What Is a Multinational Corporation? (original) (raw)

What Is a Multinational Corporation?

A multinational corporation (MNC) is a company that has business operations in at least one country other than its home country and generates revenue beyond its borders. Chances are the clothes you're wearing, the smartphone in your pocket, and the transportation you take to work all have one thing in common: they were likely manufactured by an MNC, as are 90% of American imports.

Multinationals permeate nearly every aspect of our modern lives while wielding a staggering influence politically and economically, with more than a quarter of American workers employed by one. The first multinationals were colonial enterprises. The East India Company (formed 1600), Dutch East India Company (VOC; 1602), and the Hudson Bay Colony (HBC, 1649) stand out as central to imperialist histories whose rapaciousness still haunts anyone with even the vaguest sense of history. Remarkably, HBC endures, as does its core business model, sourcing clothing and other materials—while holding massive amounts of real estate—in one part of the world to sell finished goods to Western consumers.

The MNCs formed more recently have often not equipped themselves much better: Just 57 multinationals were responsible for unleashing 80% of global carbon emissions between 2016 and 2022. Yet, despite their ubiquity in what we wear and even the air we breathe, there is still widespread confusion about what defines a company as "multinational." Is it simply having offices or factories overseas? Selling products internationally? Or is there more to it?

Key Takeaways

• A multinational corporation (MNC) has business operations in at least two countries, often with headquarters in one country and subsidiaries, manufacturing plants, and offices in other nations.
• MNCs have expanded rapidly in recent decades because of falling trade barriers, the search for new markets, expanding global supply chains, and outsourcing operations to lower-cost regions.
• Multinational corporations can bring benefits like job creation, infrastructure investment, and improved quality of goods in the countries where they operate, but many are known for disreputable tax, environmental, and labor practices.
• Well-known examples of multinational corporations include Apple Inc. (AAPL), Toyota Motor Corporation (TM), Nestle SA (NSRGY), Exxon Mobil Corp. (XOM), and Coca-Cola Co. (KO).

Multinationals have fundamentally shaped the flow of capital, goods, and services in a world that they helped connect, perhaps more than any military, during the centuries-long process of globalization. Their incredible economic clout has also sparked heated debates around their power, labor practices, environmental impacts, and tax avoidance strategies. In this article, we take you through their history, organizational structures, and complex role in globalization.

Investopedia / Jessica Olah

How a Multinational Corporation Works

MNCs operate in at least two countries, with significant business activities and investments spanning across national borders. Their rise can be traced to the 1600s and colonialism, though the modern corporation took shape with the emergence of large-scale industries such as oil, automobiles, and consumer goods in the late 19th and early 20th centuries. Companies like Standard Oil, Ford, and Coca-Cola were among the forerunners in expanding their operations globally while amassing revenues on par with entire nations.

Later, the post-World War II era saw their accelerated growth, driven by trade liberalization, advances in shipping and other technologies, and the increasing interconnectedness of global markets.

Vinci SA, the French multinational construction firm, had the most subsidiaries worldwide, at 2,689. In second place is HCA Healthcare, the U.S. pharmaceutical and healthcare giant, with 2,447.

But what are they? These companies take different forms, from giant conglomerates with diverse portfolios to specialized firms focusing on specific industries or regions. Here are the main points about their structure:

• Definition: MNCs are often formally defined as business entities with one or more foreign affiliates in which the parent company holds at least a 10% ownership stake. Most foreign affiliates are 100% owned by their parents.
• Structure: MNCs typically consist of a parent company headquartered in one country, with subsidiaries, branches, or joint ventures in multiple host countries. The parent company maintains strategic control over its global operations, setting overall goals, policies, and standards. Subsidiaries are separate legal entities in the countries where they operate.
• Governance: MNCs often have centralized management, with the most important decisions made at the headquarters. However, some adopt a more decentralized approach, giving regional or country-specific management teams greater autonomy. MNCs may also have a matrix-like structure, where employees report to both functional (e.g. marketing, finance) and geographic managers (e.g. country or regional heads).

The foreign direct investment (FDI) flows of multinational corporations increased by over 106 times between 1970 and 2023, from 13billionto13 billion to 13billionto1.37 trillion.

The specific organizational design of MNCs depends on where they are and their industry. Though the two terms are often used interchangeably, multinational enterprises (MNEs) and MNCs are different. MNEs are entities that engage in foreign direct investment (FDI) and own or control production or material development firms in more than one country. This is a very broad definition for a reason: MNEs include corporations, partnerships, state-run enterprises, and other types of business structures. MNEs can be private or state-owned and may operate in various sectors, such as manufacturing, services, or extractive industries. MNCs are a specific type of MNE that takes the form of a corporation. In sum, while all MNCs are MNEs, not all MNEs are MNCs.

Developing an international presence can open up new markets where multinationals can sell goods or produce the same quality of products at lower costs. MNCs can thus reduce prices and increase the purchasing power of consumers worldwide. They may also take advantage of lower tax rates in countries eager for FDI, and critics point to their propensity for developing monopolies where they operate. This can drive up prices, squelch competition, and inhibit innovation.

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.