Dynamics of Multinational Companies

2345 words (9 pages) Essay in International Business

23/09/19 International Business Reference this

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Table of Contents

1. Introduction

2. Literature Review

3. Main Characteristics of Multinational Companies

4. Difficulty in Regulating the Multinational Companies

5. Impacts of Regulating Multinational Companies

6. Conclusion

7. References

1.    Introduction

A multinational company (MNC), is a company that has business operations such manufacturing and productions of services and goods in a foreign country other than its own home country (Birkinshaw 2016, p.24). According to Dunning and Lundan (2008), a company can only be regarded as a multinational company only if its revenue is coming from business operations that are carried outside its home country, and they amount to at least more than 25% of the total profits (p.13). Globally, most of the largest and influential multinational companies are publicly traded. Despite this, multinational corporations are always at the centre of criticism because of how sometimes their ways of conducting business operations lack ethics. This is portrayed in the way that they go out of their way to avoid business operations laws of ethics where they use their capital to maximise their gain in the agendas of their business and at a time apply Government backing from their home nations that are wealthy.

The multinational corporations are also associated with tax havens, which practices tax evasion and associated with profit shifting and base erosion. The basic actions of the multinational companies are supported by the free markets and the economy that is liberal on a global scale (Jansky and Prats 2013, p.15). Notably, individuals are more likely to act rationally to cater for their self-interests, and when they do, markets that are free are created, and they perform best because there is less interference from governments. This report aims at giving better insights on whether multinational companies should be regulated, and why it has proven to be difficult to regulate them.

2.    Literature Review

 Multinational companies are primarily characterised by their large sizes located across the world and by the fact that all their business operations are controlled by the single parent company that is located in the country of origin (Fobete 2005, p.47). Notably, the multinational companies undertake several business activities on a global scale that include:

  1. Exportation and importation of services and goods.
  2. Buying and selling of foreign markets licenses for the interest of their own companies (Reuters 2012, p.4).
  3. Making the steps of making investments that are very significant to the objectives and goals of the company in the foreign markets.
  4. Starting up manufacturing and assembly amenities in the foreign countries for business operations for the company (Luo 2005, p.5).
  5. Also, the multinational companies engage in activities that involve contract manufacturing where the company allows local firms from the host country to manufacture and produce their products and services (Luo, 2005, p.21).

These multinational companies usually gain a lot due to their global presence in some ways. Firstly, about microeconomics, the multinational corporations gain huge benefits from the economy of scale, which is the advantage of the cost that the company attains because of the operations scales, by spreading the research and development costs of advertising and expenditure in their scales globally (Devereux and Hubbard 2003, p.470). Multinational companies take advantage of the cheap labour that is readily available in the developing countries that the company sets out to invest in. However, there are constraints on the legal and moral problem by the multinational companies, even if they do not have a particular state, are among the most crucial social economic shortcomings on a global scale (Aharoni 2015, p.19). The stateless corporation’s concept is by far the only concept with the potential and ability to analyse the governance of a particular society on the limitations over the multinational corporations.

3.    Main Characteristics of Multinational Companies

Generally, in the multinational companies, there exists a strength that is deemed national with bigger companies as the main bodies and in the light of foreign direct investment (FDI) that gain access to local enterprises, branches in some foreign countries or subsidiary companies (Cullen and Parboteeah 2014, p.62). More so, the multinational companies have a decision-making system that is complete by head office. Additionally, each branch and subsidiary of the company has its own body that is responsible for making decisions because of their difference in features and culture (Langenmayr 2013). However, these decisions must be typically made by the headquarters of decision making for review and considerations. To gain maximum profits, the multinational corporations are typical of identifying markets on the global scale, production layouts that are rational and production points that are fixed and professional.

Multinational companies are said to have the most robust competitiveness in the world, because of the fund’s injections that facilitate the faster transfers across the borders, technical strength and a strong economy and much quicker and sophisticated ways of communication (Rolfe et al. 1993, p.336). Lastly, due to the advantages that are brought about by the production, technical and economic strength, most multinational companies that are big have differing levels of monopoly. The firms have huge finances and assets because they operate on a global scale and as a result, have a substantial financial and physical asset that allows for huge sales (Verbeke and Greidanus 2009, p.1477). Also, there is economic power that results from continued mergers and control of companies from the countries of investment.

4.    Difficulty in Regulating the Multinational Companies

In 2014, the five nations, South Africa, Venezuela, Bolivia, Ecuador and Cuba came together to sign a treaty that will lead to the ability to regulate multinational companies. During the very first trial to regulate multinational companies, the step was not finalised because of several disagreements that surfaced between the developed countries and the developing countries (Egger and Winner 2010, p.100). This code of conduct was a draft on the code of conduct on transnational corporations. On the second attempt, the finalisation of another treaty which was the Norms and Responsibilities of multinational companies and other firms was also not successful due to human rights. The five nations took a step to present the treaty on norms for approval, and they were met with a disastrous blow from the Human Rights Commission (HRC) where they regarded the standards illegal with no standing (Forsgren 2017, p.55). Additionally, the ever-increasing power concerning the economy of multinational companies has resulted from, and it has led to putting corporate social responsibilities in danger. (The Conversation, 2015)

It is also evident that, as the world economy recovers, it is still difficult for nations to protect themselves from the actions of those neighbouring them despite them having wealth and resources (Bolman and Deal 2017, p.70). Besides, the power that the multinational companies have gained over the years make it harder for some of the nations to control. This is because these multinational companies typically own and manage at least 20% of all assets globally and, they approximately provide and employ more than six million people as seen by this report (Bauer and Langenmayr 2013, p.29). Also, this report noted that multinational companies control half of the top economies in the world and a further 25 multinational companies which are said to be richer than most of the countries around the globe. These statistics are evidence that shows how difficult it is still to control these multinational companies. Another issue concerning the difficulty in regulating these multinational corporations is that countries are not ready or willing to enforce the rules that are safeguarding the human right of their citizens (Australian Treasury 2013). Also, the companies typically outsource employment so as they can avoid the prices and cost that affected by labour and workers union and even labour rights which are aspects that allow fair business conduct. Therefore, it is a much welcome idea to regulate multinational companies.

