Multinational Corporations in the International Economy
Transnationalization in the business sector is one of the most distinctive features of the modern system of international economic relations, which is realized in the economic structures of multinational corporations (MNCs). MNC is an international organization, which operates on the principle of corporate ownership of the stock form of management and distribution of income on the international scale. Its important feature is the implementation of a single coherent strategy of MNC through one or more centers for financial and economic decision making. The activities of multinational corporations extend to practically all areas of economic activity. Therefore, they are important factors in today’s global economy.
Nowadays, automobile production, oil mining and transportation, as well as electrical and electronic equipment production are among the priorities of multinational corporations and leading industries in the world. Globally, commercial transnationalization, deepening concentration and specialization of production processes, means optimizing the use of resources, such as natural energy and raw material, labor and capital.
The reasons for creation of transnational corporations are very diverse, but they all are more or less related to the benefits of using the elements of planning in comparison to a “pure” market. As the “big business” replaces the natural development of corporate planning, multinational corporations are a kind of “planned economy”, consciously taking advantages of the international division of labor.
The possible criteria of the multinational corporation are the number of countries where the enterprise operates (according to the different proposed approaches, it involves a minimum of two to six countries). These criteria include the minimum number of countries in which the production facilities are located; a certain size, achieved by the company; a minimum share of foreign operations in the income or sales company (typically 25%). They also include possession of at least 25% of the “voting” shares in three or more countries – the minimum foreign equity participation in the share capital, which would provide firm control over economic activities of foreign companies. It is also aimed to represent foreign direct investment and multi-ethnic composition of the company’s personnel, as well as of its senior management.
MNCs play an important role in the development of international economic relations. Previously, the features and trends of international cooperation and international division of labor were associated exclusively with the cooperation of countries, interaction of national economic systems, and the modern view on the problem associated with the dual nature of the process optimization of corporate management. It is primarily the expansion and deepening of the international division of labor, provided by a broad base of cooperation between various links of multinational corporations and specialized large businesses.
International corporations are essential elements in the development of the world economy and international economic relations. They are direct participants in the whole spectrum of global economic relations, being “locomotives” of the world economy. International (multinational) corporations, on the one hand, are products of the rapidly developing international economic relations, and, on the other hand, they represent a powerful mechanism of influence on them.
By the end of the 1990s, the world economy had about sixty thousand multinational companies. 85% out of 500 the most powerful multinational companies, control 70% of foreign investments.
The bulk of multinational corporations is concentrated in the US, EU, and Japan. The volume of output at the corporate enterprises exceeds $1 trillion. They employ 73 million workers.
The Characteristics of Multinational Companies
MNCs are the companies that have an annual turnover exceeding 100 million USD. They have offices in more than six countries. In recent years, the international status of such corporation was determined by indicators such as the size of the percentage of its sales and the amount of products sold outside the country of its origin. Some foreign studies include multinational corporations with 25% of its assets abroad.
The most common cause for the MNC establishment is the internationalization of production and capital based on the development of the productive forces outgrowing the national frontiers. The internationalization of production and capital acquires the expansion of economic relations through creation of many branches abroad and transformation of national largest companies into multinational corporations. The flow of capital becomes the most important factor in the formation and development of multinational corporations. The specific causes of the MNC formation should include their cost-effectiveness due to large-scale production in many industries. The need to survive in the competitive environment contributes to the concentration of production and capital on an international scale.
The state plays an important role in the development of national and multinational corporations. It encourages them to work at the global arena and provides them with markets through conclusion of various international treaties, as well as political and economic agreements with trade unions. The practice of supporting large domestic businesses in Japan or in the Republic of Korea (now known international corporations such as “Samsung”, “Daewoo “) is one of the examples. There is a special program to support domestic multinational corporations in China.
There are various definitions of international monopolies: multinational corporations, international corporations, multinational companies, global companies, and others.
- Transnational corporations (MNCs).
- International corporations are national monopolies with foreign assets, whose activities go beyond one state. The legal regime presupposes business activity, carried out in different countries through foreign affiliates in the form of structural units without legal independence and subsidiaries. Ethnocentric type of relationship is characteristic of international companies. The senior management of such corporations focuses on absolute priority of the parent company.
- Multinational corporations (MNCs) are, in fact, multinational enterprises and national companies, which bring together a number of states on the industrial, scientific and technical basis. Examples of such corporations are the Anglo-Dutch company “Royal Dutch Shell”, the Swiss-Swedish company ABB, specializing in mechanical engineering and electrical engineering, “Unilever”, “Phillips”, and others.
Multinational corporations, being the products of objective economic processes that are taking place in the global economy, have a number of specific features.
Main features of MNCs are:
- the presence of the multinational equity;
- the existence of multi-ethnic governing center;
- the acquisition of foreign affiliate administration staff who know local conditions.
