Rise of Multinational Corporations

This article gives an overview of the structure of multinational corporations and tracks the historical transformation of American corporations from locally chartered companies to multinational corporations aiming to serve the interests of their investors. Today, multinationals garner an inordinate amount of credit for the rising affluence of emerging economies in developing countries and criticism for tax avoidance and unfair labor policies.

Keywords Income Tax; Franchise Tax; Liberal Marketplace; Micro-Multinational Company; Multinational Corporation; Post-Industrial; Supply Chain; Tariffs; Third-World

The Rise of Multinational Corporations

Overview

Karl Marx (1818 - 1883) believed that corporate capitalism was the most dynamic force available to humanity for creating wealth. He considered America a wonder of economic efficiency and marveled at the possibilities for affluence that the American model presented. For Marx, corporate capitalism possesses two contradictory forces. The first continually created better productivity and promised to free humanity from centuries of feudal poverty and despotism. The second would give rise to international forms of capitalism that would lock the working class in oppression and poverty (Derber, 2000). Perhaps the one thing that Marx understood better than his contemporaries was that the future of corporate capitalism and the plight of the worker would unfold on an international stage (Derrida, 1994). Modern multinational corporations are credited for generating vast wealth in post-industrial countries and the rising affluence of developing countries. At the same time, multinationals are the targets of rigorous critiques, as many political organizations and analysts allege that they damage local economies and the environment.

Once the term "multinational" signified a unique characteristic of a few companies. Today, virtually every large corporation provides goods or services in multiple countries or has a manufacturing supply chain involving numerous countries. In 1990, the United Nations reported that there were approximately 30,000 multinational companies. That figure now exceeds 60,000 (Copeland, 2006). The growth in multinationals is being driven by technology that deems borders irrelevant to providing services and manufacturing, international acquisitions and mergers, and the relevantly new phenomenon of micro-multinationals. Like the high-tech start-ups that preceded them, successful micro-multinationals promise to be gobbled up by powerful multinational corporations who desire access to new markets and efficient low cost manufacturing and service providers. This will only accelerate the international presence and influence of multinational corporations and spurn the debate as to whether this is ultimately good or bad for local communities and the people who live and work there.

Corporate Structure

The construction of the corporate structure arose over many centuries. The Latin word corpus means "body." A corporation actually embodies a business and is able to carry on business like an individual. The Scandinavian corporation Stora Kopparberg is believed to one of, if not the, first corporations granted a charter. Stora Kopparberg was granted a charter in 1347 as a copper mining company. Stora Kopparberg still exists today as a forest-product company named Stora-Enso (Cantwell, Gambardella, & Granstrand, 2004). Stora-Enso is an example of many of the attributes identified with modern corporations. Corporations are formed as entities, or bodies, separate from people who form the corporation. They have a right to own property, make legal agreements, and set up its own rules and bylaws. Corporations have a perpetual life that allows the entity to exist beyond the lifetime of shareholders, managers, and workers. For this very reason, many early churches incorporated and played a critical role in the development of the evolution of corporations (Davis, 1961). Modern corporations can also be formed with no specific business purpose and, like Stora-Enso, completely change their line of business. In addition to these characteristics, corporations enjoy many of the same personal rights as individuals and provide shareholders limited liability for debt, losses, and corporate crimes.

Rise of Corporate Personhood

Corporations did not always enjoy the status they do today. In the middle of the nineteenth century, American corporations applied to local jurisdictions for one to three year corporate charters. At the end of the term of the charter, the company had to prove that it had provided benefits to the local community and its workers in order to have another one to three year charter granted (Derber, 2000). Not only were corporations temporal bodies, but their continuation was based on providing demonstrable local benefits to the community. In 1855, the Supreme Court, in Dodge v. Woosley, stated that local people through State jurisdictions still held power of corporations. This started to change in the 1880s. In 1844, the Supreme Court ruled, in Louisville, C&C.R. Co. v. Letson, that a corporation was capable of being treated as a citizen. Though the ruling was in part to an effort to hold corporations accountable to State jurisdiction, the ruling began the process of granting corporations legal personhood and started the shift away from creating local benefits to seeking personal benefit. In 1886, the Supreme Court, in Santa Clara County v. Southern Pacific Railroad, ruled that corporations could not be deprived due process under the Fourteenth Amendment. The Fourteenth Amendment, which was created to give ex-slaves access to the Bill of Rights, was being used by corporations to gain access to the Fifth Amendment's right to life, liberty, or property (Derber, 2000).

