This is a preview. Log in to get access
Abstract
Foreign direct investment (FDI) is an important element of the global economy and a central component of economic development strategies of both developed and developing countries. Numerous scholars theorize that the economic benefits of attracting multinational corporations come at tremendous political costs, arguing that democratic political systems attract lower levels of international investment than their authoritarian counterparts. Using both cross-sectional and time-series cross-sectional tests of the determinants of FDI for more than 100 countries, I generate results that are inconsistent with these dire predictions. Democratic political systems attract higher levels of FDI inflows both across countries and within countries over time. Democratic countries are predicted to attract as much as 70 percent more FDI than their authoritarian counterparts. In a final empirical test, I examine how democratic institutions affect country credibility by empirically analyzing the link between democracy and sovereign debt risk for about eighty countries from 1980 to 1998. These empirical tests challenge the conventional wisdom on the preferences of multinationals for authoritarian regimes.
Journal Information
International Organization is a leading peer-reviewed journal that covers the entire field of international affairs. Subject areas include: foreign policies, international relations, international and comparative political economy, security policies, environmental disputes and resolutions, European integration, alliance patterns and war, bargaining and conflict resolution, economic development and adjustment, and international capital movements. Guidelines for Contributors at Cambridge Journals Online
Publisher Information
Cambridge University Press (www.cambridge.org) is the publishing division of the University of Cambridge, one of the world’s leading research institutions and winner of 81 Nobel Prizes. Cambridge University Press is committed by its charter to disseminate knowledge as widely as possible across the globe. It publishes over 2,500 books a year for distribution in more than 200 countries. Cambridge Journals publishes over 250 peer-reviewed academic journals across a wide range of subject areas, in print and online. Many of these journals are the leading academic publications in their fields and together they form one of the most valuable and comprehensive bodies of research available today. For more information, visit //journals.cambridge.org.
Rights & Usage
This item is part of a JSTOR Collection.
For terms and use, please refer to our Terms and Conditions
International Organization © 2003 Cambridge University Press
Request Permissions
The World Investment Report focuses on trends in foreign direct investment (FDI) worldwide, at the regional and country levels and emerging measures to improve its contribution to development.
It also provides analysis on global value chains and the operations of multinational enterprises, with special attention to their development implications.
Overviews of the report are available in all official UN languages.
Every issue of the Report has:
Analysis of the trends in FDI during the previous year, with especial emphasis on the development implications.
Ranking of the largest transnational corporations in the world.
In-depth analysis of a selected topic related to FDI.
Policy analysis and recommendations.
Statistical annex with data on FDI flows and stocks at the country level.
What Is a Multinational Corporation?
A multinational corporation (MNC) is a company that has business operations in at least one country other than its home country. By some definitions, it also generates at least 25% of its revenue outside of its home country.
Generally, a multinational company has offices, factories, or other facilities in different countries around the world as well as a centralized headquarters which coordinates global management.
Multinational companies can also be known as international, stateless, or transnational corporate organizations or enterprises. Some may have budgets that exceed those of small countries.
Key Takeaways
- Multinational corporations conduct business in two or more countries.
- Some consider a multinational company to be one that generates 25% or more of its revenue outside the home country.
- An MNC can have a positive economic effect on the countries in which it operates.
- Some believe outsourcing U.S. manufacturing to a foreign country has a negative effect on the U.S. economy.
- Investing in a multinational corporation is a way to add international exposure to a portfolio.
Multinational Corporations
How a Multinational Corporation Works
A multinational corporation is an enterprise whose business activities occur in at least two countries. Some may consider any company with a foreign branch to be a multinational corporation. Others may limit the definition to only those companies that derive at least a quarter of their revenue outside of their home country.
Multinational companies can make direct investments in foreign countries. Many are based in developed nations. Advocates say they create high-paying jobs and technologically advanced goods in countries that otherwise would not have access to such opportunities or goods.
However, critics of these enterprises believe multinational corporations exert undue political influence over governments, exploit developing nations, and create job losses in their own home countries.
The history of the multinational company is linked with the history of colonialism. Many of the first multinational companies were commissioned at the behest of European monarchs to conduct international expeditions.
Some of the colonies not held by Spain or Portugal existed under the administration of some of the world's earliest multinational companies. One of the first was The East India Company, established in 1600. This British multinational enterprise took part in international trade and exploration, and operated trading posts in India. Other early examples of multinational companies include the Swedish Africa Company, founded in 1649, and the Hudson's Bay Company, founded in 1670.
