Multinational Corporations
Sponsors' logos of the UEFA Champions League of football, Thessaloniki, August 2018
Credit: Ververidis Vasilis / Shutterstock
Summary
Multinational firms are among the most powerful actors in the global space. Their internationalization is both the consequence and one of the engines of globalization. Faced with their global strategies and transnational ways of working, states find it hard to introduce a system of governance that would offset the social and environmental consequences of their activities.
Because of their economic and financial clout and their ability to influence the fiscal and social policies of states, multinational corporations (MNCs, also known as transnational corporations) are major actors on the world scene. An MNC is a very large company possessing subsidiaries in several countries, and its organization, production and sales strategy, are conceived on a global scale. At the present time, there are some 60,000 MNCs worldwide, controlling more than 500,000 subsidiaries. They are responsible for half of international trade, especially due to the scale of intra-company trading (between subsidiaries of the same company).
The 2,000 largest multinational companies, 2008-2017
Comment: On the map of the stock market capitalization of the 2,000 major multinational companies in 2017, the size of the circles is proportional to their weight in terms of stock market capitalization. The weight of United States firms can be seen (44%, compared with 22% for all European firms). The range of colors indicates progress made over the last decade: in addition to the growth of United States companies, an increase in those of emerging Asian countries is visible, at a time when some European, Japanese, and Latin-American firms are stagnating.
The origin of MNCs can be traced back to the late sixteenth century, with the creation of European trading companies, particularly English and Dutch ones. Among the most prominent of these was the Dutch East India Company, founded in 1602 and entrusted with exploiting resources from the colonies. These companies became one of the pillars of capitalist development and an essential vehicle for European imperialism in the world.
From internationalization to globalization
The first MNCs of the modern era were in the mining, oil, and agricultural sectors, where production was directly linked to the land. They were formed in the nineteenth century, with the advent of industrial capitalism. Many companies in the mining and agricultural sectors are more than a hundred years old, and still figure among the largest global enterprises. During the second half of the twentieth century, companies became much more international, particularly in the manufacturing sector. This was partly in order to get around customs and commercial barriers, which they did by setting up subsidiaries directly within consumer markets – a strategy used by European and Japanese car-manufacturers when they established assembly lines in the United States so as to have access to the local market. But internationalization particularly took advantage of the opening-up of trade between states as part of the GATT (General Agreement on Tariffs and Trade) agreements and then the WTO (World Trade Organization), as well as from financial liberalization, which gave rise to greater mobility of capital, a downward trend in transport costs, and the development of information technology and telecommunications.
The 25 largest multinational companies, 2017
Comment: According to the annual ranking of companies by the US economic magazine Forbes, this diagram shows the sector of activity, stock market capitalization, turnover (according to which the ranking is decided), and profits of the 25 major multinational companies in 2017. Multinationals in the energy/raw materials and automobile sectors remain the most numerous, but, in terms of profits, finance and electronics occupy the top ranks. Seven Asian multinationals appear in this category, representing a quarter of the total both in number and in stock market capitalization.
From the 1980s, MNCs were able to delocalize their production to take advantage of cheap labor costs and the very low social, environmental, and safety standards offered by developing countries, especially those in Southeast Asia. Thereafter, the production chain was split up into multiple units scattered across countries where labor was cheapest, while communication and marketing strategies were carried out on a world scale (with the emergence of global brands and products) and profits were tucked away in tax havens in order to maximize returns. The cash flows from FDI (Foreign Direct Investment), which was a pillar of MNC globalization, was multiplied by more than 139 in half a century (going from 13 billion dollars in 1970 to 1,750 billion dollars in 2016).
Inward flows of foreign direct investment (FDI), 2007-2016
Comment: UNCTAD helps governments to promote and facilitate investment; it compiles, validates, and disseminates data on FDI. This map shows both the stocks (proportional circles) and changes over the course of the last decade (color shading). Data on the growth of FDI inflows show marked contrasts which are not correlated with the data on volume; some economies no longer attract foreign investment (in blue), while others, on the contrary, capture it owing to their growth, tax concessions, or because they are tax havens.
