MULTINATIONAL CORPORATIONS

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Photo by: iDesign

Multinational corporations have existed since the beginning of overseas trade. They have remained a part of the business scene throughout history, entering their modern form in the 17th and 18th centuries with the creation of large, European-based monopolistic concerns such as the British East India Company during the age of colonization. Multinational concerns were viewed at that time as agents of civilization and played a pivotal role in the commercial and industrial development of Asia, South America, and Africa. By the end of the 19th century, advances in communications had more closely linked world markets, and multinational corporations retained their favorable image as instruments of improved global relations through commercial ties. The existence of close international trading relations did not prevent the outbreak of two world wars in the first half of the twentieth century, but an even more closely bound world economy emerged in the aftermath of the period of conflict.

In more recent times, multinational corporations have grown in power and visibility, but have come to be viewed more ambivalently by both governments and consumers worldwide. Indeed, multinationals today are viewed with increased suspicion given their perceived lack of concern for the economic well-being of particular geographic regions and the public impression that multinationals are gaining power in relation to national government agencies, international trade federations and organizations, and local, national, and international labor organizations.

Despite such concerns, multinational corporations appear poised to expand their power and influence as barriers to international trade continue to be removed. Furthermore, the actual nature and methods of multinationals are in large measure misunderstood by the public, and their long-term influence is likely to be less sinister than imagined. Multinational corporations share many common traits, including the methods they use to penetrate new markets, the manner in which their overseas subsidiaries are tied to their headquarters operations, and their interaction with national governmental agencies and national and international labor organizations.

WHAT IS A MULTINATIONAL
CORPORATION?

As the name implies, a multinational corporation is a business concern with operations in more than one country. These operations outside the company's home country may be linked to the parent by merger, operated as subsidiaries, or have considerable autonomy. Multinational corporations are sometimes perceived as large, utilitarian enterprises with little or no regard for the social and economic well-being of the countries in which they operate, but the reality of their situation is more complicated.

There are over 40,000 multinational corporations currently operating in the global economy, in addition to approximately 250,000 overseas affiliates running cross-continental businesses. In 1995, the top 200 multinational corporations had combined sales of $7.1 trillion, which is equivalent to 28.3 percent of the world's gross domestic product. The top multinational corporations are headquartered in the United States, Western Europe, and Japan; they have the capacity to shape global trade, production, and financial transactions. Multinational corporations are viewed by many as favoring their home operations when making difficult economic decisions, but this tendency is declining as companies are forced to respond to increasing global competition.

The World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank are the three institutions that underwrite the basic rules and regulations of economic, monetary, and trade relations between countries. Many developing nations have loosened trade rules under pressure from the IMF and the World Bank. The domestic financial markets in these countries have not been developed and do not have appropriate laws in place to enable domestic financial institutions to stand up to foreign competition. The administrative setup, judicial systems, and law-enforcing agencies generally cannot guarantee the social discipline and political stability that are necessary in order to support a growth-friendly atmosphere. As a result, most multinational corporations are investing in certain geographic locations only. In the 1990s, most foreign investment was in high-income countries and a few geographic locations in the South like East Asia and Latin America. According to the World Bank's 2002 World Development Indicators, there are 63 countries considered to be low-income countries. The share of these low-income countries in which foreign countries are making direct investments is very small; it rose from 0.5 percent 1990 to only 1.6 percent in 2000.

Although foreign direct investment in developing countries rose considerably in the 1990s, not all developing countries benefited from these investments. Most of the foreign direct investment went to a very small number of lower and upper middle income developing countries in East Asia and Latin America. In these countries, the rate of economic growth is increasing and the number of people living at poverty level is falling. However, there are still nearly 140 developing countries that are showing very slow growth rates while the 24 richest, developed countries (plus another 10 to 12 newly industrialized countries) are benefiting from most of the economic growth and prosperity. Therefore, many people in the developing countries are still living in poverty.

Similarly, multinational corporations are viewed as being exploitative of both their workers and the local environment, given their relative lack of association with any given locality. This criticism of multinationals is valid to a point, but it must be remembered that no corporation can successfully operate without regard to local social, labor, and environmental standards, and that multinationals in large measure do conform to local standards in these regards.

