The multinational corporation is a business organization whose activities are located in more than two countries and is the organizational form that defines foreign direct investment. This form consists of a country location where the firm is incorporated and of the establishment of branches or subsidiaries in foreign countries. Multinational companies can, obviously, vary in the extent of their multinational activities in terms of the number of countries in which they operate. A large multinational corporation can operate in 100 countries, with hundreds of thousands of employees located outside its home country. The economic definition emphasizes the ability of owners and their managerial agents in one country to control the operations in foreign countries. There is a frequent confusion that equates the ability to control with the flow of capital across national borders. Since Hymer’s thesis (1976), it is recognized widely that capital flow is not the distinguishing characteristic of a multinational corporation (see International Business). Capital can flow from one country to another in expectation of higher rates of return. However, this flow may be invested in the form of bonds, or in equity amounts too insignificant to grant control to foreign owners. In this case, this type of investment is treated as a ‘portfolio’ investment. The central aspect of ‘direct investment’ is the ownership claim by a party located in one country on the operations of a foreign firm or subsidiary in another. The multinational corporation is, thus, the product of foreign direct investment that is defined as the effective control of operations in a country by foreign owners. 

The economic definition, however, does not capture the importance of the multinational corporation as the organizational mechanism by which different social and economic systems confront each other. The multinational corporation, because usually it develops in the cultural and social context of one nation, exports its organizational baggage from one institutional setting to another. In this regard, it plays a powerful role as a mechanism by which to transfer organizational knowledge across borders. However, while being foreign implies that it might serve the valuable role of importing new practices, its foreign status also implies that its practices are likely to conflict with existing institutions and cultural norms. Moreover, since multinational corporations are often large, they pose unusual challenges to national and regional governments who seek to maintain political autonomy and yet are often anxious to seek the investment, technology, and managerial skills of foreign firms. There are, thus, economic and sociological definitions of the multinational corporation that differ, and yet complement, each other. In the economic definition, the multinational corporation is the control of foreign activities through the auspices of the firm. In the sociological definition, the multinational corporation is the mechanism by which organizational practices are transferred and replicated from one country to another.

In this twenty-first century, MNC has become the central institution of developing nations. A significant number of MNCs started their operations in developing countries by the 1990s. The effects of their operations in developing countries are now assessed quite differently from that was done in the past. MNCs benefit from the lower labor costs and grants given by the government of developing countries in order to attract these MNCs. Moreover, lower tax rates or tax exemptions are also given to MNCs for a period in the developing countries. On the other hand, these developing countries can also gain from the investment made by these MNCs. MNCs can help reducing poverty, driving economic growth, creating jobs that utilize local people, raise employment standards by paying better wages than local firms pay. In addition, they can boost economic development by transferring technology and knowledge, improve or build up infrastructure, raise people’s standard of living. Overall, it might seem that the developing countries gain from investments of MNCs. Is that really true? Although MNCs have become omnipresent in the developing world, there has always been an uncertainty about them, in both positive and negative ways. Most of the MNCs take advantage of developing countries. They can be guilty of making pollution or doing human rights abuse. Nevertheless, laborers are paid low wages, as there are few or no trade unions to protect their rights or negotiate with the MNCs. Thus, the theoretical dispute over the effects of MNCs in developing countries is mirrored in the conflict. Apparently, two broad positions can be derived from these differences of opinion- the positive and negative. Some proponents have developed arguments that emphasize the positive results of foreign direct investment (FDI) by MNCs. They are willing to admit some gains from FDI. On the contrary, others are unwilling to accept a positive role for multinational capital under any circumstances.

Multinational corporations (MNCs) play significant roles in shaping the global economy. Despite the prevalence of the economic activities of MNCs across the globe, few studies exist that examine their political influence on foreign policy-making. This chapter develops a theoretical framework for understanding how MNCs’ unique positions in the market affect their political activities. Specifically, we argue that MNCs’ economic dominance reduces the relative cost of engaging in political activities, while their large-scale transnational activities increase the marginal benefits of influencing policy-making individually. To examine this empirically, we first introduce a novel dataset of lobbying in the US encompassing lobbying activities of all public firms from 1999 to 2019. We then employ the difference-in-differences identification strategy to estimate the effect of MNC status on lobbying. 

