Multinational Corporations

From the past to the Present

The phenomenon of MNCs is not new, instead tracing back to the late 18th century when firms like the British, Dutch, and French East Indian companies sought raw materials overseas. The modern-day counterparts of these raw material-seeking firms are the multinational oil and mining companies, as recent advances in transportation and communications technology increased the feasibility of global production, enabling MNCs to grow rapidly over the past 60 years.

Direct foreign investment usually allows the formation of MNCs, although their existence does not necessarily reflect a net capital flow from one country to another. MNCs can raise money for the expansion of their subsidiaries in the host country rather than in the home country. Furthermore, a good deal of [Page 601]two-way foreign direct investment occurs among industrial countries: U.S. firms expand their European subsidiaries and at the same time European firms expand their U.S. subsidiaries.

Among the major factors that influence firms' decisions to go global are (a) appropriation of raw materials, (b) reduction in costs, mainly labor costs, (c) search for new markets and consequently for demand, (d) circumventing trade restrictions such as import tariff barriers, and (e) taking advantage of government policies offered by the host country, particularly relatively lower taxes.

The three largest MNCs worldwide in 2006 were ExxonMobil, with headquarters in the United States and revenue of $339.9 billion; Wal-Mart, with headquarters in the United States and revenue of $315.6 billion; and Royal Dutch Shell, with headquarters in the Netherlands and revenue of $306.7 billion.

Impact of Multinational Corporations

MNCs can create several problems in the home country. Among these the most important are reduction in potential production and employment; transfer of technology to other nations, which might undermine the current and future technological superiority of the home nation; and reduction of potential tax revenue of the home country.

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