Multinational Corporations

1. Multinational Corporations

 Definition of MNC




Ownership criterion



Depending on the production process, each is considered an American multinational company in one case, and each is considered a foreign multinational in another. Thus, ownership does not really matter.

Nationality mix of headquarters managers

An international company is multinational if the managers of the parent company are nationals of several countries. Usually, managers of the headquarters (e.g., GM, Toyota) are nationals of the home country. This may be a transitional phenomenon.

Japan's New Business Language (Rakuten)

Very few companies pass this test currently.

Business Strategy

Sabvei(Subway) in Moscow.

 global profit maximization

some are home country oriented,

others are host country oriented.


How to say Stop in Russian

 Root's definition

Starkbuck shop in Qian Men street, Beijing




(iii) implements transnational business strategies in production, marketing, finance and staffing in a way that transcend national boundaries.




Wheat is purchased from around the world.


2. Three Stages of Evolution

Export Stage

(i)  initial inquiries ⇒ result in first export.


(iii) ⇒ foreign sales branch or assembly operations are established (to save transportation costs)

Foreign production stage



(ii) Wage rates may be lower in LDCs.

(iii) Environmental regulations may be lax in LDCs (e.g., China). Itai-Itai (meaning: ouch ouch) disease in Japan since the 1920s was caused by cadmium poisoning. Contaminated effluents leaked into rice paddies and water source.) Watch the movie, Erin Brochovich.

(iv) meet Consumer demands in the foreign countries


DFI versus Licensing



MacDonalds in Moscow
 Licensing is usually the first experience (because it is easy)

e.g.: Kentucky Fried Chicken in the U.K.

Licensing does not require any capital expenditure

Financial risk is zero.

royalty payment = a fixed % of sales
licensor may provide training, equipment, etc.



In order to deter entry of copycat producers, MacDonalds may supply American ingredients or raw materials (e.g., beef)

 Direct Investment




(ii) plants are established in several countries



 Multinational Stage




Global 500 (2008)
The World's Biggest Public Companies
(by sales)
A lion's share of MNCs are headquartered in the US:

Exxon Mobil
Royal dutch Shell
General Motors

How to tell whether a firm is multinational?

Rule of Thumb


Examples: Manufacturing MNCs

24 of top fifty firms are located in the U.S.

9 in Japan (shrinking)

6 in Germany.

Petroleum companies: 6/10 located in the U.S.


US Multinational Corporations: Exxon, GM, Ford, etc.


3. Motives for Foreign Direct Investment (FDI)

  Anecdote on Sunzi, who wrote "The Art of War." Sunzi (544-496 BC) was a native of Ch'i, but served under King of Wu during the Spring and Autumn period (771-476 BC).
   New MNCs do not pop up randomly in foreign nations. They are the product of conscious planning by corporate managers. Investment flows from regions of low profits to those of high returns.

 2 Bypass protection in importing countries



(i) European Union: imposed common external tariff against outsiders. US companies circumvented these barriers by setting up subsidiaries. JBS USA is a subsidiary of a Brazilian company, the world's largest meat processor of beef and pork. (It kills 5000 head of cattle per day.)

(ii) Japanese corporations built auto assembly plants in the US, to bypass VERs.

3. avoid high corporate tax US corporate tax = 39.6%, Greece = 29%, France = 33%. Corporate tax rates are lower in most other countries.
 4 avoid high transport costs

Build factories where consumers are.


Multinational firms (e.g. Toyota) are better off establishing factories where consumers are located than shipping goods to faraway counries.

 5 avoid Exchange Rate fluctuations


Toyota is behind GM and Volkswagen in China, and plans to expand its production in China (in addition to Tianjin and Guangzhou) and has no plans to build more plants in North America. (China's autoparts are cheaper.) It may have been a mistake for Toyota to overexpand its plants in the US. GM and Volkswagen have expanded their production plants in Shanghai.