The OECD (2018) estimates that MNCs account for half of global exports, nearly a third of world GDP (28%), and about fourth of global employment. These firms all generate a significant share of their revenue from abroad as well. Importantly, their transnational activities have transformed the nature of international trade, investments, and technology transfers in the era of globalization. The extensive global value chains (GVCs) prevalent in today’s world economy have been driven by how MNCs structure their global operations through outsourcing and offshoring activities. In fact, their decisions have enormous implications for a wide range of policy issues—such as taxation, investment protection, immigration—across many countries with different political and economic institutions. MNCs also may have strong political influence domestically. Indeed, their global economic dominance may go hand-in-hand with their powerful domestic political position. 

Recent political developments bring multinational lobbying efforts into stark relief. Multinational firms have vocally opposed the Trump Administration’s escalation of trade tensions, tightening of immigration restrictions, and disruption of global value chains. Intensive lobbying, however, does not always equate with political power. While the Trump Administration has largely rebuffed MNC’s efforts to preserve existing trade agreements, individual firms have lobbied successfully to win tariff exemptions. In other policy domains such corporate taxation and the proposed Destination-Based Cash Flow Tax, multinationals lobbied on both sides of the issue. Despite the prevalence of the economic activities of MNCs across the globe, few studies exist that examine their political influence on foreign policy-making.

MNCs’ distinct roles as political actors. We focus mostly on the US and on one form of political activity, lobbying .  First, are MNCs different from other firms in their political activities? In particular, do the global connections of these firms lead them to have distinct policy preferences from domestic firms? Second, do the political activities of MNCs differ even from those of big domestic firms? Past research notes that big firms are different; they have more political activity generally and usually do so more alone. Are MNCs just global versions of these big firms? Third, do MNCs care about the same set of issues that all firms, or all big firms, concentrate on?.

We begin by pointing out MNCs’ unique economic characteristics compared to other firms that compete primarily in domestic markets. In doing so, we relate our discussion to the theoretical framework of heterogeneous firms in international economics to describe MNCs’ unique positions in the global economy. Specifically, we discuss how MNCs’ engagement in international trade and foreign investment affects their policy preferences. We show that MNCs policy preferences are likely to differ greatly from those of purely domestic firms on issues related to foreign economic policy. This implies that these firms will differ from domestic firms, even big ones, in the the issues they care about most. And it means their positions on many issues will diverge from those of the much more numerous domestic firms, who will be less likely to organize collectively for political action. In addition, because of their size, global reach and leading role in the national economy, they will have more means to affect politics and more reasons to do so.

The second contribution of this chapter is to empirically examine MNCs’ political activities in the US. We introduce a new database of lobbying—LobbyView—to study MNCs’ engagement in lobbying (Kim 2018). This database, based on the lobbying reports filed under the Lobbying Disclosure Act of 1995, provides highly granular data on lobbying that scholars and practitioners can use to evaluate special interest group politics. We merge this data with a firm-level finance database to investigate whether MNCs exhibit different political activities compared to purely domestic firms. To estimate the independent effect of the change in a firm’s status from domestic to multinational, we employ a difference-in-differences identification strategy. Specifically, we compare the difference in lobbying expenditure of firms that became multinational against those of domestic firms that are similar in their size and previous lobbying activities. We find strong evidence for an increase in lobbying expenditures when firms become multinational. Furthermore, we find that MNCs tend to lobby on a more diverse set of foreign policy issues. To be sure, our study in this chapter is limited to the US, recent years, and individual firm lobbying activity. However, our findings lay an empirical foundation for future research of MNCs’ political activities across various countries, in different periods, and their connections to lobbying through larger industry associations. 

In sum, MNCs are politically distinct as well as economically. They act politically in ways that differ from domestic firms, and even from large domestic ones. Our findings suggest that MNCs are important political actors whose distinct interests should be incorporated into our understanding of foreign policy-making. While we cannot fully assess their political influence, we do note that many of the policy positions they alone have championed have become US policy in recent decades and indeed have helped create the globalized world economy that we live in today.