In 1906, Hale v. Henkel granted Fourth Amendment search and seizure rights to corporations making the review of corporations' internal records more difficult to access. In 1908, Armour Packing Co. v. U.S., the Supreme Court granted Sixth Amendment rights to corporations. Though the granting of constitutional rights to corporations continue to this day, the final step in shifting a corporation away from benefitting local communities and under control of the States that grant them the right to exist as a business entity came in 1919. The Michigan State Supreme Court case Dodge v. Ford Motor Co. stated and set the precedent that corporations are primarily organized to carry on business to benefit shareholders. From that point in time, stockholder primacy has superseded the rights of local communities and workers. After this ruling, corporations stood as independent bodies endowed with citizen rights and protected by limited liability. Corporations were now positioned to turn away from local concerns and focus on actions that would financially benefit their shareholders.

The Reach beyond Borders

One of the other early uses for creating corporations, or joint-stock companies, was for colonialism and mercantilism. As early as the 15th century nations and private investors regularly organized joint stock ventures to colonize new lands or establish new lucrative trading companies (O'Brien, 2000). The risks on these ventures were very high, but the possible financial rewards were too great to ignore. Today, companies look at foreign markets in much the same manner. With the rise of mass communication and the Internet reaching these foreign markets is becoming much easier. In addition to selling products in foreign markets, many companies now manufacture all or part of their products in foreign countries. In fact, it is not usual for a company to employ companies or employees from many countries for just one product. To do this, companies use what is a called global supply chain. Dell, the world's second largest computer maker, uses 30 key parts in every computer they sell. For each key part, Dell has multiple vendors that can the part to their exact specifications. In order to ensure that local politics, economies, and natural disasters affect Dell's ability to deliver their product, Dell requires that no vendors producing the same part can be located in the same country. Though a computer may be built at any one of Dell's six manufacturing sites, the parts are manufactured worldwide, and a single computer may contain parts from over twenty different countries (Friedman, 2006).

Taxes

Not only do corporations move beyond their native borders to manufacture and sell products, they also relocate offices to take advantage of more favorable tax laws. This ability to move across borders in order to gain access to more favorable tax laws is a controversial practice. This does not only happen on the national level. It is a common practice of states and cities in America to forgive real estate and franchise taxes for a number of years to draw a new company to their area. The idea is that these companies will return the investment to the community in the form of jobs and future tax revenue. If after a few years the corporation leaves, then the local economy can be harmed for a number of years.

In 2007, after receiving $21 billion in contracts from the American government for work related to the Iraq and Afghanistan wars, the Halliburton Corporation decided to move from America to Dubai in order to save hundreds of millions of dollars in taxes. Critics argued that the defense contractor was earning money from the conflicts while avoiding its tax liabilities. In a historical sense, critics argued that the move was comparable to General Electric—who benefitted greatly from the First and Second World Wars—moving to Turkey during World War II.

Corporate Muscle

The world’s largest multinational companies have annual revenues that exceed the gross domestic product of over one hundred countries. Research has shown that, historically, the larger the corporation, the more likely it will be involved with political lobbying (Masters, & Keim, 1985). Their ability to use massive profits in order to lobby governments for favorable laws has been a concern of critics for decades. As an example, despite decades of expert testimony before the Congress on the issue of protecting American businesses with tariffs on foreign goods the Congress consistently moved toward lower tariffs (Lindeen, 1970). Critics fear the democratic process is undermined by foreign companies who lobby for favorable laws that deny consideration of labor rights and environmental sustainability.

Applications

Globalization

Those who favor the strength and influence of multinational corporations point to the many advantages gained by globalization. Companies gain access to new markets, increased productivity, and increased innovation opportunities. Globalized companies draw more foreign investment harmonize with other countries and cultures (Wishard, 1999). Critics of globalization believe that multinationals undermine democracy and the rule of law. Because multinationals can move assets and resources all over the world, they can avoid environmental or other laws by moving manufacturing to countries with lax laws, abusing local laws, exploiting legal ambiguities or threatening market withdrawal. For multinationals, if laws cannot be avoided they can be exploited due to the porous open-ended nature of these laws toward companies so capable of amassing huge profits and working on a global stage (Scheuerman, 1999).

Corporate Responsibility

Large corporations understand the economic value of appearing socially responsible. Multinationals attempt to tailor their marketing campaigns based on the values of the local community (Nakata, & Pokay, 2004). Multinationals spend millions of dollars reaching out to local communities investing in education, welfare, and the arts. However, multinationals are not always socially responsible or moral. Scholars debate whether multinational corporations have a moral obligation to the nations and communities in which they operate (Koehn, 1993). The argument ultimately goes back to whether a multinational has a social responsibility to the countries it operates in, its employees, or its shareholders. The American courts have made it clear that in the United States corporations are primarily responsible to its shareholders.

