Multinational corporation facts for kids
A multinational corporation (MNC) is a big company that owns and controls how goods or services are made in more than one country. Think of it like a company having factories or offices in different parts of the world, not just where it started. This is different from just investing money in other countries.
Many of the biggest and most important companies today are multinational corporations. They are often traded on stock markets, meaning people can buy parts of the company.
Contents
History
Early Global Companies
The idea of multinational corporations started a long time ago, often linked to the history of colonialism. The very first ones were set up to create trading posts or "factories" in faraway lands.
Two famous examples were the British East India Company, started in 1600, and the Dutch East India Company (VOC), started in 1602. These companies didn't just trade; they sometimes acted like governments in the places they operated, even having their own armies! Other early companies included the Swedish Africa Company and the Hudson's Bay Company. They explored new lands and set up trading spots.
Over time, governments took over many of these private companies. For example, the Dutch government took over the VOC in 1799. As countries gained independence, these old colonial companies were eventually closed down. The last one, the Mozambique Company, ended in 1972.
Mining for Resources
Mining for valuable resources like gold, silver, copper, and oil has always been a big global business. In the 1800s, international mining companies became very important.
One example is the Rio Tinto company, started in 1873. It began by buying mines in Spain. Today, Rio Tinto is a huge company that mines many different materials around the world, like aluminum, iron ore, copper, uranium, and diamonds.
Another famous person in mining was Cecil Rhodes. He started companies like the British South Africa Company and De Beers. De Beers became so powerful that it controlled most of the world's diamond market from its base in southern Africa.
The Story of Oil Companies
After World War II, the United States needed more oil than it could produce. So, it looked to other countries, especially in the Middle East. This led to the rise of powerful multinational oil companies.
These companies were often called the "Seven Sisters." They controlled most of the world's oil from the 1940s to the 1970s. These included companies that are now part of BP, Royal Dutch Shell, Chevron, and ExxonMobil.
In 1951, Iran's leader tried to take control of his country's oil industry. This caused big problems, and Iran couldn't sell its oil for a while. Later, the oil industry in Iran was opened up again to international companies.
Oil use grew very fast between 1949 and 1970. But in 1959, companies lowered oil prices, which hurt countries that produced oil. This led to the creation of OPEC (Organization of the Petroleum Exporting Countries) in 1960. OPEC is a group of oil-producing countries that work together to manage oil prices.
Before the 1973 oil crisis, the "Seven Sisters" controlled about 85% of the world's oil. But in the 1970s, many countries with large oil reserves took control of their own oil industries. Since then, state-owned oil companies like Saudi Aramco and Gazprom have become very powerful.
Oil Market Changes
After 1973, OPEC countries started to have more control over oil prices. This led to big changes in the world economy. Countries realized they needed to work together on energy policy. The International Energy Agency (IEA) was created to help countries coordinate and share information about oil.
In 1979, another big change happened when the leader of Iran left the country. This caused oil production in Iran to drop a lot, and oil prices went up again.
Later, in the 1980s, Saudi Arabia increased its oil production, which made oil prices drop sharply. This showed that OPEC's power to control prices was changing.
In 1990, a conflict in the Middle East caused oil prices to rise again. This led to new relationships between oil-producing countries and countries that use a lot of oil, like the United States. Today, OPEC still influences oil prices, but the market is more complex.
Since the early 2000s, new ways of getting oil and gas have increased production in countries like the United States. This has created new tensions in the global oil market. By 2012, most of the world's known oil reserves were controlled by state-owned companies, not private international companies.
Making Things: Manufacturing
For a long time, most international investments by multinational companies were in basic resources like mining and farming. This was especially true in colonies.
But after 1945, things changed a lot. Companies started investing more in industrialized countries and in making things, especially high-tech items like electronics, chemicals, medicines, and cars.
For example, SKF, a Swedish company that makes parts for machines, decided in 1966 that it needed to use English for its international business. This shows how companies adapt to work globally.
Growth After World War II
After World War II, the number of companies operating in foreign countries grew hugely. In 2007, there were over 78,000 such companies! Most of these parent companies are in wealthy countries. However, developing countries like China, India, and Brazil are receiving more and more foreign investment.
This growth happened because the world became more stable, technology made it easier to manage businesses far away, and companies found it helpful to expand globally.
How Multinational Corporations Work Today
A multinational corporation (MNC) is usually a very large company that started in one country but makes or sells its products and services in many others. They are typically big and manage their worldwide activities from a central office.
MNCs do many things globally:
- They import and export goods and services.
- They make big investments in foreign countries.
- They buy and sell licenses, allowing others to use their ideas in foreign markets.