Change in foreign direct investment (FDI), 1974-2016
Comment:
To take best advantage of the international division of labor without having to endure the legal (and moral) constraints associated with possessing subsidiaries in countries where social protection and environmental rules are flouted, MNCs tend to organize their production via a network of companies that no longer have capitalistic links between them. Many products (electronic, textile, etc.) are now assembled or made in factories belonging to subcontractors who are legally independent of those placing the order. This is the case with Apple, whose products are manufactured in China by a Taiwanese subcontractor, Foxconn. MNCs thus try to absolve themselves from any responsibility for the health, environmental, and social conditions in which their products are manufactured, as did the big clothing brands employing workers in the garment manufacturing workshops of the Rana Plaza building in Dhaka (Bangladesh), whose collapse in 2013 caused more than a thousand deaths.
Web of BP oil subsidiaries, 2013
Comment: British Petroleum is made up of hundreds of subsidiaries which themselves own subsidiaries. The graph of the network shows that most subsidiaries come under US or British and Dutch law for BP Europe. The map reveals that these subsidiaries, scattered throughout the regions of the globe, do not necessarily correspond to the places where hydrocarbons are extracted. On the contrary, BP domiciles many of its subsidiaries in tax havens (the Caribbean, the Netherlands, Switzerland, the Gulf, Singapore, Hong Kong, etc., and, of course, the United Kingdom).
Impossible to regulate?
The internationalization of MNCs has certainly enabled some countries of the South to catch up economically – countries such as China, whose development is based on receiving FDI and on becoming part of the globalization process. But it also contributes to deepening internal inequalities : by causing the employees of rich countries to compete with those in developing countries, it helps to increase unemployment in developed countries, which are becoming de-industrialized, while at the same time encouraging the appearance of affluent classes in countries of the South. Since MNCs are often in positions of power with regard to states, they are responsible for making the latter compete for the attractiveness of their territories (amenities, subsidies, and even the relaxation of fiscal, social, and environmental standards).
Nevertheless, the globalization of MNCs means they are subject to increased monitoring by civil society organizations, which urge them to adopt responsible business practices, particularly with regard to the social and environmental standards they apply. MNCs respond by voluntarily developing codes of conduct (sometimes at the sectional level) and corporate social responsibility (CSR) policies relating to environmental protection, the defense of human and social rights, and the combat against corruption. Often limited to greenwashing, these actions seek as much to respond to the criticisms of advocacy NGOs about their practices and the negative consequences of their activities as to dissuade public authorities from adopting restrictive legislation on these issues. In so doing, corporations are also vehicles for spreading standards (accounting, managerial, social, and environmental) throughout the world.
- colonies > Colonization
- A historical process by which Europe established deep links with the rest of the world. From the late fifteenth century (the Age of Discovery), a vast movement began for economic, political, and cultural domination of the world, first by Spain and Portugal and then by England, France, and Holland, which from the late sixteenth century started to compete for possession of colonial wealth. A second wave of colonization took place in the nineteenth century, when all the countries of South America that had been under the first two empires were already independent. The Industrial Revolution encouraged the search for new markets, and France and England jockeyed for a share of part of Asia and Africa. The colonized territories had different statuses (dominions, protectorates, or direct rule).
- capitalist > Capitalism
- An economic system based on private ownership of the means of production and the free market (free enterprise, free trade, free competition, etc.; the foundations of liberalism). In this system, the capital holders (as distinct from employees who form the workforce and who, according to Marx, are exploited) seek to maximize their profits (accumulating capital). After the end of feudalism, the system took hold during the Industrial Revolution. Now adopted by all countries (with the exception of communist ones), it takes multiple forms, and still includes state intervention (to a greater or lesser extent), for the purpose of regulation (notably in the Rhineland model or the social market economy in Scandinavian countries) or as actor and planner (Japan, Singapore, France, etc.).