National Borders & Immigration

Multinational corporations not only have personhood rights, but rights that many individuals do not. Corporations can work in a country and pay income taxes in another. Through technology, companies can have employees far away from America. India provides services such as accounting, customer service, high tech support, and even taking fast food orders from drivers at a burger drive-thru (Friedman, 2006). The same borders that cause great concerns for immigrants do not hinder multinationals and their employees. Worries about immigrants crossing the border of the United States and taking American jobs seems shortsighted when multinational corporations employ people in India that already work in the American marketplace and take away American jobs, though they sit at a desk thousands of miles away. With the rapid advancements of Internet and telecommunications-based technologies since the mid 1990s, multinationals do not necessarily need employees to be physically located in a country in order for those employees to serve the consumers of that country. In many industries the immigrant worker can cross the border and work in a country without ever physically leaving their own.

Conclusion

Multinational corporations are much loved and much hated. They are the vanguards of the liberal marketplace, economic opportunities for historically poor nations, and a catalyst for cultural understanding and peace. They are also polluters, tax evaders, callous task masters, and the champion of broken promises. Whether multinationals are ultimately seen as doing more good than ill is usually relative to an individual's experiences and personal biases. Marx's concern was that capitalism would eventually go global, and unless worker unions went global their ability to organize and negotiate on their own behalf would be undermined by a company's ability to move production elsewhere. As it turns out, Marx understood well the future international stage that business would operate on. Today, whether you like multinational corporations or not, one thing is certain. They are too big and too powerful to be going away anytime soon.

Terms & Concepts

Income Tax: A federal, state, or city tax paid by companies based on a companies net operating income (profit).

Franchise Tax: Also called a margin tax. A tax usually paid to a state in which a company is doing business. The franchise or margin tax can be based on a number of different items. The most common basis for franchise taxes are gross profits (revenue less direct cost of good or payroll), value added to raw materials through manufacturing, or the value of inventories.

Liberal Marketplace: An economic market where individuals are free to pursue their own economic and creative interests and supply and demand is not regulated.

Micro-Multinational Company: Small companies that operate in more than one country.

Multinational Corporation: A business that has been granted corporate articles by a state or nation and operates in more than one country.

Post-Industrial: An economy that has gone through the process of developing an industrial manufacturing-based economy and moved to a more services (financial, professional, government, and hospitality) based economy.

Supply Chain: A network of producers, manufacturers, distributors, transporters, storage facilities and suppliers provide retailers with a product to sell.

Tariffs: A tax imposed on products imported from another country.

Bibliography

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Cantwell, J., Gambardella, A, & Granstrand, O. (2004). The economics and management of technological diversification. London: Routledge.

Contu, A., Palpacuer, F., & Balas, N. (2013). Multinational corporations’ politics and resistance to plant shutdowns: A comparative case study in the south of France. Human Relations, 66, 363-384. doi:10.1177/0018726712469547 Retrieved October 30, 2013 from EBSCO online database SocINDEX with Full Text: http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=85871161&site=ehost-live

Copeland, M.V. (2006). The mighty micro-multinational: The garage goes global as a new breed of startup operates worldwide in the battle for technology, talent, and customers. Business 2.0 Magazine, July 28. Retrieved August 15, 2008. http://money.cnn.com/magazines/business2/business2_archive/2006/07/01/8380230/index.htm

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Lindeen, W. (1970). Interest-group attitudes toward reciprocal trade legislation. Public Opinion Quarterly, 34 , 108-112. Retrieved August 15, 2008, from EBSCO Online Database SocINDEX with Full Text: http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=5415697&site=ehost-live

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Suggested Reading

Drutman, L. & Charlie Cray, C. (2004). The people's business: Controlling corporations and restoring democracy. San Francisco: Berrett-Koehler Publishers.

Maiangwa, B., & Agbiboa, D. E. (2013). Oil Multinational Corporations, Environmental Irresponsibility and Turbulent Peace in the Niger Delta. Africa Spectrum, 48, 71-83. Retrieved October 30, 2013 from EBSCO online database SocINDEX with Full Text:http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=91515891&site=ehost-live

Robins, N. (2006). The corporation that changed the world: How the East India company shaped the modern multinational. London: Pluto Press.

Zerk, J.A. (2007). Multinationals and corporate social responsibility. Cambridge: Cambridge University Press.