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A multinational corporation (MNC) or transnational corporation (TNC), also called multinational enterprise (MNE)^[1], is a corporation or enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation.

The first modern MNC is generally thought to be the British East India Company, established in 1600. Very large multinationals have budgets that exceed some national GDPs. Multinational corporations can have a powerful influence in local economies as well as the world economy and play an important role in international relations and globalization.

Contents 1 Market imperfections 2 International power 2.1 Tax competition 2.2 Market withdrawal 2.3 Lobbying 2.4 Patents 2.5 Government power 3 Micro-multinationals 4 See also 5 References 6 External links

[edit] Market imperfections

A multinational enterprise is facing the paradox that although it doesn't have the contacts and knowledge of local customs and business practices as indigenous competitors and located in one country, it does business in another country.^[1] If there are unique assets of value overseas, why not sell or rent these assets to local entrepreneurs, who could then combine them with local factors of production at lower costs than those experienced by foreign direct investors?^[1]

The answer to this paradox is that there might be circumstances under which using market exchange to coordinate the behavior of agents located in two separate countries is less efficient than organizing their interdependence within a multinational firm.^[1] When this is the case, a firm located in one country may find it profitable to incur the additional costs of operating in a foreign environment.^[1] The idea that MNEs owe their existence to market imperfections was first put forward by Hymer, Kindleberger and Caves.^[2] The market imperfections they had in mind were, however, structural imperfections in markets for final products.^[1] Hymer, for example, considered two firms, each a final product monopolist in its own market, isolated from competition by high transportation costs and tariff and non-tariff barriers.^[1] A decline in these costs exposed them to each other's competition and reduced their profits.^[1] A combination of the two firms, through merger or acquisition, into an MNE would then maximize their joint income by forcing them to take into account the gains and the losses competition inflicts on them.^[1] The transformation of two domestic firms into one MNE thus internalized pecuniary externalities and produced a gain for the owners of these tow firms, but not necessarily for society, since it redistributed income towards the MNE and away from its customers.^[1]

A similar case arose when the technology had often few substitutes and the number of potential licensees in any given foreign market was also often limited, thus creating a biletaral monopoly.^[1] The consolidation of licensor and licensee within an MNE (by acqusition or merger of the potential licensee or by vertical integration of the innovator into overseas manufacturing) reduced haggling and made it easier to enforce price discrimination schemes across countries.^[3] This analysis of the reasons behind the emergence of multinational firms led Hymer to take a negative view of MNEs, which he considered an instrument for restraining competition between firms of different nations.^[4]

According to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentation^[5], but in their absence markets are perfectly efficient.^[1] By contrast, the insight of transaction costs theories of the MNEs, simultaneously and independently developed in the 1970s by McManus (1972), Buckley and Casson (1976), Brown (1976) and Hennart (1977, 1982), is that market imperfections are inherent attributes of markets, and MNEs are institutions to bypass these imperfections.^[1] Markets experience natural imperfections, i.e. imperfections that are due to the fact that the implicit neoclassical assumptions of perfect knowledge and perfect enforcement are not realized.^[6]

[edit] International power

[edit] Tax competition

Multinational corporations have played an important role in globalization. Countries and sometimes subnational regions must compete against one another for the establishment of MNC facilities, and the subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts sometimes offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labor standards enforcement. This process of becoming more attractive to foreign investment can be characterized as a race to the bottom, a push towards greater autonomy for corporate bodies, or both.

However, some scholars, for instance the Columbia economist Jagdish Bhagwati, have argued that multinationals are engaged in a 'race to the top.' While multinationals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of lax environmental regulation or poor labour standards. As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to tailor production processes in all of their operations in conformity to those jurisdictions where they operate (which will almost always include one or more of the US, Japan or EU) which has the most rigorous standards. As for labor costs, while MNCs clearly pay workers in, e.g. Vietnam, much less than they would in the US (though it is worth noting that higher American productivity—linked to technology—means that any comparison is tricky, since in America the same company would probably hire far fewer people and automate whatever process they performed in Vietnam with manual labour), it is also the case that they tend to pay a premium of between 10% and 100% on local labor rates.^[7] Finally, depending on the nature of the MNC, investment in any country reflects a desire for a long-term return. Costs associated with establishing plant, training workers, etc., can be very high; once established in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as, e.g., expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of unnecessary 'licenses,' etc. Thus, both the negotiating power of MNCs and the supposed 'race to the bottom' may be overstated, while the substantial benefits which MNCs bring (tax revenues aside) are often understated.

[edit] Market withdrawal

Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal.^[8] For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force MNCs to make their intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil^{[citation needed]}, which have viable indigenous market competitors.

[edit] Lobbying

Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations. There is no unified multinational perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries.^[9] For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones. Says Ely Oliveira, Manager Director of the MCT/IR: This is very serious and is very hard and takes a lot of work for the owner.

Multinational corporations such as Wal-mart and McDonalds benefit from government zoning laws, to prevent competitors from competing.^[10]

Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly.^[11]

[edit] Patents

Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefits from software patents.^[12] The pharmaceutical companies lobby international agreements to enforce patent laws.

[edit] Government power

In addition to efforts by multinational corporations to affect governments, there is much government action intended to affect corporate behavior. The threat of nationalization (forcing a company to sell its local assets to the government or to other local nationals) or changes in local business laws and regulations can limit a multinational's power.

[edit] Micro-multinationals

Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers."How startups go global". http://money.cnn.com/2006/06/28/magazines/business2/startupsgoglobal.biz2/index.htm.  These multinationals start operating in different countries from the very early stages. These companies are being called micro-multinationals. What differentiates micro-multinationals from the large MNCs is the fact that they are small businesses. Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries. Internet tools like Google, Yahoo, MSN, Ebay and Amazon make it easier for the micro-multinationals to reach potential customers in other countries.

Service sector micro-multinationals, like Indigo Design & Engineering Associates Pvt. Ltd.^[13], Facebook, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities

[edit] See also

[edit] References

[edit] External links

• Data on transnational corporations
• CorpWatch
• UNCTAD publications on multinational corporations
• UNCTAD - Lists of largest TNCs
• http://www.bartleby.com/65/fu/Fugger.html An early multinational business.
• ILO - Multinational Corporations
• List of Multinational companies