- imperialism > Imperialism
- Initially denoting a political strategy or doctrine of colonial expansion, imperialism establishes a relationship of political, economic or cultural domination of one state over one or more others. More recently the term has also been used to describe economic, cultural or legal domination by one international actor (not necessarily a state) over another (North-South relations, cultural hegemony, etc.). Concept used in particular by Marxist analysts, for whom imperialism is linked with the capitalist mode of production.
- liberalization > Liberalism
- Arising from Enlightenment philosophy, Liberalism refers to a corpus of political philosophy that places the preservation of individual rights at the center of its conception of society and the political order. Devolving from this, on the one hand, are mechanisms to safeguard the individual against the arbitrary use of state power, which mostly translate into a preference for a democratic political order; and, on the other, an emphasis on respecting private property, which leads in turn to a preference for minimal state involvement in the economy – restricting the state’s role to matters of sovereignty. Behind this consensus are many debates around the level of state involvement in the economy, or around protection of individuals vs. that of a political order and given social norms, which translate into different variants of liberalism (such as German-style ordoliberalism, libertarianism, or liberal conservatism).
- environmental > Environment
- In broad terms, the environment is understood as the biosphere in which living species cohabit, while ecology studies the relations between these organisms and their environment. The environment encompasses very diverse natural areas from undisturbed virgin forests to artificialized environments planned and exploited by humans. In a more limited definition of the term, “environmental” issues are those relating to natural resources (their management, use and degradation) and biological biodiversity (fauna and flora). As a cross-cutting public concern, the environment encompasses issues of societal organization (production models, transport, infrastructure, etc.) and their impacts on the health of humans and ecosystems.
- tax havens > Tax Haven
- A territory that uses its sovereignty to establish fiscal and legal exemption regimes (banking secrecy, low or non-existent taxation, fast, flexible procedures, limited or non-existent administrative requirements, etc.) that are then used by multinational companies, hedge funds, wealthy individuals and organized crime networks to escape the tax and justice systems of their home country. Tax havens are key links in the financial globalization chain and are regarded as a threat to global economic stability. However, in practice they are treated with indulgence by large states more keen to benefit from the system than to change it, and almost all have tax havens under their control.
- FDI > Foreign direct investment
- Any investment motivated by a company’s aim of acquiring a lasting interest (shareholding exceeding 10% of voting rights) and significant influence in the management of a company based in another country. The transaction, implying a long-term relationship (unlike speculative investments), can involve the creation of a new company or, more usually, the takeover of all or part of an existing company via acquisition or merger. FDI, which mostly concerns flows between countries of the Global North, underpins multinational corporations’ globalization strategies.
- international division of labor > International division of labor
- The technical, social, and spatial division of labor within production processes across the world. It stems from the revolution in sea and air transport and the development of information technologies. In company production costs, transport by large vessels and container ships has diminished, while labor costs remain high and the cost of research and development (R & D) is rising. Unskilled work is therefore done in countries with the lowest labor costs, with semi-finished products being moved for assembly to regions with more skilled labor, and R&D and market research to regions with the highest skills. Some countries show great ability to move up the chain (South Korea, Taiwan and, to a certain extent, China).
- social protection > Social Protection
- Payments enabling individuals to cope with life’s risks without compromising their living standards. These include maternity, the costs of raising a family, sickness and disability, unemployment, old age, etc. The three current systems have different origins and aims and influence each other. Social assistance is a minimum income intended to establish solidarity between individuals in the fight against poverty. It is means-tested rather than being based on previous contributions (for example, the welfare system advocated by Beveridge in the UK). Social insurance seeks to counteract the risk of loss of income by providing benefits funded by contributions taken from wages (for example, the system introduced by Bismarck in Germany). Universal benefits are intended to cover certain types of expenditure for all individuals and identical amounts are paid to all, regardless of income or contributions (for example, universal health care coverage in France).
