What are MNCs?
A firm that “controls and manages production establishments — plants — in at least two countries”
a company that “place multiple production facilities in multiple countries under the control of a single corporate structure”
cross-border production, trade and investment
Great growth in numbers and power
last 40 years, grown 11 times
Globalization
main drivers — and main beneficiaries of — globalization
these are the subjects of globalization in a way
MNCs or TNC?
Are these international companies or do they represent a particular country
How to decide?
a question of CEOs and boards
but above all ownership
Symbolism of MNCs
Surprisingly emotive subject
IHU professors taking pride in Turkish MNCs
American members of my family cheering when they see a Coca Cola sign
Like avatars of your country
Also great symbols of globalization and cultural imperialism
lot’s of people don’t go to MacDonalds
“Macdonaldization” of the world — rational, efficient, cheap, but really not very good
easy targets — the Climate Movement — anti Shell
Coca Cola boycotted since they do business with Israel
Sanctions against Russia
we don’t want to play with you any more
Russians taking over the stores
a loss to consumers — but great for nationalists
What happens to an economy and a society when foreign companies all suddenly leave?
Economic, political, cultural impact
I remember lining up to get a hamburger in the old Soviet Union
“you are what you eat” — “eat the West”
nationalism replaces internationalism
Some statistics
Multinational companies
Regionalization
Companies are not spreading out evenly
Japanese companies in Southeast Asia
German companies in Eastern Europe
American companies in Mexico
A global corporate culture?
Are all companies becoming the same?
the evolutionary pressure on niches
what if the whole world is the same ecological niche?
FDI – foreign direct investments
100 top firms account for 4 per cent of world GDP
91 of the top 100 companies have HQs in the US, Europe or Japan
Rest of the world
Brazil and Mexico attract a lot of capital
Africa is attracting more than before, but still not so much
There are also an increasing number MNCs in developing countries
Some stats
World
US
Turkey
Why are there MNCs?
Economists: trade and investments are the same
no reason to pay attention to MNCs
they might as well trade
Or, differently put, MNCs can’t be explained
why is Volkswagen investing in a production plant in Mexico?
why not just buy car parts made there?
Supply chains
best to rely on the market
you can’t make everything yourself
Most common in consumer electronics and automotive industry
today 60% of trade is in intermediate goods and services rather than final goods
subcontracting and outsourcing
when there is a market you can rely on without high transaction costs
If transaction costs are high it’s better to make things yourself
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Impossible for companies to make everything for themselves
think of a car maker making microprocessors and display screens
If you buy it from outsiders
more flexible
incorporate the latest technology
but vulnerable if there are no alternatives
But various transaction costs — exposed vulnerabilities
cf. the current inflation
Rise in economic nationalism
produce at home
easier access, more reliable
Rethink “lean manufacturing strategies”
“just in time” manufacturing
The challenge …
how to make supplies more resilient
without becoming less competitive — globalization is still a good thing
Theory of the firm (Coase)
Actually a sub-question of why there are companies at all
Companies rely on markets — they are actors in the market — but they are not themselves markets
companies are hierarchical organizations — rely on superiority and submission
you know this if you ever worked anywhere
Economic theory
markets are more efficient than hierarchies
companies are centrally planned after all
Imagine a company that only consists of a finance dept …
and then buy everything else they need on the market
Outsourcing
many services are not provided in-house
catering at IHU — custodial staff — cleaners, gardeners, güvenlik dudes, but also management expertise
the professors are also bought in — very small faculties
What is the reason to rely on the market?
get much cheaper services
renegotiate prices on a regular basis
not have to take responsibility for a lot off HR issues
So why are there companies?
Coase : transaction costsit’s costly to organize markets — set up an exchange
easier to simply have someone to yell at
But there is a kind of boundary around the core of the company which determines its optimal size
subcontractors etc for car companies
cf. supply-chains
How does this argument apply to MNCs?
as a way to reduce transaction costs
Which kinds of transaction costs are they trying to avoid?
Location
unimpeded access to natural resources
to a foreign market
avoid trade hurdles
Take advantage of comparative advantages
move to the country which has the comparative advantage
where taxes are lower
less regulation
cheaper labor
Scale — operating in oligopolistic markets
bigger companies can produce things far more cheaply
oligopolistic power — they can influence markets
more political influence
Intangible assets
the kind of know-how that is in-house, tacit, a part of corporate culture
cannot be bought by others
if a company relies heavily on a particular asset — a mine — they had better control it themselves
there is no market to rely on here
Foxconn making Apple products
Notable products manufactured by Foxconn include the BlackBe rry , iPad , iPhone , iPod , Kindle , all Nintendo gaming systems since the GameCube , Nokia devices, Sony devices, Google Pixel devices, and Xiaomi
Turkish white goods companies, TV screens, etc
Wielding political power
these are not only economic decisions, but strategic and political
making friends with regimes
developing connections
thinking of very long-term market shares
Benefits of MNCs
Ship capital to where it is scarce
draw on the savings of the whole world
enjoy faster growth
Transfer technology and management expertise
positive externalities — spinoffs
Promote efficient allocation of resources in the global economy
better for everybody everywhere
Access to marketing networks
Disadvantages of MNCs
Instruments of capitalist domination
control critical sectors of a country’s economy
make independent policy-making more difficult
Make decisions without consideration for the economy of the country they are in
not helping economic development
people in a country want to maximize their well-being
but the MNC wants to maximize the well-being of its share-holders
Weaken labor and environmental standards
Profits are expropriated
MNCs charge for technology transfer
making goods more expensive
Drive local companies out of business
manavlar are disappearing and everyone goes to European stores — Migros, Carrefour
And not just the West
China as a new colonial power
The trick
to benefit from FDI while minimizing the costs
Race to the bottom
Exploit lower labor standards
and everyone has to lower theirs in order to compete
lower rate of unionization
Same for environmental protection
Cf. Chinese Communist Party
policing the Chinese workforce on behalf of international capitalism — strange end for a Communist Party
However,
not clear that the alternatives available to the locals are a lot better
standards might improve as a result of the MNC
better pay, shorter hours, better conditions
Bargaining position of MNCs
Depends on the extent to which they can monopolize resources
drive a harder bargain
can the same natural resources be found in many places?