Characteristics of a Multinational Corporation
Some of the characteristics common to various types of multinational corporations include:
- A worldwide business presence
- Typically, large and powerful organizations
- Business conducted in various languages
- A complicated business model and structure
- Direct investments in foreign countries
- Jobs created in foreign countries, potentially with higher wages than found locally
- Seeks improved efficiencies, lower production costs, larger market share
- Has substantial expenses associated with navigating rules and regulations of foreign countries
- Pays taxes in countries in which it operates
- Reports financial information according to International Financial Reporting Standards (IFRS)
- Sometimes accused of negative economic and/or environmental impacts in foreign markets
- Sometimes accused of negative economic impacts in home country due to outsourcing jobs
U.S. multinational corporations employed 43.9 million workers throughout the world in 2019.
4 Types of Multinational Corporations
Multinational corporations can be viewed as four main organizational types.
A Decentralized Corporation
A decentralized corporation maintains a presence in its home country and has autonomous offices and other facilities in locations around the world. This type of multinational company has the capability to achieve more, faster because it's decentralized. Each office manages the local business itself, making its own decisions.
A Centralized Global Corporation
A centralized global corporation has a central headquarters in the home country. Executive officers and management located there oversee the global offices and operations as well as domestic operations. They, rather than managers at local offices in foreign countries, make the key business decisions. The offices typically must report to and obtain approval from headquarters personnel for major activities.
An International Division Within a Corporation
An international division is that part of the multinational corporation that has been made responsible for all international operations. This structure facilitates business decision-making and general activities in local, foreign markets. However, operating independently can pose problems when overall corporate consensus
and action is required. Maintaining and presenting the carefully nurtured, enterprise-wide brand image established by the multinational may also be a challenge.
A Transnational Corporation
A transnational corporation involves a parent-subsidiary structure whereby the parent company oversees the operations of subsidiaries in foreign countries as well as in the home country. Subsidiaries can make use of the
parent's assets, such as research and development data. Subsidiaries may be different brands, as well. The parent usually maintains a management role directing the operations of its subsidiaries, domestic and foreign.
Examples of multinational corporations include IBM, Berkshire Hathaway, Apple, Microsoft, Amazon, and Walmart. Nestlé S.A. is an example of a transnational corporation that executes business and operational decisions in and outside of its headquarters. One of its subsidiaries is Nespresso.
Advantages and Disadvantages of Multinational Corporations
International operations present a variety of advantages and disadvantages to multinational companies, consumers, and a workforce.
Advantages
Developing an international presence can open up new markets and sales opportunities unavailable or not feasible when operating just domestically. For example, a presence in a foreign country such as India can allow a corporation to meet widespread Indian demand for particular products without the transaction costs associated with long-distance shipping.
Corporations can establish operations in markets where their capital can be used most efficiently and wages have less impact on the bottom line than they did in the home country.
By producing the same quality of goods at lower costs, multinational companies can reduce prices and increase the purchasing power of consumers worldwide.
Multinational companies can also take advantage of lower tax rates available in countries eager for their direct investments and the jobs that they'll create. Note, however, that the European Union has a plan to implement a minimum tax of 15% on corporate profits, to become effective in 2023.
Other benefits include a direct financial investment in foreign countries and job growth in their local economies.
Disadvantages
A trade-off of globalization—the price of lower prices—is that domestic jobs move overseas. This can increase unemployment in the home country and make it difficult for longtime employees in outsourced industries to find new jobs.
Those opposed to multinational corporations point to the potential they may have to develop a monopoly (for certain products). This can drive up prices for consumers, stifle competition, and inhibit innovation.
Multinational corporations are also said to have a detrimental effect on the environment because their operations may encourage land development and the depletion of local and natural resources.
Multinational companies may also cause the downfall of small, local businesses. Activists have also claimed that multinational companies breach ethical standards. They accuse them of evading laws to advance their business agendas.
What Makes a Corporation Multinational?
A multinational corporation is one that has business offices and operations in two or more countries in the world. These companies are often managed from a central office headquartered in the home country. Simply exporting goods for sale abroad does not make a business a multinational company.
Why Would a Business Want to Become a Multinational Company?
Usually, the primary goal of a business is to increase profits and growth. If it can grow a global customer base and increase its market share abroad, it may believe that opening offices in foreign countries is worth the expense and effort. Companies may also see a benefit in certain tax structures or regulatory regimes found abroad.
What Are Some Risks That Multinational Corporations Face?
Multinational corporations are exposed to risks related to the different countries and regions in which they operate. These can include regulatory or legal risks, political instability, crime and violence, cultural sensitivities, as well as fluctuations in currency exchange rates. People in the home country may also resent the outsourcing of jobs.