The latter, incidentally, is peculiar to many multinationals. Generally, the boundaries between the two groups of international companies are very mobile since one form can easily transit to another.
Polycentric relationship, which usually occurs between the parent company and subsidiary companies, is characteristic of multinational corporations. It means that the external market is more important sector of multinational corporations as compared to the domestic market. These foreign branches of MNCs not only sell products of the parent company, but also produce them at the local level, according to the needs of their markets. Moreover, multinational corporations are characterized by high levels of decentralization of management functions and delegation of authority subsidiaries.
Capital movement of MNC usually takes place regardless of the processes occurring in the home country of the corporation. MNC establishes an international system of production based on the placement of branches and subsidiaries in many countries of the world.
MNC permeates high-tech and knowledge-intensive industries, which require huge investments and highly skilled workers (personnel). There is a tendency to monopolize these MNC industries.
An essential feature of international companies is diversification of their production and services. Thus, Swedish automobile manufacturer “Volvo” produces not only world famous cars. This MNC, which has more than thirty subsidiaries in different parts of Sweden, and several dozens of subsidiaries abroad, produces boat and aircraft engines, as well as food and even beer (‘Pripps’). In turn, each of the 500 largest US multinationals has about eleven branches, and the most powerful ones cover thirty to fifty branches. The number and nature of the members of the MNC enterprises are mainly determined by economic expediency.
With its strong industrial base, multinational corporations carry out such production and trade policy, which ensures highly efficient production planning, as well as product market. Planning, being carried out within the parent company, also applies to subsidiaries.
Expanding their influence, MNCs use a variety of forms of development of the world market. These forms are largely based on the contractual relationship and are not associated with participation in the equity of other companies. Furthermore, other forms of MNC expansion usually include licensing, franchise, management contracts, technical and marketing services provision, joint ventures creation agreement limits, and specific operations implementation agreements.
In practice, it is quite difficult to clearly distinguish between this or that form of multinational corporations. They are used indiscriminately and are often intertwined. An important feature of these forms is that they are used largely in order for MNC to strengthen centripetal tendencies.
For the major industrialized countries, multinational corporations determine the nature of international relations by their foreign activities. For example, up to 40% of the property of the largest 100 MNCs (including financial property) is outside of their home countries.
The Positive Impact of Multinational Corporations
The international production of MNC gives a number of advantages. It provides opportunities for international production specialization of individual countries; maximizes the use of tax and investment, and other benefits provided by countries for foreign investors. It helps to maneuver capacity utilization, adapting their manufacturing programs in accordance with the situation on the world market. It also uses their subsidiaries as a base for the conquest of emerging markets. By investing in many developing countries, multinational corporations are building factories for the needs of those countries, which are the recipients of capital. Lastly, MNCs extend the life cycle of the product, establishing its production through foreign affiliates as it becomes older in home country and its headquarters.
Additional profits of multinational corporations can be obtained due to the differences in the security and value of natural resources of residing states, in workforce skills and wages, in antitrust and labor law, in the level of taxation based on the environmental standards, instability of currencies, among others.
Multinational corporations allow achieving a significant centralization of capital, which includes the possibility of activities diversification, risk reduction, crisis impacts mitigation, and flexible organizational structure management. Additionally, it is necessary to consolidate the financial statements within the entire system in order to develop a strategy for lowering taxes. Then, it will be possible to redistribute profits between companies within the corporation in order to receive the highest return and enjoy tax benefits. Multinational corporations benefit because of joint formation of the market, a monopoly on this market, and an opportunity to be in the dominant position.
MNCs greatly contribute to the economy of the host country as well as the global world economy because they promote optimal allocation of all resources. Thus, multinational corporations promote optimal allocation of production and expand international cooperation. Moreover, new products and technologies are more actively applied. The basis of world domination of MNCs is the export of capital and its effective deployment. The total foreign investment of multinational corporations now plays a more important role than trade.
Multinational corporations are active in international financial markets due to their huge capital. Total foreign exchange reserves of MNCs are several times greater than the reserves of all central banks in the world combined.
The industrial structure of MNC is wide enough, comprising 60% of the material companies engaged in production, 37% of companies involved in the service sector, and 3% of companies involved in mining and agriculture. Obviously, there is a trend of increasing investment in services and technology-intensive production. At the same time, the share of the mining industry in agriculture and resource-intensive production is reduced.
MNCs are increasingly becoming determining factors in deciding the fate of a particular country in the international system of economic relations. Active industrial, investment, and trade activities of multinational corporations allow them to perform a function of international regulators of production and distribution, and even, according to experts of the United Nations, to promote economic integration in the world.
Multinational corporations account for 40% of world trade in services, and 90% of patents, licenses, and hi-tech sales. The one hundred largest multinational corporations hold 40-50% of all foreign assets. If to compare the assets of hundred companies with a total of assets worldwide, which is estimated at $20 trillion, it turns out that these hundred companies hold approximately 16% of the productive assets all over the world, and three hundred largest companies control around 25% of all assets.
