Multinational corporations (MNCs) are an essential component of modern business environment. However, despite widespread adoption and numerous economic benefits, MNCs have raised many concerns in the recent decades. The current paper outlines the evolution of multinational corporations, identifies their main positive and negative effects on world economy, and outlines the main arguments in favor of their regulation by the international community.
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Evolution of Multinational Corporations
Multinational corporations, also referred to as multinational enterprise, are organizations that conduct their operations on a global scale by owning or controlling the production in one or more foreign countries. Thus, the main principle behind MNCs is the ability to maximize profitability of a corporate entity by leveraging economies of scale. According to this simplified definition, it is possible to assert that at least some of the events in early history of humanity can be considered examples of MNCs in their most primitive form. However, the majority of scholars agree that imperialist ventures that emerged in Western Europe in the sixteenth century are more appropriate examples since they share several important characteristics, such as a corporate origin, reliance on international trade, and use of regional characteristics to leverage profitability. The most evident examples of these early MNCs are British East India Company and Hudson’s Bay Company, organizations created to facilitate trade and colonization.
It is worth noting that at the time, these ventures’ main purpose was to expand the territories of their home countries through land acquisition, which essentially made them the main instrument of colonization in the era. Interestingly, the cultural and socioeconomic effects of these activities were acknowledged and prioritized, leading to the perspective where overseas expeditions were viewed as agents of civilization. Most historians agree that overseas trade in the colonization era had profound effects on economic, social, political, and cultural development of host countries which can be observed even today (Cawthorne). The onset of industrial capitalism in nineteenth century was another major milestone in the development of international organizations. Technological advancements in the domains of manufacturing, the shift towards factory-based production, and the improvements in the fields of communication and transportation provided the stakeholders with additional opportunities for profit generation. At this point, foreign direct investment, the practice of issuing control over manufacturing process in host countries, has become a mainstay of MNC framework at this point. The development of effective and inexpensive communication systems strengthened the control over the activities in host countries, thus solidifying the concept of MNC in its current form.
By the end of the nineteenth century, it became apparent that the scope and scale of MNC activities became unprecedented, with certain industries displaying concentration of transactions in international trade. In the U.S., the overwhelming majority of banana imports were controlled by a single multinational corporation, United Fruit Company by the end of the nineteenth century (Casson 200). Similar trends were observed in other agricultural sectors as well as petrochemical industry.
The pace of scientific and technological development of the twentieth century, coupled with the onset of major global conflicts, created a surging demand for energy and, by extension, the need for natural resources. This demand sustained the growth of MNCs in the first half of the twentieth century. At this point, the United States entered the international scene, starting with I. M. Singer and Company, the first US-based MNC founded by a French entrepreneur, and later joined by other prominent players such as Eastman Kodak, General Electric, and Westinghouse. Simultaneously, the Japanese financial conglomerates, zaibatsu, expanded in control over industrial and trade sectors at a national scale and entered other countries, further diversifying the MNC scene.
By the second half of the twentieth century, the field of foreign direct investment was dominated by the U.S., European, and Japanese companies, with each side providing significant investment in industrial stock, thus solidifying the MNC approach in the modern economy. The gradual emergence and adoption of information technology provided the necessary boost to international operations, stemming primarily from its automation and communication capabilities. As a result, in the 1970s the capital concentration of corporate entities reached an unprecedented scale. For instance, the number of corporations with assets of more than $500 million increased from 3 in 1906 to 333 in 1971, with one third of these having assets of more than $1 billion (Jaworek and Kuzel 57). It is also estimated that by this time, at least 70 percent of global trade was handled by MNCs (Jaworek and Kuzel 57).
Currently, more than 40,000 multinational companies exist, with the majority of them originating from the developed countries. However, it should be pointed out that the wealth distribution of these entities is uneven, with top 100 corporations in possession of the overwhelming majority of assets. However, the developing countries also actively seek participation in MNC domain, creating a formidable competition to Western players. Recently, a new subtype of an MNC, transnational corporation, has emerged. Its main difference from a traditional MNC is the lack of association with a particular home country. A good example of a transnational corporation is Nestle, who spreads its operations across multiple countries to gain responsiveness on a global scale instead of adding foreign subsidiaries while rigidly identifying with a specific country. Essentially, a transnational corporation further enhances the principles established by MNCs by capitalizing on its strengths and utilizing its capacity for local responsiveness.
Influence of MNCs on Modern Economy
The massive growth of MNCs coupled with the increasing scale of their operations eventually raised concerns regarding their influence on economy. The default view provided by the notion of economic liberalism and the principles of free market suggests that MNCs are ultimately beneficial for economic development. Multinational corporations create unparalleled opportunities for self-interest maximization, thus providing a safeguard of values for economic liberals (Röpke 212). The main advantage in this regard is the benefit of economies of scale, which result in lower costs for companies as well as more attractive prices for the consumers. By extension, it is possible to view this factor as a major contributor to the increase in overall quality of life due to increased affordability of goods and services. In addition, MNCs are often credited for the creation of wealth and jobs in developing countries and, thus indirectly facilitating their development. Next, MNCs created an environment favorable for development of intangible assets through significant investment in research and development on a scale unacceptable for smaller entities. Finally, standardization of production and control processes boosted consumers’ confidence by fulfilling customer expectations and enabling trust between stakeholders.