Multinational corporations are also seen as acquiring too much political and economic power in the modern business environment. Indeed, corporations are able to influence public policy to some degree by threatening to move jobs overseas, but companies are often prevented from employing this tactic given the need for highly trained workers to produce many products. Such workers can seldom be found in low-wage countries. Furthermore, once they enter a market, multinationals are bound by the same constraints as domestically owned concerns, and find it difficult to abandon the infrastructure they produced to enter the market in the first place.

The modern multinational corporation is not necessarily headquartered in a wealthy nation. Many countries that were recently classified as part of the developing world, including Brazil, Taiwan, Kuwait, and Venezuela, are now home to large multinational concerns. The days of corporate colonization seem to be nearing an end.

ENTRY OF MULTINATIONAL
CORPORATIONS INTO NEW MARKETS

Multinational corporations follow three general procedures when seeking to access new markets: merger with or direct acquisition of existing concerns; sequential market entry; and joint ventures.

Merger or direct acquisition of existing companies in a new market is the most straightforward method of new market penetration employed by multinational corporations. Such an entry, known as foreign direct investment, allows multinationals, especially the larger ones, to take full advantage of their size and the economies of scale that this provides. The rash of mergers within the global automotive industries during the late 1990s are illustrative of this method of gaining access to new markets and, significantly, were made in response to increased global competition.

Multinational corporations also make use of a procedure known as sequential market entry when seeking to penetrate a new market. Sequential market entry often also includes foreign direct investment, and involves the establishment or acquisition of concerns operating in niche markets related to the parent company's product lines in the new country of operation. Japan's Sony Corporation made use of sequential market entry in the United States, beginning with the establishment of a small television assembly plant in San Diego, California, in 1972. For the next two years, Sony's U.S. operations remained confined to the manufacture of televisions, the parent company's leading product line. Sony branched out in 1974 with the creation of a magnetic tape plant in Dothan, Alabama, and expanded further by opening an audio equipment plant in Delano, Pennsylvania, in 1977.

After a period of consolidation brought on by an unfavorable exchange rate between the yen and dollar, Sony continued to expand and diversify its U.S. operations, adding facilities for the production of computer displays and data storage systems during the 1980s. In the 1990s, Sony further diversified it U.S. facilities and now also produces semiconductors and personal telecommunications products in the United States. Sony's example is a classic case of a multinational using its core product line to defeat indigenous competition and lay the foundation for the sequential expansion of corporate activities into related areas.

Finally, multinational corporations often access new markets by creating joint ventures with firms already operating in these markets. This has particularly been the case in countries formerly or presently under communist rule, including those of the former Soviet Union, eastern Europe, and the People's Republic of China. In such joint ventures, the venture partner in the market to be entered retains considerable or even complete autonomy, while realizing the advantages of technology transfer and management and production expertise from the parent concern. The establishment of joint ventures has often proved awkward in the long run for multinational corporations, which are likely to find their venture partners are formidable competitors when a more direct penetration of the new market is attempted.

Multinational corporations are thus able to penetrate new markets in a variety of ways, which allow existing concerns in the market to be accessed a varying degree of autonomy and control over operations.

CONCERNS ABOUT MULTINATIONAL
CORPORATIONS

While no one doubts the economic success and pervasiveness of multinational corporations, their motives and actions have been called into question by social welfare, environmental protection, and labor organizations and government agencies worldwide.

National and international labor unions have expressed concern that multinational corporations in economically developed countries can avoid labor negotiations by simply moving their jobs to developing countries where labor costs are markedly less. Labor organizations in developing countries face the converse of the same problem, as they are usually obliged to negotiate with the national subsidiary of the multinational corporation in their country, which is usually willing to negotiate contract terms only on the basis of domestic wage standards, which may be well below those in the parent company's country.

Offshore outsourcing, or offshoring, is a term used to describe the practice of using cheap foreign labor to manufacture goods or provide services only to sell them back into the domestic marketplace. Today, many Americans are concerned about the issue of whether American multinational companies will continue to export jobs to cheap overseas labor markets. In the fall of 2003, the University of California-Berkeley showed that as many as 14 million American jobs were potentially at risk over the next decade. In 2004, the United States faced a half-trillion-dollar trade deficit, with a surplus in services. Opponents of offshoring claim that it takes jobs away from Americans, while also increasing the imbalance of trade.

When foreign companies set up operations in America, they usually sell the products manufactured in the U.S. to American consumers. However, when U.S. companies outsource jobs to cheap overseas labor markets, they usually sell the goods they produce to Americans, rather than to the consumers in the country in which they are made. In 2004, the states of Illinois and Tennessee passed legislation aimed at limiting offshoring; in 2005, another 16 states considered bills that would limit state aid and tax breaks to firms that outsource abroad.