MNCs received many benefits from intra-trade relations since they were based on the so-called transfer pricing. Intercompany transfer pricing refers to a kind of prices, which are widely used for the exchange of goods and services within multinational corporations. As a rule, the specific details of these prices is a trade secret, as their level is significantly different from the supply prices of the same goods between independent enterprises, outside the framework of transnational corporations. In the context of expansion of the production activities of transnational corporations, the role of in-house transfer pricing, as an instrument of international exchange, has consistently increased. MNCs use these prices for calculation of the cost of production and other economic indicators that help minimize the income from which taxes must be paid, as well as to finance activities of some MNCs units. Importantly, one-third of world trade currently goes through in-house international turnover. This means that the MNCs significantly changed the nature of world trade, a third of which is distributed not between distinct owners, but within multinational corporations.
The main advantage of the multinational corporations is an ability to develop their relationship within the company. Intra-firm trade, which, in its form, is international trade between individual branches and subsidiaries of transnational corporations located in different countries became widespread. Intra-trade exchange between different parts of multinational firms protects them from the effects of international competition, thereby having a great impact on the entire turnover.
According to UNCTAD, in 2012, the accumulated worldwide FDI reached 23 trillion USD. It resulted in more than 86 trillion dollars, further evaluated and controlled assets by MNCs, including foreign branches involved in allocation of assets of the local partners. Sales of foreign affiliates of multinational corporations amounted to about 26 billion USD; the volume of added value generated by these branches exceeded 9% of global GDP, while their exports were estimated at 7.5 billion USD, accounting for one-third of all world trade. The foreign affiliates of MNCs employ about 72 million people. It is only around 2% of the economically active population around the globe, even as FDI in labor-intensive sectors represents a more high-performance businesses over national competing companies.
Negative Impact of Multinational Corporations
While considering the positive aspects of the MNCs functioning in the world economy and international economic relations, there are several negative impacts on the economies of the countries where they operate. These disadvantages include countering implementation of the economic policy of the states where multinational corporations operate, as well as violating laws of the host countries. The main causes of these drawbacks are manipulation of transfer pricing policy and operation of MNCs subsidiaries in different countries, cleverly circumventing the national legislation in order to shelter income from taxation by transferring it from one country to another. Moreover, the establishment of monopoly prices and dictation of conditions prejudicial to the interests of developing countries belong to other negative sides. In general, multinational corporation is a complex and constantly evolving phenomenon of economic relationships in the world economic system, which requires constant attention, learning, and international control.
MNC intrudes into areas that have traditionally been considered areas of public interest. Considering the scope of their activities and divergent interests of the host country, MNCs are able to resist implementation of the economic policy of the countries in which they operate, disorganizing foreign trade of the partner country.
Multinational corporations are able to bypass national laws on taxation, which results in insufficient funds in state and local budgets of the host country. The predatory exploitation of natural and human resources of the country often characterizes MNCs. These corporations tend to concentrate research facilities and technological innovations in the home country; therefore, the host countries are less advanced in the field of science, engineering and technology in comparison with the home country of the parent corporation.
The activities of influential MNCs, whose economic power exceeds the capacity of many states, become a qualitative change in the system controlling the world economy. In the mid twentieth century, the main regulators of the world economic order were the governments of stronger states. The situation has changed by the end of the twentieth century due to creation of a certain “third power”. Thus, in addition to national governments, multinational corporations and supranational organizations started to affect economic relationships on a global scale.
Multinational corporations indicate that their level of concentration of capital and production has outgrown national borders; such enterprises have taken a strong position not only in the national market, but also in the global economy. Considering the contribution of multinational corporations to the world economy, their particular importance in the transfer of knowledge through training of local personnel and introduction of local entrepreneurs to the new technologies and management methods is obvious. For many countries, FDI of multinational corporations is a valuable source of capital, which is actually not necessary to return as opposed to borrowed funds.
Ultimately, MNCs are actively engaged in the modernization of the global economy. However, in a number of less developed countries, the activities of multinational corporations are controversial, including their negative attitude towards local corruption (although this does not prevent foreign investors from adapting to it). Considering their practice of transfer pricing, undervaluation of transnationalization in the business sector, which is one of the most distinct features of the modern system of international economic relations, is realized in the economic structures of multinational corporations.
Multinational corporations comprise of international partners as well as personnel. Their important feature is the implementation of a single coherent strategy through one or more centers for financial and economic decision making. This way, they spread own tendencies of doing business and economic activities all over the world. The activities of multinational corporations extend to practically all areas. Therefore, they are important factors in today’s global economy. Despite the fact that operations of MNCs have advantages and disadvantages, the growing importance of such organizations for the global economy is undeniable.