- development > Development
- Definitions of development and its opposite – underdevelopment – have varied considerably according to the political objectives and ideological positions of those using these words. In the 1970s, Walt Whitman Rostow conceived of it as an almost mechanical process involving successive stages of economic growth and social improvement, whereas Samir Amin analyzed the relationships between center and peripheries, seeing the development of the former as founded on the exploitation of the latter. In Latin America, the dependency theory condemned the ethnocentrism of the universal view that the “periphery” of underdeveloped states could simply catch up through modernization. Talking of poor or developing “countries” masks the inequalities that also exist within societies (in both Northern and Southern hemispheres) and individuals’ connections to globalization processes.
- globalization > Globalization
- The term globalization refers to a set of multidimensional processes (economic, cultural, political, financial, social, etc.) that are reconfiguring the global arena. These processes do not exclusively involve a generalized scale shift toward the global because they do not necessarily converge, do not impact all individuals, and do not impact everyone in the same way. Contemporary globalization means more than just an increase in trade and exchanges, an internationalization of economies and an upsurge in connectivity: it is radically transforming the spatial organization of economic, political, social and cultural relationships.
- inequalities > Inequality
- Unequal distribution of goods, material and/or non-material, regarded as necessary or desirable. Beyond income inequality (national, international and global), cumulative inequalities can also be measured with respect to accessing public services (healthcare, education, employment, housing, justice, effective security, etc.) and accessing property and natural resources more generally, and also relative to political expression or the capacity to respond to ecological risks. When these inequalities are based on criteria prohibited by law, they constitute discrimination.
- developed countries > Developed Country
- At point 4 of his Inaugural Address of 1949, American President Harry S. Truman outlined a program of aid for “underdeveloped areas. This phrase refers to all the countries regarded as “lagging behind” in progress toward what thus becomes the model set by the developed, industrialized countries, which at that time had stronger growth and higher standards of living. The evolution of the terminology from underdeveloped to developing and developed countries has not altered the linear, evolutionist aspect of the overall vision. Nor has it in any way nuanced the homogenization and reification of the groups so described.
- civil society > Civil Society
- At the national level, civil society refers to a social body that is separate from the state and greater than the individuals and groups of which it is formed (social classes, socio-professional categories, generations, etc.). The notion of a global civil society emerged in the 1970s (John Burton, World Society) and refers to social relations formed in the international arena and beyond the control of states, when citizens of all countries take concerted action to demand regulations that may be supranational or infranational. However, the term conceals a great diversity. The notion of world society emerged among geographers in the 1990s and refers to the more all-encompassing process of creating a social space at the planetary level.
- CSR > Corporate Social Responsibility
- A set of procedures and strategies concerning corporate governance and activities, which businesses adopt voluntarily (in other words they are not compelled to do so, but generally do under pressure from civil society actors) in order to meet social expectations in relation to environmental protection, human rights, the fight against corruption, etc. In practice, CSR is manifested through a series of commitments made by businesses (codes of ethics, codes of conduct, etc.) and by funding a few local development projects. However, it is criticized for often being used as a communications tool, known as “greenwashing,” and for turning self-regulation into a pretext for delaying the establishment of legal obligations.
- greenwashing > Greenwashing
- Greenwashing, also called “green sheen, describes an action designed to mislead consumers with regard to a company’s environmental practices or the environmental benefits of a product or service. It can make use of evasive language, suggestive images and/or irrelevant claims. More broadly the aim is to distract attention by foregrounding minor actions on behalf of the environment while covering up more serious environmental damage and the deeper causes of environmental degradation.
- NGOs > Nongovernmental Organization
- Use of this expression became more widespread following its inclusion in Article 71 of the United Nations Charter. NGOs do not have an international legal status and the acronym is used in different contexts to refer to very different kinds of actors. It generally designates associations formed by individuals over the long term in relation to not-for-profit goals, often linked to values and beliefs (ideological, humanist, ecological, religious, etc.) rather than financial interests. Active on a wide range of issues at both the local and global levels, NGOs now number tens of thousands, but vary greatly in the scale of their budgets, staff and development.