GM purchased Monarch (GM Canada) and Opel (GM Germany). It did not buy Toyota, Datsun (Nissan) and Volkswagen. Subsequently, they became competitors. Toyota is #1 in the car industry at present. Market shares of car companies are:

Toyota: 12%, GM = Volkswagen: 11%, Hyundai-Kia: 9%.
World = 90 million cars. China = 24 million, US =12 million.

 8 cheap labor United Fruit has established banana-producing facilities in Honduras.





4. Export versus Foreign Direct Investment




If foreign demand exceeds the minimum efficient scale, then FDI.



5. International Joint Ventures


 Three forms



(ii) joint venture with a local firm, e.g., GM + Shanghai Automotive Industry Corporation (SAIC) = Shanghai GM.

(iii) joint venture includes local government.

Anglo-Iranian Oil Company => was nationalized in 1951:
National Iranian Oil Company
 Why form JV?




 Problem  Control is divided. The venture serves "two masters"
 Welfare effects







6. Where are MNCs?


Green Gate, Long Street (Gdansk)



A night scene of multinational firms at Hong Kong harbor.

  Multinational firms tend to be capital-intensive and require high-skilled workers. Universities are an important source of high-skilled workers.


7. US Tax Policy towards MNCs



Trump argues that American firms are moving their factories to Mexico (because of high wages, corporate taxes, and currency manipulations). Some provision concerning Currency manipulation may be included in the Trans-Pacific Partnership.

 Overlapping ⇒ double taxation





  • any foreign source income earned by the nationals are exempt from taxation. This approach is used by most European countries (e.g., France, Italy, Netherlands. 34 countries)

Remark: Most governments that adopt NT system also claim Territorial Tax jurisdiction. This creates the problem of double taxation.


8. US Taxation of Foreign Source Income



 Burke-Hartke Bill



Assume: t = 40%, t* = 30% (Spain)

Pretax profit = $1,000

MNC's profit after foreign tax = 1,000 - 300 = 700

If foreign tax is treated as business expense, then

MNC's tax to IRS = 700 × 40% = 280.



 Current Method
Taxes to foreign government = 1000 x 30% = 300

US taxes = 1000 × 40% = 400

but foreign tax credit = 300

Net tax to IRS = 400 - 300 = 100.

Total taxes = 300 + 100 = 400.

 corporate tax rates

Japan = 40.69%
China = 33%
Germany =38.31%
France = 33.33% (individual tax: 41% after €1 million ⇒ 75%)
Finland = 26%
Hong Kong = 17.5%
Macau = 12%
US = 40% (max individual tax: 56%)
Canada = 26%, Mexico = 30%
Russia = 13%
Gerard Depardieu (French actor): Putin approved his Russian citizenship)


10. Transfer Pricing

 Why manipulate TP?

MNCs manipulate prices between the headquarter and the subsidiaries so as to realize more profits in that profits may be the highest in the countries with lower tax rates.

Purpose: to minimize the total tax a multinational firm pays.


 Example  tp = tax rate in the parent country

th = tax rate in the host country


Kunsthalle Museum, Hamburg

In High tax countries: To reduce MNC profits:

(i) lower selling price, and

(ii) raise buying prices

In Low Tax countries, do the opposite

Total tax = $135 ($7000 × 15%)

Thus, a multinational company's overall tax could be paid at the lowest tax rate of all countries in which it operates.



Because of abuses in transfer pricing, taxable profits were shifted to Japan. The settlement Toyota offered to IRS reportedly approached $1 billion. 


11. Taxation and Gains from Factor Mobility

 why invest overseas

US firms invest overseas because the returns are higher there.

(private gains)

 National gains  natonal gains can be higher when investment stays home.

                 US                    Canada
Pretax profits   10%                   12%
Tax               4%                    4.8%
Net to investors  6%                    7.2%

because tax revenues can be used for public purposes.

12. FDI Shares

  Stock of outward FDI (The Economist)

(when WWI broke out)

Britain 45%

US 18%

Japan 2%

1967 US 50%, Britain 14%, Japan 2%