favors the MNC — they can just go somewhere else
If the MNC has a monopoly on the extraction technology?
the country cannot do without them
However, over time, the investment becomes a hostage
difficult to just pick up and leave
this is when you start to get involved in local politics
The MNC is in a more powerful position vis-a-vis countries with only an advantage in labor
there are many other places where they could locate production
MNCs as political actors
Necessity to get involved in politics
protect its position
protect markets
influence legislation — lobbying the EU
Nationalizations
Developing world
wave of nationalizations — defend national independence
Regulations — eg. India
MNCs that owned more than 40% of a company had to sell shares or leave the country
capital outflow in the 1970s — Coca-Cola and IBM left the country
Export-processing zones
Taiwan, Singapore — China
where MNcs can do whatever they want
FDIs have been greatly liberalized since the 1980s
the protected sectors often did really badly
Developed countries also critical
Japan and France in particular — specific approval for manufacturing companies
the US — foreign companies cannot own TV stations, airlines, defense-related industries
Tax incentives to attract MNCs
competition between US states for FDI
South Carolina subsidized each job by $67.500
Alabama $200,000 for each Mercedes-Benz job
Regulation of MNCs
Cannot engage in certain activities — require them to engage in others
must join with a local company
limit the profits they can take out
how much they can charge for technology transfers
force them to buy inputs from local suppliers
force them to do research and development in the country
limit their access to local capital markets
But
there is no international agreement
instead: bilateral investment treaties
Not much on a UN level
UNCTAD perhaps …
ILO — standardizing labor standards
International corporate tax code
Big tech companies paying no tax
Countries want them
raise to the bottom to reduce tax rates
Ireland a notorious offender
moving to the countries with the lowest taxes
Global minimum tax
15% at least
if a country sets a lower rate, other countries can take the difference from the company
no incentive to look for cheaper deals
Companies are taxed on their profits
companies don’t have the same fixed locations as before
they can easily move their profits
OECD has steered the talks on global tax
coordinate with domestic tax law
Why are some countries offering extremely low tax rates?
countries want big companies to come to them
In the US it’s supposed to be 21 percent
but they actually pay far less
perhaps nothing
all sort of ways of getting tax breaks
Amazon pays 0 percent tax
on 11 billions in profits
2021 they paid 6.1%
2020
55 other companies paid nothing
A global tax might bring in some 150 billion dollars in tax
apply to all companies making more than 800 million in revenue
But crucial that all countries do it at the same time
the US doesn’t want other countries to get the tax
poor countries worry about not getting a fair share
dtfficult to get international coordination
NYT, “Biden Finds Raising Corporate Tax Rates Easier Abroad Than at Home”
ROME — President Biden and other world leaders endorsed a landmark global agreement on Saturday that seeks to block large corporations from shifting profits and jobs across borders to avoid taxes, a showcase win for a president who has found raising corporate tax rates an easier sell with other countries than with his own party in Congress.
Leaders hailed the agreement, which was negotiated by the Organization for Economic Cooperation and Development with nearly 140 countries signing on. “Today, every G20 head of state endorsed an historic agreement on new international tax rules, including a global minimum tax that will end the damaging race to the bottom on corporate taxation,” Treasury Secretary Janet L. Yellen, who joined Mr. Biden in Rome, said in a statement. “It’s a critical moment for the U.S. and the global economy.”
The global minimum tax that Mr. Biden endorsed would be enacted separately by every country, in an attempt to eliminate havens with rock-bottom tax rates. Those companies that still use havens would face tax penalties in the United States.
Peter Coy, “The new global minimum tax may end the race to the bottom”
“Each country wants to set its corporate tax rate lower than those of other countries; the country with the lowest rate gets a windfall of tax revenue from companies that assign it their business, or at least their reported profits. That is, until another country comes along with an even lower rate. The total tax revenue collected by all countries combined goes down with each iteration of the game. The theoretical limit is a tax rate of zero.”
“The new minimum is to apply to companies with annual revenue of more than 750 million euros (that’s $868 million at the current exchange rate); if approved and fully implemented, it will generate around $150 billion in additional global tax revenue per year.”
NYT, “House Bill Raises Chance for Global Pact to Curb Corporate Tax Havens”
Overhaul of the global tax system
Crack down on tax havens
limiting the ability of companies to minimize their tax bills by setting up offices in low-tax jurisdictions
more than 130 countries have agreed to adopt a global minimum tax of at least 15 percent and are discussing a change in how taxing rights are allocated so that large businesses, including technology giants like Amazon and Facebook, pay taxes in countries where their goods or services are sold, even if they have no physical presence there.
Biden has proposed raising the corporate tax rate in the United States to 28 percent from 21 percent, and administration officials say a higher global minimum tax would reduce the incentive for U.S. companies to shift profits overseas
three countries with tax rates below 15 percent — Ireland, Hungary and Estonia — have yet to join the agreement. That poses a problem for the European Union, which needs all of its member countries to sign on for the tax changes to take effect there.
The ILO
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