Surname 1 Students Name Professor Course Date ANALYSIS OF MULTINATIONAL COMPANIES The art of business has evolved over time owing to a number of factors and so many corporations operate in multiple countries. Multinational Corporations, also known as Multinational enterprise is a corporation that owns or controls production of goods or services in at least one country other than its home country. According to Black's Law Dictionary, it suggests that a company or group should be considered a multinational corporation if it derives 25% or more of its revenue from out-of-homecountry operations. A multinational corporation can also be referred to as a multinational enterprise (MNE), a transnational enterprise (TNE), a transnational corporation (TNC), an international corporation, or a stateless corporation. Most of the largest and most influential companies of the modern age are publicly traded multinational corporations, including Forbes Global 2000 companies. This paper tries to analyses the Multinational companies and their operations globally. A multinational corporation (MNC) is usually a large corporation incorporated in one country which produces or sells goods or services in various countries. The two main characteristics of MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies. Importing and exporting goods and services Making significant investments in a foreign country Surname 2 Buying and selling licenses in foreign markets Engaging in contract manufacturing — permitting a local manufacturer in a foreign country to produce their products Opening manufacturing facilities or assembly operations in foreign countries Multinational corporations may gain from their global presence in a variety of ways. First of all, MNCs can benefit from the economy of scale by spreading research and development expenditures and advertising costs over their global sales, pooling global purchasing power over suppliers, and utilizing their technological and managerial know-how globally with minimal additional costs. Furthermore, MNCs can use their global presence to take advantage of underpriced labor services available in certain developing countries, and gain access to special research and development capabilities residing in advanced foreign countries. The problem of moral and legal constraints upon the behavior of multinational corporations, given that they are effectively "stateless" actors, is one of several urgent global socioeconomic problems that emerged during the late twentieth century (Birkinshaw & Julian 919-942). Multinational corporations are subject to criticisms for lacking ethical standards. They have also become associated with multinational tax havens and base erosion and profit shifting tax avoidance activities. The main characteristics of multinational companies are: In general, there is a national strength of large companies as the main body, in the way of foreign direct investment or acquire local enterprises, established subsidiaries or branches in many countries; Surname 3 It usually has a complete decision-making system and the highest decision-making centre, each subsidiary or branch has its own decision-making body, according to their different features and operations to make decisions, but its decision must be subordinated to the highest decision-making centre; MNCs seek markets in worldwide and rational production layout, professional fixed-point production, fixed-point sales products, in order to achieve maximum profit; Due to strong economic and technical strength, with fast information transmission, as well as funding for rapid cross-border transfers, the multinational has stronger competitiveness in the world; Many large multinational companies have varying degrees of monopoly in some area, due to economic and technical strength or production advantages. Foreign direct investment When a corporation invests in the country which it is not domiciled, it is called foreign direct investment (FDI). Countries may place restrictions on direct investment; for example, China has historically required partnerships with local firms or special approval for certain types of investments by foreigners although some of these restrictions were eased in 2019. Similarly, the United States Committee on Foreign Investment in the United States scrutinizes foreign investments. In addition, corporations may be prohibited from various business transactions by international sanctions or domestic laws. For example, Chinese domestic corporations or citizens have limitations on their ability to make foreign investments outside of China, in part to reduce capital outflow (Comyns & Breeda 349-369). Countries can impose extraterritorial sanctions on foreign Surname 4 corporations even for doing business with other foreign corporations, which occurred in 2019 with the United States sanctions against Iran; European companies faced with the possibility of losing access to the US market by trading with Iran. International investment agreements also facilitate direct investment between two countries, such as the North American Free Trade Agreement and most favored nation status. Multinational corporations can select from a variety of jurisdictions for various subsidiaries, but the ultimate parent company can select a single legal domicile; The Economist suggests that the Netherlands has become a popular choice, as its company laws have fewer requirements for meetings, compensation, and audit committees and Great Britain had advantages due to laws on withholding dividends and a double-taxation treaty with the United States. Corporations can legally engage in tax avoidance through their choice of jurisdiction, but must be careful to avoid illegal tax evasion. Stateless or transnational Corporations which are broadly active across the world without a concentration in one area have been called stateless or "transnational" (although "transnational corporation" is also used synonymously with multinational corporation), but as of 1992 a corporation must be legally domiciled in a particular country, and engages in other countries through foreign direct investment and the creation of foreign subsidiaries. Geographic diversification can be measured across various domains, including ownership and control, workforce, sales, and regulation and taxation. Surname 5 Multinational corporations may be subject to the laws and regulations of both their domicile and the additional jurisdictions where they are engaged in business. In some cases, the jurisdiction can help to avoid burdensome laws, but regulatory statutes often target the "enterprise" with statutory language around "control".As of 1992, the United States and most Organization for Economic Cooperation and Development (OECD) countries have legal authority to tax a domiciled parent corporation on