Insourcing, on the other hand, is a term used to describe the practice of foreign companies employing U.S. workers. Foreign automakers are among the largest insourcers. Many non-U.S. auto manufacturers have built plants in the United States, thus ensuring access to American consumers. Auto manufacturers such as Toyota now make approximately one third of its profits from U.S. car sales.

Social welfare organizations are similarly concerned about the actions of multinationals, which are presumably less interested in social matters in countries in which they maintain subsidiary operations. Environmental protection agencies are equally concerned about the activities of multinationals, which often maintain environmentally hazardous operations in countries with minimal environmental protection statutes.

Finally, government agencies fear the growing power of multinationals, which once again can use the threat of removing their operations from a country to secure favorable regulation and legislation.

All of these concerns are valid, and abuses have undoubtedly occurred, but many forces are also at work to keep multinational corporations from wielding unlimited power over even their own operations. Increased consumer awareness of environmental and social issues and the impact of commercial activity on social welfare and environmental quality have greatly influenced the actions of all corporations in recent years, and this trend shows every sign of continuing. Multinational corporations are constrained from moving their operations into areas with excessively low labor costs given the relative lack of skilled laborers available for work in such areas. Furthermore, the sensitivity of the modern consumer to the plight of individuals in countries with repressive governments mitigates the removal of multinational business operations to areas where legal protection of workers is minimal. Examples of consumer reaction to unpopular action by multinationals are plentiful, and include the outcry against the use of sweatshop labor by Nike and activism against operations by the Shell Oil Company in Nigeria and PepsiCo in Myanmar (formerly Burma) due to the repressive nature of the governments in those countries.

Multinational corporations are also constrained by consumer attitudes in environmental matters. Environmental disasters such as those which occurred in Bhopal, India (the explosion of an unsafe chemical plant operated by Union Carbide, resulting in great loss of life in surrounding areas) and Prince William Sound, Alaska (the rupture of a single-hulled tanker, the Exxon Valdez, causing an environmental catastrophe) led to ceaseless bad publicity for the corporations involved and continue to serve as a reminder of the long-term cost in consumer approval of ignoring environmental, labor, and safety concerns.

Similarly, consumer awareness of global issues lessens the power of multinational corporations in their dealings with government agencies. International conventions of governments are also able to regulate the activities of multinational corporations without fear of economic reprisal, with examples including the 1987 Montreal Protocol limiting global production and use of chlorofluorocarbons and the 1989 Basel Convention regulating the treatment of and trade in chemical wastes.

In fact, despite worries over the impact of multinational corporations in environmentally sensitive and economically developing areas, the corporate social performance of multinationals has been surprisingly favorable to date. The activities of multinational corporations encourage technology transfer from the developed to the developing world, and the wages paid to multinational employees in developing countries are generally above the national average. When the actions of multinationals do cause a loss of jobs in a given country, it is often the case that another multinational will move into the resulting vacuum, with little net loss of jobs in the long run. Subsidiaries of multinationals are also likely to adhere to the corporate standard of environmental protection even if this is more stringent than the regulations in place in their country of operation, and so in most cases create less pollution than similar indigenous industries.

THE FUTURE FOR MULTINATIONAL
CORPORATIONS

Current trends in the international marketplace favor the continued development of multinational corporations. Countries worldwide are privatizing government-run industries, and the development of regional trading partnerships such as the North American Free Trade Agreement (a 1993 agreement between Canada, Mexico, and United States) and the European Union have the overall effect of removing barriers to international trade. Privatization efforts result in the availability of existing infrastructure for use by multinationals seeking to enter a new market, while removal of international trade barriers is obviously a boon to multinational operations.

Perhaps the greatest potential threat posed by multinational corporations would be their continued success in a still underdeveloped world market. As the productive capacity of multinationals increases, the buying power of people in much of the world remains relatively unchanged, which could lead to the production of a worldwide glut of goods and services. Such a glut, which has occurred periodically throughout the history of industrialized economies, can in turn lead to wage and price deflation, contraction of corporate activities, and a rapid slowdown in all phases of economic life. Such a possibility is purely hypothetical, however, and for the foreseeable future the operations of multinational corporations worldwide are likely to continue to expand.