Multinational corporation facts for kids
A multinational corporation (often called an MNC) is a big company that owns and controls how goods or services are made in at least one country other than its home country. Think of it like a company that has factories or offices in many different countries around the world. These companies are very important in today's global economy. Many of the biggest and most powerful companies you know are MNCs.
Contents
History of Global Companies
Early Beginnings: Colonial Times
The idea of multinational companies started a long time ago with colonialism. The first MNCs were set up to create trading posts or port cities in new lands. For example, the British East India Company (started in 1600) and the Dutch East India Company (started in 1602) were early examples. These companies not only traded goods but also acted like governments in some areas, even having their own armies. Other similar companies included the Swedish Africa Company and the Hudson's Bay Company. They explored new places and set up trading spots.
Over time, governments took over many of these private companies. The last colonial company, the Mozambique Company, closed in 1972.
Mining for Resources
Mining for valuable resources like gold, silver, copper, and oil has always been a big part of global business. In the 1800s, international mining companies grew. For instance, the Rio Tinto company, founded in 1873, bought mines in Spain. Today, Rio Tinto mines many different materials like aluminum, iron ore, copper, uranium, and diamonds all over the world.
In South Africa, European companies opened mines in the late 1800s. These mines produced gold and other minerals, creating jobs and profits. Cecil Rhodes was a famous businessman who founded mining companies like the British South Africa Company and De Beers. De Beers controlled most of the world's diamond market from its base in southern Africa.
The Age of Oil
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 and Latin America. This led to the rise of powerful multinational oil companies known as the "Seven Sisters."
These "Seven Sisters" dominated the global oil industry from the 1940s to the 1970s:
- Anglo-Iranian Oil Company (now BP)
- Royal Dutch Shell
- Standard Oil Company of California (now Chevron)
- Gulf Oil (merged into Chevron)
- Texaco (merged into Chevron)
- Standard Oil Company of New Jersey (later Exxon, part of ExxonMobil)
- Standard Oil Company of New York (later Mobil, part of ExxonMobil)
In 1951, Iran's Prime Minister Mohammad Mosaddegh took control of Iran's oil industry. This caused problems for Iran as other companies stopped buying its oil. Later, in 1953, the industry was opened up again.
Oil use grew very fast between 1949 and 1970. This was partly because multinational oil companies produced more and because the United States had a strong influence on the global oil market.
In 1959, oil prices dropped because there was too much oil. This hurt the countries that produced oil. Saudi Arabia and Venezuela secretly agreed to act together if prices dropped again. This led to the creation of OPEC (Organization of the Petroleum Exporting Countries) in 1960. Before the 1973 oil crisis, the Seven Sisters controlled about 85% of the world's oil. But in the 1970s, many countries took control of their own oil reserves from these big companies. Now, groups like OPEC and state-owned oil companies (like Saudi Aramco and Gazprom) have more power.
Dealing with OPEC (1973 - 1991)
OPEC started to increase oil prices, which was a big change in how wealth moved around the world. The oil companies didn't really object because higher prices also helped them. By 1980, national oil companies (NOCs) had largely replaced the "Seven Sisters."
Rising oil prices made it harder for developing countries to pay their bills. OPEC members then started investing their money in other ways. In 1974, the International Energy Agency (IEA) was created to help countries work together on energy policy.
In the 1970s, OPEC slowly took over the oil operations from the Seven Sisters. Saudi Arabia, being the largest oil producer, kept oil prices steady during this time.
In 1979, the "second oil shock" happened when the Shah's government in Iran collapsed. Iranian oil workers went on strike, reducing oil production. Even though Saudi Arabia tried to produce more, oil prices still went very high.
Later, Saudi Arabia reduced its oil production, losing a lot of money. In 1986, Saudi Arabia changed its mind and greatly increased oil production, flooding the market with cheap oil. This caused a big drop in oil prices, known as the "third oil shock." This event showed that OPEC no longer had full control over oil prices.
When Iraq invaded Kuwait, Saudi Arabia asked the United States for help. US forces helped remove Iraqi troops from Kuwait. Because of the oil boycott from Kuwait and Iran, oil prices went up again. Saudi Arabia once more led OPEC, and new ties formed between the US and OPEC. This showed that major oil producers and consumers depended on each other.
The New Normal (1991-2018)
Since the Iraq war, OPEC has had less influence on oil prices. It now has 11 members and produces about 40% of the world's oil, which is less than before. Oil prices have become more unpredictable. Many OPEC countries are rich but still rely on oil money.
The United States still has close ties with Saudi Arabia. In 2003, US forces went into Iraq, partly to gain access to Iraq's oil. From 2000 to 2008, there was often not enough oil, but people kept using more, keeping prices high.
From 2005 to 2012, new ways of getting oil and gas were developed, leading to more production in the US from 2010. The USA became a top oil producer, creating some tension with OPEC. In 2014, Saudi Arabia increased production to push new American producers out of the market, which lowered prices. OPEC then cut production in 2016 to raise prices, making relations with the US worse.
By 2012, only 7% of the world's known oil was in countries that let private international companies operate freely. Most oil (65%) was controlled by state-owned companies that sold oil to big multinationals like BP and Shell.
Making Things: Manufacturing
Before the 1930s, most international investments by MNCs were in raw materials like oil, rubber, and sugar. These investments often went to colonies in the "Third World." After 1945, this changed a lot. Investors started putting money into industrialized countries and into manufacturing, especially high-tech electronics, chemicals, medicines, and vehicles.