its worldwide revenue, including subsidiaries as of 2019, the US applies its corporate taxation "extraterritorially", which has motivated tax inversions to change the home state. By 2019, most OECD nations, with the notable exception of the US, had moved to territorial tax in which only revenue inside the border was taxed; however, these nations typically scrutinize foreign income with controlled foreign corporation (CFC) rules to avoid base erosion and profit shifting. In practice, even under an extraterritorial system taxes may be deferred until remittance, with possible repatriation tax holidays, and subject to foreign tax credits. Countries generally cannot tax the worldwide revenue of a foreign subsidiary, and taxation is complicated by transfer pricing arrangements with parent corporations. There are a number of advantages to establishing international operations. Having a presence in a foreign country such as India allows a corporation to meet Indian demand for its product without the transaction costs associated with long-distance shipping. Corporations tend to establish operations in markets where their capital is most efficient or wages are lowest. By producing the same quality of goods at lower costs, multinationals reduce prices and increase the purchasing power of consumers worldwide. Establishing operations in many different countries, a multinational is able to take advantage of tax variations by putting in its business officially in a nation where the tax rate is low — even if its operations are conducted elsewhere. The other Surname 6 benefits include spurring job growth in the local economies, potential increases in the company's tax revenues, and increased variety of goods. A trade-off of globalization – the price of lower prices, as it were – is that domestic jobs are susceptible to moving overseas. Studies indicate that for each year between 2003 and 2015, imports were responsible for job displacements of 136,000 workers. This data underscores how important it is for an economy to have a mobile or flexible labor force, so that fluctuations in economic temperament aren't the cause of long-term unemployment. In this respect, education and the cultivation of new skills that correspond to emerging technologies are integral to maintaining a flexible, adaptable workforce. According to Bureau of Labor Statistics projections, a few of the fastest-growing industries in the United States are home health care services, outpatient care centers, medical and diagnostic laboratories, and information services; together, these industries are replacing many of the American jobs that were displaced by overseas manufacturing. Those opposed to multinationals say they are a way for the corporations to develop a monopoly (for certain products), driving up prices for consumers, stifling competition, and inhibiting innovation. They are also said to have a detrimental effect on the environment because their operations may encourage land development and the depletion of local (natural) resources. The introduction of multinationals into a host country's economy may also lead to the downfall of smaller, local businesses. Activists have also claimed that multinationals breach ethical standards, accusing them of evading ethical laws and leveraging their business agenda with capital. Surname 7 The actions of multinational corporations are strongly supported by economic liberalism and free market system in a globalized international society. According to the economic realist view, individuals act in rational ways to maximize their self-interest and therefore, when individuals act rationally, markets are created and they function best in free market system where there is little government interference. As a result, international wealth is maximized with free exchange of goods and services. To many economic liberals, multinational corporations are the vanguard of the liberal order. They are the embodiment par excellence of the liberal ideal of an interdependent world economy. They have taken the integration of national economies beyond trade and money to the internationalization of production. For the first time in history, production, marketing, and investment are being organized on a global scale rather than in terms of isolated national economies. International business is also a specialist field of academic research. Economic theories of the multinational corporation include internalization theory and the eclectic paradigm. The latter is also known as the OLI framework (Kotabe, Masaaki & Tanvi Kothari 729-743). The other theoretical dimension of the role of multinational corporations concerns the relationship between the globalization of economic engagement and the culture of national and local responses. This has a history of self-conscious cultural management going back at least to the 60s. The history of multinational corporations is closely intertwined with the history of colonialism, the first multinational corporations being founded to undertake colonial expeditions at the behest of their European monarchical patrons. Prior to the era of New Imperialism, a majority European colonies not held by the Spanish and Portuguese crowns were administered by chartered multinational corporations. Examples of such corporations include the British East India Surname 8 Company, the Swedish Africa Company, and the Hudson's Bay Company. These early corporations facilitated colonialism by engaging in international trade and exploration, and creating colonial trading posts. Many of these corporations, such as the South Australia Company and the Virginia Company, played a direct role in formal colonization by creating and maintaining settler colonies. Without exception these early corporations created differential economic outcomes between their home country and their colonies via a process of exploiting colonial resources and labour, and investing the resultant profits and net gain in the home country. The end result of this process was the enrichment of the colonizer and the impoverishment of the colonized. Some multinational corporations, such as the Royal African Company, were also responsible for the logistical component of the Atlantic slave trade, maintaining the ships and ports required for this vast enterprise. During the 19th century, formal corporate rule over colonial holdings largely gave way to state-controlled colonies, however corporate control over colonial economic affairs persisted in a majority of colonies. During the process of decolonization, the European colonial charter companies were disbanded, with the final colonial corporation, the Mozambique Company, dissolving in 1972. However the economic impact of corporate colonial exploitation has proved to be lasting and far reaching, with some commentators asserting that this