5.    Impacts of Regulating Multinational Companies

After the push and pull between regulation entities, governments and multinational companies, it is evident that there can be a change in the way these companies conduct business. First, the UN appointed a representative who later came up with a guideline that would respect and protect human rights and the business framework of business (Brooks 2013, p.34). These guidelines need the businesses to allow the governments to have the sole responsibility of safeguarding human rights and enforce the laws when violated. The business community typically received the two documented guidelines with open hands after they were endorsed by the Human Rights Council (HRC) (OECD 2013). However, despite the endorsement of these guidelines, it is still not easy to fully control the actual misconduct of the multinational companies. Currently, the business community and the global governance only have made a binding document that is open-ended, and it is just a resolution. The fight against multinational company’s business misconduct has led to most NGOs to try and challenge the power gained by the companies using means that are legal such as public awareness, campaigns and promoting (Cullen and Parboteeah 2014, p.67). When the companies are regulated, the domestic industries are safe from challenges that are presented by the incoming companies such as winding up their business. Notable, most of these multinational companies assist the governments, and with time they gain independence and start interfering with their politics (Dunning and Lundan 2008, p.93). Therefore, if they are regulated, such issues of interference shall not take place. Also, when companies are regulated, they do not get to exploit the natural resources of the host country such as the non-renewable resources that lead to damage to the economy.

6.    Conclusion

The recent shift in social responsibilities globally presents a powerful and very practical counterbalance that diffuses the greed witnessed in the business world. This leads to the creation of a platform for the development for enforcing the principles and laws that guide and govern business operations by the multinational corporations. This report has given very informative insights into the dynamics of multinational companies and the effects they have on the economy. Also, the report has identified a detailed list of the characteristics that set these types of companies apart from the rest.

Furthermore, it has met the objective of answering the question of whether these companies ought to be regulated and why it has over the years been such a daunting task for governments to regulate them. More so, the report has detailed the actual impacts that result from attempts of regulating these multinational companies. Finally, as long as countries place the economic interests of their companies well before human rights, then efforts like that proposed by Bolivia, Cuba, Ecuador, South Africa and Venezuela will continue to be overshadowed.

7.    References

  • Aharoni, Y., 2015. The many faces of the ever-changing multinational enterprise. Handbook of emerging market multinational corporations, pp.17-37.
  • Australian Treasury. 2013. Implications of the modern global economy for the taxation of multinational enterprises.
  • Bauer, C.J. and Langenmayr, D. 2013. Sorting out outsourcing: Are profits taxed at a gorilla’s arm’s length? Journal of International Economics, Vol. 90, pp.326-336.
  • Birkinshaw, J., 2016. Multinational corporate evolution and subsidiary development. Springer.
  • Bolman, L.G. and Deal, T.E., 2017. Reframing organisations: Artistry, choice, and leadership. John Wiley & Sons.
  • Brooks, R. 2013. The Great Tax Robbery, Oneworld Publications.
  • Cullen, J. B., and Parboteeah, K. P. (2014). Multinational management: A strategic approach. Mason, OH: Thomson/South-Western Pub.
  • Devereux, M.P. and Hubbard, R.G. 2003, Taxing Multinationals, International Tax and Public Finance, 10, pp.469-487.
  • Dunning, J. H., and Lundan, S. M. (2008). Multinational enterprises and the global economy. Cheltenham, UK: Edward Elgar.
  • Egger, E. and Winner. 2010. Saving taxes through foreign plant ownership, Journal of International Economics, Vol 81, pp99-108.
  • Fobete, D. N. 2005. Multinational corporation and third world development: Research paper. Ravensburg: Grinverl.
  • Forsgren, M. (2017). Theories of the multinational firm: A multidimensional creature in the global economy. Northampton: Edward Elgar Publishing.
  • Jansky, P and Prats, 2013. Multinational Corporations and the Profit-shifting lure of tax havens, Christian Aid Occasional Paper Number 9, March.
  • Langenmayr, D. 2013. Why do multinationals pay less profit tax? The inherent limitations of the arm’s length principle. Retrieved from www.voxeu.org on 1 November 2018.
  • Luo, Y. 2005. Corporate governance and accountability in multinational enterprises: Concepts and agenda, Journal of International Management, 11(1), 1-18.
  • Luo, Y. 2005. How does globalisation affect corporate governance and accountability? A               perspective from MNEs Journal of International Management, 11(1), 19-41.
  • OECD. 2013. Addressing Base Erosion and Profit Shifting, OECD, Paris.
  • Reuters. 2012. Special report: how Starbucks avoids UK taxes, 15 October.
  • Rolfe, R.J., Ricks, D.A. Pointer, M.M. and McCarthy, M. 1993. Determinants of FDI Incentive Preferences of MNEs, Journal of International Business Studies, Vol 24, No. 2, pp335-355.
  • The Conversation. (2015). How multinational companies keep avoiding the threat of regulation. [online] Available at: http://theconversation.com/how-multinational-companies-keep-avoiding-the-threat-of-regulation-38795.
  • Verbeke, A., & Greidanus, N.S. 2009. The end of the opportunism v trust debate: Bounded rationality as a new envelope in research on MNE governance, Journal of International Business Studies, 40, 1471-1495.

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