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 7but 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 the foreign direct investment fdi flows of multinational corporations increased by over 106 times between 1970 and 2023 from 13 billion to 1 37 trillion 8the 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 corporationsmultinational corporations and foreign direct investmentsthe 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 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 10 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 8typically 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 11 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 12however 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 8 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 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 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 13 while fdi flows to developed countries like the u s increased by 29 in 2023 flows to developing countries decreased by 9 8while 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 13 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 