impact is among the chief causes of contemporary global income inequality (Waworuntu, Stephanus Remond, Michelle Dewi Wantah & Toto Rusmanto 493-500). Contemporary critics of multinational corporations have charged that some present day multinational corporations follow the pattern of exploitation and differential wealth distribution established by the now defunct colonial charter corporations, particularly with regards to Surname 9 corporations based in the developed world that operate resource extraction enterprises in the developing world, such as Royal Dutch Shell, and Barrick Gold. Some of these critics argue that the operations of multinational corporations in the developing world take place within the broader context of neocolonialism. However, multinational corporations from emerging markets are playing an ever-greater role, increasingly impacting the global economy. Anti-corporate advocates criticize multinational corporations for being without a basis in a national ethos, being ultimately without a specific nationhood, and that this lack of an ethos appears in their ways of operating as they enter into contracts with countries that have low human rights or environmental standards. In the world economy facilitated by multinational corporations, capital will increasingly be able to play workers, communities, and nations off against one another as they demand tax, regulation and wage concessions while threatening to move. In other words, increased mobility of multinational corporations benefit capital while workers and communities lose. Some negative outcomes generated by multinational corporations include increased inequality, unemployment, and wage stagnation. The aggressive use of tax avoidance schemes, and multinational tax havens, allows multinational corporations to gain competitive advantages over small and medium-sized enterprises. Organizations such as the Tax Justice Network criticize governments for allowing multinational organizations to escape tax, particularly by using base erosion and profit shifting (BEPS) tax tools, since less money can be spent for public services. Surname 10 In conclusion, the economic effects of Multinational Corporations continue to be felt globally. The developing countries have the untapped resources but lack the skills, equipment and the necessary technology to exhaustively exploit the God given resources. Multinational corporations have come in to close the gap and lend a hand in helping these countries to exploit their resources thereby leading to a globalized economy and the benefits accrue to all the parties. Although caution has to be taken so that the Multinational enterprises do not over exploit the developing countries by transferring all the benefits to their countries of origin without caring much about the developing countries. Proper laws relating to taxation design policies and other policy guidelines to regulate the multinational corporations should be given priority by the developing countries. Practices such as students exchange programs, internship and job opportunities for the local people should be encourage. Multinational corporations – those with active business operations in more than one country – pose special problems for tax systems, since it is necessary to determine the location and character of taxable income, as well as the means by which double tax relief is to be provided. Double tax relief is essential because a corporation's home country claims the right to tax all of its income, including the income earned by its foreign affiliates, while host countries in which foreign affiliates are located insist on their rights to tax affiliates' incomes. In the absence of tax relief, income earned by foreign affiliates would be subject to taxation both by host countries and by home countries at cumulative rates that would often be prohibitive to business operations. There is ample evidence that international tax rate differences influence the timing and location of investment by multinational corporations (Görg, Holger & Eric Strobl 289-303). Countries and subnational jurisdictions that tax corporate income at low rates receive unusually large volumes of foreign direct investment, particularly from countries that do not tax foreign income. Surname 11 Furthermore, multinational firms arrange their business transactions to avoid international taxes. Thus, foreign affiliates located in high-tax countries tend to be financed with higher debt/equity ratios than are investments in low-tax countries, and are more likely to remit profits in the form of (deductible) royalty payments than (nondeductible) dividends. Only a small fraction (16 percent in 1984) of the foreign affiliates of American companies pay dividends to their parent companies each year, and those that do tend to have particularly tax advantaged situations (Viloria, Amelec & Paula Viviana Robayo 531-551). And the pretax profitability of foreign affiliates is correlated negatively with host country tax rates (Hines& Rice 204-211), which is suggestive of tax motivated transfer pricing and unlikely to be the outcome of ordinary investment responses to tax rate differences. A lot of caution should be taken when dealing with Multinational Corporations in order to benefit from it as a country and minimize on its negative effects. Surname 12 References Dunning, John H., and John H. Dunning. Economic analysis and multinational enterprise. Routledge, 2014. Birkinshaw, Julian. Multinational corporate evolution and subsidiary development. Springer, 2016. Cuervo-Cazurra, Alvaro, et al. "Governments as owners: State-owned multinational companies." (2014): 919-942. Waworuntu, Stephanus Remond, Michelle Dewi Wantah, and Toto Rusmanto. "CSR and financial performance analysis: evidence from top ASEAN listed companies." Procedia-Social and Behavioral Sciences 164 (2014): 493-500. Kotabe, Masaaki, and Tanvi Kothari. "Emerging market multinational companies’ evolutionary paths to building a competitive advantage from emerging markets to developed countries." Journal of World Business 51.5 (2016): 729-743. Comyns, Breeda. "Determinants of GHG reporting: an analysis of global oil and gas companies." Journal of business ethics 136.2 (2016): 349-369. Viloria, Amelec, and Paula Viviana Robayo. "Inventory reduction in the supply chain of finished products for multinational companies." Indian Journal of Science and Technology 8.1 (2016). Alejandra Gonzalez-Perez, Maria, and Juan Fernando Velez-Ocampo. "Targeting one’s own region: Internationalisation trends of Colombian multinational companies." European Business Review 26.6 (2014): 531-551. Surname 13 Görg, Holger, and Eric Strobl. "Multinational Companies, Technology Spillovers and Plant Survival." Multinational Enterprises and Host Country Development. 2016. 289-303.
