Multinational Corporations and the Global Economy

Introduction: Defining Multinational Corporations

This essay examines the role of multinational corporations (MNCs) in the global economy. Depending upon one's point of view, multinational firms are either demonized or celebrated for their role in globalization. Navaretti and Venables, both professors of international economics, cite evidence that MNCs are generally a force for prosperity in the world economy (1).

Even though modern multinational firms date back to the late nineteenth century, the term "multinational corporation" did not appear until 1960. The term was used to distinguish between portfolio and direct investment, and referred to corporations having their home in one country while operating and living under the laws of other countries as well. Stephen Kobrin, professor of multinational management at the Wharton School, points out: "It is of interest that from the start the multinational corporation was defined in terms of jurisdiction and potential jurisdictional conflict" (1).

MNCs may be linked to the parent by merger, operated as subsidiaries, or they may have considerable autonomy. Multinationals are often perceived as large, utilitarian enterprises with little or no regard for the social and economic well-being of the countries in which they operate; however, the reality of their circumstances is more complicated than that (Slaughter).

Eldridge discusses other MNC characteristics, pointing out that in 1995 "the top 200 multinational corporations had combined sales of $7.1 trillion, which is equivalent to 28.3% of the world's gross domestic product." The top MNCs are headquartered in the U.S., Western Europe, and Japan, and they have the ability to shape global trade, production, and financial transactions (Eldridge).

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. In the 1990s, most foreign investment was concentrated in high-income countries and a few geographic locations such as East Asia and Latin America. According to Eldridge, the share of low-income countries attracting foreign direct investment was "very small; it rose from 0.5% in 1990 to only 1.6% in 2000" (Eldridge).

Foreign-owned multinationals employ one worker in every five in European manufacturing and one in seven in U.S. manufacturing. They also account for one euro in every four of manufactured goods sold in Europe and one dollar in five in the U.S. Nonetheless, policymakers and the public around the world have mixed feelings about multinationals. In the words of Navaretti et al., "They see them either as welcome bearers of foreign wealth and knowledge or as unwelcome threats to national wealth and identity." MNCs are thus cast as either heroes or villains. Navaretti further argues: "Policymakers want multinationals to invest in their country, but are unhappy when national firms close down domestic activities and open up foreign ones or when foreign brands compete successfully with national ones" (1).

Multinationals are firms that own a significant equity share — typically 50% or more — of another company operating in a foreign country. MNCs include corporations like IBM, General Motors, Intel, and Nike, but they also include smaller firms with international operations. Research data on MNCs relies on tracking flows of foreign direct investment (FDI) recorded from balance of payment statistics (Navaretti 1–2).

FDI, Scale Economies, and MNC Performance

FDI is a form of investment in a foreign company in which the foreign investor owns at least 10% of the ordinary shares. The investment is undertaken with the objective of establishing a "lasting interest" in the country, as well as a long-term relationship and significant influence over the firm's management. FDI flows differ from portfolio investments, which can be easily divested and do not confer significant influence over the firm's management. For these reasons, multinationals undertake FDI to create, acquire, or expand a foreign subsidiary (Navaretti et al. 2–3).

Firms invest abroad because of scale economies. Some firms develop intangible assets — such as a brand name or new technology — whose benefits can be spread across several plants. Foreign operations do not necessarily need to be carried out by wholly owned foreign subsidiaries; in many circumstances they can be conducted through arm's-length agreements with local firms. These agreements are frequently cheaper than establishing a foreign subsidiary (Navaretti et al. 5).

Navaretti et al. conclude that organizing activities across borders works. In their view, "multinationals generally perform better than national firms in home and host economies alike" (5). Such firms are able to expand by becoming multinational and applying their higher productivity to a wider range of inputs. "Multinationals are also on average larger than other firms, they do more research and development and they use more skilled personnel."

If multinationals are more efficient than national firms, then the larger their share of world activity, the more efficient world production will be, and the higher world income will be. However, Navaretti et al. note that "these global benefits may not necessarily make everyone better off." At the country level, world efficiency gains do not always trickle down to improve welfare.

The history of multinationals has always included controversy. With their strategic partnerships connecting countries in complex alliances, MNCs have come to embody globalization and function as its principal agent. They have become the primary force behind globalization, reaping the benefits of increasingly open domestic economies and extending their reach across national markets and societies.