For example, SKF, a Swedish company that makes bearings for machines, decided in 1966 to use English for all its main internal documents. This helped it expand its business around the world, as English became the common language for multinational companies.
After World War II Growth
After the war, the number of companies operating in at least one foreign country grew hugely. It went from a few thousand to over 78,000 by 2007. Most of these parent companies (74%) are in wealthy countries. Developing countries like China, India, and Brazil receive a lot of foreign investment. This growth in MNCs happened because of more stable politics, new technologies that help manage faraway places, and business ideas that encourage expanding into other countries.
What Global Companies Do Today
A multinational corporation (MNC) is usually a very large company based in one country that makes or sells goods and services in many other countries. MNCs are typically big and manage their worldwide activities from a central location.
Here are some ways MNCs operate globally:
- They import and export goods and services.
- They make large investments in foreign countries.
- They buy and sell licenses in foreign markets.
- They use contract manufacturing, letting local companies in other countries make their products.
- They open their own factories or assembly plants in foreign countries.
MNCs can benefit from being global in many ways. They can save money by spreading costs like research and advertising across all their global sales. They can also buy materials in bulk for all their operations, getting better prices. They use their technology and management skills worldwide with little extra cost. Also, MNCs can use cheaper labor in some developing countries and access special research skills in advanced countries.
One challenge with MNCs is that they operate in many countries, making it hard to decide which country's laws should control them. This is a big global problem that came up in the late 1900s.
The idea of "stateless corporations" describes companies that are very active worldwide, not just focused on one area. While a company must be legally based in one country, it can operate in many others through investments and foreign branches.
The East India Company, started in 1601, was one of the first multinational businesses. After that, the Dutch East India Company, founded in 1603, became the largest company in the world for almost 200 years.
Here are the main features of multinational companies:
- They are usually large companies based in one country. They set up branches or buy local businesses in many other countries through direct investment.
- They have a complete system for making decisions, with a main decision-making center. Each branch or subsidiary also makes its own decisions, but these must follow the main center's rules.
- MNCs look for markets all over the world. They plan their production and sales carefully to make the most profit.
- Because they are strong economically and technically, they can send information and money across borders quickly. This makes them very competitive globally.
- Many large MNCs have a strong hold on certain markets due to their economic strength or production advantages.
Foreign Direct Investment
When a company invests money in a country where it is not based, it's called foreign direct investment (FDI). Countries sometimes have rules about FDI. For example, China used to require foreign companies to partner with local firms, though some rules have changed. The United States also reviews foreign investments.
Also, international rules or laws can stop companies from doing business in certain places. For instance, the US has sanctions against Iran, which means European companies might face problems if they trade with Iran, because they could lose access to the US market.
Agreements between countries, like the North American Free Trade Agreement, also make it easier for companies to invest in each other's countries.
Where Companies Are Legally Based
In 1977, a report showed that most large manufacturing MNCs were based in the United States, Western Europe, or Japan. Today, MNCs can choose where to legally base their main company. The Economist magazine suggests that the Netherlands is a popular choice because its company laws are simpler. Great Britain also has benefits due to its tax laws.
Companies can legally try to pay less tax by choosing certain countries, but they must be careful not to break laws about tax evasion.
Stateless or Transnational
Companies that are very active all over the world without being focused on just one area are sometimes called "stateless" or "transnational." However, a company must still be legally based in a specific country. It then operates in other countries by investing directly and creating foreign branches. How spread out a company is can be measured by where its owners are, where its workers are, where it sells things, and how it's regulated and taxed.
Rules and Taxes for Global Companies
Multinational corporations must follow the laws and rules of their home country and all the other countries where they do business. Sometimes, choosing a certain country can help avoid strict laws, but rules often target the whole "enterprise" or group of companies.
As of 1992, the United States and most wealthy countries could tax a parent company on all its worldwide income, including its branches. By 2019, most wealthy countries, except the US, taxed only income earned within their borders. However, these countries often have rules to prevent companies from moving profits to avoid taxes.
In practice, even with worldwide taxation, taxes might be delayed until the money is brought back home. Also, companies can get credits for taxes paid in foreign countries. Countries usually cannot tax the worldwide income of a foreign branch. Taxation can also be complicated by how parent companies charge their branches for goods and services.
How Companies Resolve Disputes
Disagreements between companies in different countries are often solved through international arbitration, which is like having a neutral third party help settle the problem.
Why Global Companies Exist
The actions of multinational corporations are strongly supported by ideas like economic liberalism and the free market system in a globalized world. These ideas suggest that people act to get what's best for them. When they do, markets are created and work best with little government interference. This means that wealth around the world grows when goods and services are exchanged freely.
Many who believe in economic liberalism see multinational corporations as leaders of this free global system. They have taken the joining of national economies beyond just trade to making things internationally. For the first time, production, marketing, and investment are organized globally, not just within single countries.
International business is also a field of study. Economic ideas about MNCs include how companies expand internally and how they choose where to invest.
Another idea about MNCs is how their global business affects local cultures. Companies have tried to understand different cultures to sell their products better. For example, Ernest Dichter, who worked on Exxon's international campaigns in 1963, believed that understanding local cultures was key to success. He thought that companies should aim to create a "world customer" by helping nations define themselves in a more international way.
Multinational Enterprise
"Multinational enterprise" (MNE) is another term used by economists for a multinational corporation (MNC). It means a company that controls and manages production facilities, like factories, in at least two countries. MNEs make foreign direct investments (FDI) by investing directly in plants in other countries. They do this to own and manage these facilities and avoid certain business costs.
See also
- Globalization
- List of multinational corporations
- World economy
