 2023, flows to developing countries decreased by 9%. 

While the percentages and acronyms thrown around in many of these discussions can seem abstract, the consequences are not. These represent millions of jobs, the aspirations of local and regional economies, and massive inequalities worldwide that keep poverty entrenched in some regions of the globe.

The political stakes couldn’t be higher. The terms economists use for the recent drop in FDI flows include “global economic fragmentation,” which suggests a movement away from a previous era’s economic integration and globalization. The trade wars between the U.S. and China, the pandemic, rising nationalism, and regional wars have upended earlier investment patterns, just as they have billions of lives. We seem to have entered a new chapter, perhaps, in the history of the multinational corporation.

Why Would a Business Want to Become a Multinational Company?

Usually, a business’s primary goal is to increase profits and growth. If it can grow a global customer base and increase its market share abroad, it may believe opening offices in foreign countries is worth the expense and effort. Companies may benefit from certain tax structures or regulatory regimes found abroad.

How Do Multinational Corporations Influence Global Trade Policies?

MNCs greatly affect trade policies through lobbying efforts and economic diplomacy. They advocate for trade agreements and regulations that favor their business operations, often helping to shape policies to reduce tariffs, improve market access, and protect intellectual property rights. MNCs leverage their economic might to negotiate favorable terms with governments, influencing international trade to attain environments conducive to their growth.

What Are Some Risks Multinational Corporations Face?

Multinational corporations are exposed to risks related to the different countries and regions in which they operate. These can include regulatory or legal risks, political instability, crime and violence, cultural sensitivities, and fluctuations in currency exchange rates.

The Bottom Line

Multinational corporations are as influential as any stakeholders in the global economy, with the potential to drive economic growth and development in the countries where they operate. However, their impact on host countries, particularly in the developing world, is not without controversy. While MNCs can bring valuable foreign direct investment, technology, and expertise, they also raise concerns about exploitation, loss of sovereignty, and uneven distribution of benefits.

As global FDI flows decline, especially in developing countries, policymakers, businesses, and civil society must work together to create a more balanced and equitable framework for international investment. Ultimately, the role of MNCs in global development is complex and constantly evolving, shaped by the actions and decisions of countless stakeholders worldwide.

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