However, some scholars also point to several major adverse effects created by MNCs. The first issue deals with the possibility of manipulative intra-company price transfers. Despite the focus on international operations, a significant proportion of trades facilitated by a multinational corporation is done internally. While the said proportion has remained steady in the recent decades, its absolute value has grown dramatically. At the same time, intra-trade allows circumventing national regulations and misusing established market mechanisms, both of which can be considered unfair practices. On a large scale, these actions may press host countries to alter their taxation policies in order to attract investors, which offers speculative power to MNCs. In addition, the reliance on international trade introduces the factor of currency exchange rate.
Typically, exchange rate is determined by one of several exchange rate systems. Fixed exchange rate system is arguably the most straightforward approach, where the rate is either constant or exhibits few fluctuations due to rigid control of financial institutions. Fixed rate is attractive to MNCs as it offers stability of investment. In floating exchange rate system, the rate is determined based on the principles of free market with little to no external interference. While such volatility may provide high rewards in certain scenarios, it is less predictable and, by extension, less suitable for strategic planning and long-term control of profits. Finally, managed float exchange rate system is a combination of the former, since the rate is determined largely by free market laws with occasional interference of the governments. The factor of government control gives MNCs the opportunity to influence the rate in a way that would maximize its profits. However, these manipulations are usually harmful for host country’s economy.
Another popular issue with MNCs is the tendency to maximize profits by circumventing international regulations and laws. The most vulnerable areas in this regard are workplace safety and environment. MNCs in developing countries often demonstrate huge gaps in workplace safety and violations of environmental guidelines and regulations (Zhao 656). Considering the scope of their operations, it becomes evident that their total impact is enormous. For example, MNCs are considered responsible for the majority of current carbon imprint and the production of compounds that disrupt the planet’s ozone layer. Massive extraction of natural resources, a process monopolized by MNCs, has numerous adverse effects observable on a large scale. Currently, it is reasonable to expect that virtually every major environmental issue can be traced to an MNC responsible for it. In addition, despite seemingly positive implications for job market, the practice of moving operations to areas with lower employee wages reduces the bargaining power of trade unions and, by extension, undermines the integrity of hiring practices.
Finally, it should be acknowledged that the identified manipulation opportunities can be used to influence the political environment of a host country. In some cases, MNCs explicitly attempted to use their influence to pursue a certain political agenda, as exemplified by the International Telephone and Telegraph’s offer to influence the outcome of presidential elections in Chile. The same tendency can be observed at an international level. The recent attempts to introduce unified international trade regulations were actively and, in some cases, successfully, lobbied by TNCs in order to eliminate barriers to profit maximization.
Regulations by International Community
The concerns outlined above have prompted several suggestions regarding the necessity to regulate the international market. However, the proposed regulations conflict with certain economic schools of thought, leading to controversies. From the utilitarian perspective, an action is considered beneficial if it maximizes positive outcomes for all stakeholders. Interestingly, from this viewpoint, an action that significantly benefits some of the stakeholders while having no negative impact for the overwhelming majority can be justified as ultimately positive. Thus, it is argued by some that the unregulated, self-regulating, liberal economy is the most feasible option for all entities engaging in international trade, which implies that regulations are not only unnecessary but undesirable.
However, this perspective contains a major flaw – namely, it does not acknowledge a multitude of indirect effects of MNC activities in developing countries. Specifically, the harmful impact on environment has a profound negative effect even by the conservative estimates. In addition, its impact is expected to be felt on a much wider time frame, eventually nullifying the initial economic gain created by foreign direct investment. It is also worth noting that in its most basic form, utilitarianism utilizes the concept of happiness, or well-being, as its central variable. While neither of the concepts can be strictly defined, it is evident that its determinants reach far beyond the financial gain and related benefits of employment opportunities and economic flexibility. In other words, it would be unreasonable to measure “common good” using economic growth as a sole measurement of its success. From this point of view, regulations by international community are an absolute necessity.
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Multinational corporations are a relatively old phenomenon. However, its exponential growth has led to the emergence of several negative factors that nullify the positive economic implications of the concept. Thus, the introduction of guidelines and principles that would prioritize human rights and needs over monetary profits is expected to create more sustainable business environment. Specifically, the increase in the quality of life of local population associated with MNC activities in the region will establish trust of potential employees, ensuring a healthy labor market. Next, responsible environmental policies will ensure the availability of resources. Finally, compliance with international regulations will strengthen the corporate image, thus garnering loyal customer base and expanding collaboration opportunities.
Casson, Mark, editor. The Growth of International Business (RLE International Business). Routledge, 2013.
Cawthorne, Ellie. “The East India Company: How a Trading Corporation Became an Imperial Ruler.” History Extra. 2017, Web.
Jaworek, Małgorzata, and Marcin Kuzel. “Transnational corporations in The World Economy: Formation, Development and Present Position.” Copernican Journal of Finance & Accounting, vol. 4, no. 1, 2015, pp. 55-70.
Kumar, Ashwani, and Dirk Messner, eds. Power Shifts and Global Governance: Challenges from South and North. Anthem Press, 2010.
Röpke, Wilhelm. A Humane Economy: the Social Framework of the Free Market. Open Road Media, 2014.
Zhao, Meng, et al. “From Voids to Sophistication: Institutional Environment and MNC CSR Crisis in Emerging Markets.” Journal of Business Ethics, vol. 122, no. 4, 2014, pp. 655-674.