- They might have local companies in other countries make their products for them.
- They open their own factories or assembly plants in foreign countries.
MNCs benefit from being global in many ways. They can save money by spreading costs like research and advertising across all their sales worldwide. They can also buy materials in large amounts, which gives them more power with suppliers. Plus, they can use their technology and management skills in many places without much extra cost.
They can also find cheaper labor in some developing countries or access special research and development skills in advanced countries.
One challenge for multinational corporations is that they operate in many countries, so it can be hard to decide which country's rules they should follow. This is a big topic in global business today.
Some companies are so global that they are called "stateless" or "transnational" corporations. This means they are active all over the world and don't seem to have one main home country, even though they must legally be based somewhere. They focus on getting resources and making products for customers everywhere.
The East India Company, started in 1601, was one of the first multinational businesses. Then came the Dutch East India Company, which was the biggest company in the world for almost 200 years!
Here are some main features of multinational companies:
- They usually start as large companies in one country.
- They set up smaller companies or offices in many other countries by investing money or buying local businesses.
- They have a clear system for making decisions, with a main decision-making center. Each local office makes its own choices, but they must follow the main company's goals.
- They look for markets all over the world and plan where to make and sell products to earn the most money.
- Because they are strong in money and technology, they can share information quickly and move money across borders fast. This makes them very competitive globally.
- Many large multinational companies have a strong position in certain areas because of their size and skills.
Investing in Other Countries
When a company invests money in a country where it is not based, it's called foreign direct investment (FDI). Countries often have rules about this. For example, some countries might require foreign companies to partner with local businesses.
Also, companies can be stopped from doing business in certain places by international sanctions or local laws. For instance, some countries limit how much their own companies can invest abroad. Countries can even stop foreign companies from doing business with other foreign companies, like when the United States put sanctions against Iran.
Agreements between countries, like the North American Free Trade Agreement, also make it easier for companies to invest in each other's nations.
Where Companies Are Legally Based
In 1977, most large manufacturing multinational companies were based in the United States, Western Europe, or Japan. Today, multinational companies can choose from many places for their different offices, but the main company still has one legal "home country." Some countries, like the Netherlands, have become popular choices because their company laws are simpler.
Companies can choose where they are based to help them pay less in taxes, but they must always follow the law and avoid illegal tax evasion.
Global or "Stateless" Companies
Companies that are active all over the world without being focused on just one area are sometimes called "stateless" or "transnational." Even though a company must have a legal home country, it can operate globally through investments and by setting up offices in other countries. This means they get resources and make products for customers worldwide.
Rules and Taxes
Multinational corporations must follow the laws and rules of both their home country and all the other countries where they do business. Sometimes, a company might choose a location to avoid strict laws, but many rules are designed to control the entire company.
As of 1992, countries like the United States could tax their home companies on all their earnings worldwide, including from their foreign offices. By 2019, most wealthy countries, except the U.S., only taxed income earned within their own borders. However, they still have rules to prevent companies from moving profits to avoid taxes.
In practice, taxes can sometimes be delayed until money is brought back to the home country. Also, companies often get credits for taxes they've already paid in other countries. It's complicated because countries usually can't tax the worldwide earnings of a foreign office, and companies use special pricing arrangements between their different parts.
How Disputes Are Solved
When companies from different countries have disagreements, they often solve them through international arbitration. This is a way of settling disputes outside of traditional court systems.
Why Companies Go Global
The idea of multinational corporations is strongly supported by the idea of economic liberalism and a free market system in a globalized world. This view suggests that when people and companies act to get what's best for them, markets work well, and the world becomes wealthier through the free exchange of goods and services.
Many people who believe in economic liberalism see multinational corporations as leaders in creating a connected world economy. These companies have taken the idea of linking national economies beyond just buying and selling goods to actually making products all over the world. For the first time, making, selling, and investing are organized globally, not just within single countries.
Studying international business is also a special field of research. There are theories that explain why multinational corporations exist, like "internalization theory."
Another important idea is how global business affects local cultures. Companies try to understand the cultures of the countries they work in. For example, in the 1960s, an expert named Ernest Dichter said that companies needed to understand different cultures to succeed globally. He believed that this would help create a "world customer" who felt connected to global brands.
Multinational Enterprise (MNE)
"Multinational enterprise" (MNE) is another term used by economists. It means the same thing as a multinational corporation (MNC): a company that controls and manages factories or offices in at least two countries. MNEs make foreign direct investments to own and manage operations in other countries.
See also
In Spanish: Multinacional para niños
- Globalization
- Global workforce
- List of multinational corporations
- World economy
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