Globalization and the Rise of MNCs

Given their high degree of mobility and visibility, it is not surprising that MNCs, as described by economist Loraine Eden and business professor Stefanie Lenway, "have become a lightning rod for groups concerned about the various costs of globalization: social, cultural, political, and perhaps most importantly, the economic costs" (383). They argue that although international business scholars and policymakers focus on the advantages of globalization and cooperative dealings with MNCs, the public and non-governmental organizations have often overlooked these positions and instead focused on the unfavorable aspects of relations between MNCs and nation-states. Nonetheless, Eden and Lenway argue that there is value in exploring both sides, in that "when scholars look at problems identified with globalization's dark side, they also often contribute to our understanding of the bright side" (383).

Eden and Lenway describe the growth of globalization and the events leading up to the current state of affairs. In the 1970s and 1980s, countries were protected by political barriers and could maintain their own cultures, traditions, ways of life, and governmental modes. With the advent of changes in government policy and new information technologies, many of these barriers between economies have been reduced or removed. Beginning in the 1980s, developed and developing nations began to liberalize their economies by dropping trade barriers and opening their doors to foreign direct investment (FDI). The collapse of Communism allowed the economies of the U.S.S.R., Central Europe, and Eastern Europe to privatize state-owned enterprises and deregulate domestic markets (Eden and Lenway 384).

The information technology revolution also significantly changed the global economy. Computer chips, satellites, and the Internet have all dramatically reduced telecommunications costs. Individuals, businesses, and governments now have immediate access to one another and can share events simultaneously across the globe (Eden and Lenway 384).

Just as information technology and government policy were the underlying forces behind globalization, the primary economic instrument to facilitate and benefit from globalization has been the MNC. By definition, MNCs span borders, and they represent a paradox for nation-states. As Eden and Lenway point out, on the one hand, MNC characteristics "offer the potential for cooperative behavior and mutual gains," while on the other hand, there is the potential for the MNC "to reap extraordinary profits at the expense of the nation-state" (385).

Highly mobile entities like MNCs have the ability to move beyond national jurisdictions and play one government against another. For this reason it is not surprising that host governments have historically distrusted the multinationals within their midst. During the 1980s and 1990s, MNC–state relations transitioned from confrontation to cooperation. Increasingly, government policymakers look upon MNCs favorably, while many societal groups — including NGOs such as labor, environmental, and church organizations at the national and international level — view the MNC less favorably (Eden and Lenway 385–386).

Globalization represents far-reaching and permanent change in the natural order of society. According to Eden and Lenway, globalization is not defined simply by the growth in cross-border activities, but rather by the "creation and growth of globalized activities, that is, phenomena that transcend national borders, extending across, leveraging, and moving between many locations around the globe simultaneously" (387). Examples of globalization include satellite television, newspaper websites, 24-hour foreign exchange trading, and the provision of global environmental public goods such as the prevention of global warming and the protection of the ozone layer.

With the start of a new century, globalization is a source of both opportunities and threats. Opportunities include economic abundance, freedom of political expression, and cultural diversity. Threats include economic and social insecurity, political instability, environmental degradation, and cultural decay. One consequence of globalization is that it is leaving some parts of the world behind — unconnected through the Internet and untouched by FDI — while other parts of the world are rocked by international capital flows moving instantly in and out of countries. As Eden and Lenway point out, we should therefore "not be surprised by the backlash from those who feel disenfranchised by the process or who blame their suffering on globalization" (388).

The multinational enterprise (MNE) offers the capability to create value-adding activities that improve national competitiveness, which in turn contributes to economic growth and national welfare. MNCs thus engineer national competitive advantage, making them particularly attractive to nation-states. Yet their size and geographic scope endow MNCs with considerable economic power, potentially leading these firms to take their toll on both home and host states. Eden and Lenway argue that if the MNC has "a bright side in terms of its potential contribution to economic growth and national welfare, it also has a dark side represented by its potential negative impacts in the environment, labor and human rights areas" (389). Websites maintained by citizen and NGO groups depict MNC groups as "pollution-generating, tax-evading, corruption-breeding MNEs, stifling domestic entrepreneurship and bringing misery and hardships to the public" (Eden and Lenway 390).