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Trading companies in the 1600s, precursors to multinational corporations (MNCs), acquired and controlled foreign assets in order to reduce costs and risks and to gain advantage over their competitors. Modern MNCs that invest directly in foreign markets benefit from advances in research and development, from privileged access to capital and finance in the home country, and from the ability to manage organizational, marketing, and branding techniques.

Multinational corporations (MNCs) are corporations that own an asset in more than one country. We can classify multinational corporations according to their function. For example, market-oriented overseas multinational corporations are those that invest abroad to sell their products directly in foreign markets; supply-oriented multinationals are those that operate abroad to have access to or control over strategic input for their production process.

Many multinational corporations are both market oriented and supply oriented. The best examples are those companies that are involved in oil discovery, refining, and distribution through an international network in a world market. According to another taxonomy (system of classification), a multinational corporation can be vertically integrated, horizontally integrated, or diversified, according to the nature of its foreign assets. Moreover, the production facility located in the host country must be not only owned but also controlled: CalPERS (California Public Employees Retirement System), one the most important pension funds in the world, is not a multinational corporation. It is, in fact, a major shareholder in many countries’ largest corporations but does not exert control over their management. The conjunction of foreign ownership and a certain degree of control over the overseas subsidiary creates the concept of foreign direct investment (FDI). FDI can take the form of the acquisition of an existing facility or of the realization of a completely new production unit (greenfield investment). When FDI is less than 100 percent of the subsidiary’s capital, different taxonomies of MNC can be used. The most common such MNC is the joint venture, which often involves two or more partners, not necessarily all foreign firms. For instance, in many cases the only way for a nondomestic firm to establish a production facility in a country is to associate itself with a local firm, creating a new venture.

Patterns of Evolution

According to the preceding definitions the MNC is a quite old phenomenon, dating back at least to the “commercial revolution” of the Middle Ages and the following emergence of large colonial empires at the beginning of the modern period. Single merchants and bankers started quite early to conduct overseas activities, and soon national trading companies were investing abroad. Examples are the British East India Company, the Compagnie Generale de Belgique (General Company of Belgium), and the Veerenigde Oost-Indische Compagnie (Dutch East India Company), which, although based in Europe, owned, managed, and controlled production assets in east Asia, India, and Africa. With the first industrial revolution the rate of diffusion of multinational activity began to increase. High transportation costs; uncertainty; high custom tariffs or, alternatively, incentives and a favorable attitude shown by a host country; or simply a competitive advantage led to a spin-off of production investments from the most advanced European nations. This is, for instance, the case of Swiss entrepreneurs in the cotton industry who invested during the mid-nineteenth century in northern Italy, a promising market that also provided a cheap and docile workforce.

The first wave of globalization during the second half of the nineteenth century brought an extreme form of the MNC: the free-standing company (FSC). In its simplest form the FSC was a company that raised resources in home capital markets and invested them exclusively abroad in production facilities. The FSC was, according to many scholars, the most relevant form of British foreign investment at the eve of the twentieth century. The combination of two phenomena—the technological progress in transportation and communications and the diffusion of scale-intensive, large corporations—has further diffused FDI. The second Industrial Revolution created a growth in the absolute amount of FDI (which on the eve of World War I was $40–50 billion). At the same time leadership in multinational activity began to be transferred from the United Kingdom to the new world economic leader, the United States. The leading position of the United States was further confirmed after World War II and during the 1960s when U.S. conglomerates began an extensive policy of acquiring foreign companies. During the same period and after the 1980s other countries, mainly in Europe (France, Germany, the United Kingdom, and the Netherlands) and Asia (Japan), began to increasingly challenge U.S. leadership in FDIs. At the beginning of the new millennium, when the recently industrialized countries of east Asia began consistent multinational activity, the world stock of outward FDI exceeded $2 trillion.

Theories

Scholars have offered various theories to explain the existence of multinational corporations. Economic imperialism theorists (going back to the Russian Communist leader Vladimir Lenin) saw the MNC simply as an instrument for the diffusion of the new capitalist order on a world scale. According to other theorists, such as the economist Raymond Vernon, we must see the MNC as the natural evolution of the life cycle of a product; in this model FDI is directly connected to the maturity and standardization of a product. When producing a product at the lowest marginal cost is vital, a corporation will tend to transfer the production abroad, especially in developing economies.

Since the 1960s, however, starting with the writings of the U.S. scholar Stephen Hymer, the analysis of multinational corporations has progressed. Scholars have identified a number of factors that justify the advantage that a MNC gains by investing directly in foreign markets (instead of simply exporting). Among such factors scholars have given special importance to proprietary technology and research and development; privileged access to capital and finance in the home country; and the ability to manage organizational, marketing, and branding techniques, given the competence acquired in the home market. A long experience in multinational activity has been considered a competitive advantage in itself. In other cases FDI flows are influenced by the institutional context in the host country in terms of trade and industrialization policies.

The relationship between multinational activity and uncertainty is the core of other theories that try to explain the existence of multinational corporations from a neoinstitutional perspective. This is, for instance, the case of transaction costs (TC) theory, which tends to consider the imperfections in world markets, especially for raw materials and other intermediate products, as a major force driving the internalization of overseas activity of a corporation. The British scholar John Dunning formulated a more general approach at the beginning of the 1990s. In his approach (the so-called OLI paradigm) the MNC is an organization that is able to understand and manage a complex array of variables in noneconomic fields, such as politics or culture in the host country. The decision to invest abroad is the outcome of a series of advantages the corporation has, or gains from the investment, in terms of (O) ownership (e.g., of superior technologies or management, or marketing techniques), (L) location (e.g., in terms of resource endowment of the host country), (I) internalization of segments of the value chain (e.g., in some cases it is better to control directly the distribution in a foreign market than relying on local agents).

Bibliography:

Dunning, J. H. (1993). The globalization of business. London: Routledge.
Goshal, S., & Westley, E. G. (Eds.). (1993). Organization theory and the multinational corporation. New York: St. Martin’s Press.
Jones, G. (1993). Transnational corporations: An historical perspective. London: Routledge.
Jones, G. (1996). The evolution of international business: An introduction. London: Routledge.
Jones, G. (2000). Merchants to multinationals: British trading companies in the nineteenth and twentieth centuries. Oxford, U.K.: Oxford University Press.
Moosa, I. A. (2002). Foreign direct investment: Theory and practice. London: Palgrave.
Rugman, A. M. (Ed.). (2009). The Oxford handbook of international business (2nd ed.). New York: Oxford University Press.
Tolentino, P. E. (2000). Multinational corporations: Emergence and evolution. London: Routledge.
Wilkins, M. (1974). The emergence of multinational enterprise. Cambridge, MA: Harvard University Press.

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