 History

The multinational corporation is defined in some sense arbitrarily by where frontiers are drawn. In ancient Greece, these frontiers were the borders among city–states. In imperial Rome, the new administrative units of an expanding empire and its external boundaries defined the borders. Political borders correspond only approximately to the distribution of cultural and ethnic dispositions. The history of the multinational corporation is tied closely to the origins of trade in and between cultural communities, and these communities remain important in many sectors in the modern economy. Early trade was often characterized by the difficulty of transacting across borders. Trading has always instigated from the unequal and varied distribution of resources across geographies. The trading of salt was an important factor in most continents and still can be found in rather ancient forms in east Africa. Towns, such as Salzburg, owed their origins to their fortuitous access to salt mines. This unequal distribution incited traders to travel long distances and undergo unusual risks for the hope of gain. The dilemma is quite apparent. How can markets for trade develop between distant cultures? Indeed, there is good evidence that early trading was quite precarious. Brown (1969) notes that Hermes was not only the god of messengers but also of theft and trade. He was often worshipped at borders, marking the place of trade. Herodotus describes the practice of the ‘silent trade’ of goods at boundary markings in which one party would deposit their goods at the border, the second party would later deposit a corresponding offer. The original party might accept this bid, take the goods, and leave their initial offer. Clearly, only a strong demand for unusual foreign goods could sustain such a treacherous institution of transaction. Not surprisingly, Curtin (1984) doubts the accuracy of this account. Instead, he stresses the importance of ethnic groups, such as the Gujerati or overseas Chinese, or the force of imperialism and military power as ways in which ‘cross-cultural trading’ was permitted to develop. But such solutions remained fragile, with foreign enclaves and ethnic groups subject to local hatred and military rule often confronting competition from other powers. Yet, trade persisted through the centuries. Indeed, the demand for foreign goods was so strong that incredible profits could be realized by international trade. Since transportation was poor, and technology to hold inventories rudimentary, an agent in the right spot at the right time could earn fortunes. And in this laid the great problem. For in times of great demand, prices could rise astronomically, as Braudel (1973) documents in his history of material life. With such distances between the agent and the principal in the exporting country, an agent could easily, and often did, disappear with the profits. The early solutions were many and provide insight into one of the great properties of the multinational corporation: its ability to organize transactions within its own organizational boundaries. Great fairs were one solution, where principals met their customers in one place. But fairs were intermittent and often distant from final markets. The further development of Roman commercial law during the medieval and Renaissance periods strengthened the liability of the principal and also legal recourse in principal–agent conflict. However, the application of law between two parties in different legal jurisdictions has always been a difficult form of dispute resolution. In his study of the Jewish Magrebi traders of the twelfth century, Greif (1989) places considerable emphasis upon the value of membership in ethnic ‘trading communities.’ Since ethnic enclaves in foreign sites could monitor the activities of agents, principals could be informed of malfeasance. Agents could then be excluded from future contracts within the community, thus deterring dishonest behavior. Partnerships were also another way in which agents were also bonded to the firm. However, another solution was the company, a word whose roots come from the Latin meaning ‘with bread’ which implies the familial origins of this business organization. The company permitted in time the investing of capital in its ownership by outsiders in promise of future dividends. The capital might be raised for a single voyage or, eventually, could be maintained in the company in the form of stock ownership. With the evolution of limited liability law in the nineteenth century, and the diminished role of the state in restricting the growth of the joint stock company, this organizational form expanded rapidly in many European countries as well as in the United States. Along with the growth of equity markets, the financial resources to invest overseas became more available due to advances in the banking system and also in bond markets. Indeed, the great capital needs of the railway industry created an international market for the sale and purchase of railroad bonds. However, international loans and bonds were risky and it was not uncommon for sovereign governments to default, including state governments within the United States. The increasing wealth of western countries, along with constraints on the speed by which national industries could absorb new loans, encouraged massive foreign investments by the end of the nineteenth century and early twentieth century. This was a period of globalization in terms of the percentages of capital outflows to total capital accumulation. Great Britain is estimated to have exported some 25 percent of its capital prior to World War I and French capital exports were often greater. This capital went to countries hungry to finance their industrial expansion, including the newly industrializing countries of Russia and especially America.

The British were unusual in directing a considerable amount of their outward capital flows in the form of direct investments. A great deal of this investment went into their colonies. Prior to the mid-1800s, companies operating overseas engaged largely in wholesale operations; they did not run factories, operate mines, or own agriculture. The British direct investments were, thus, different than before, as British came to own and run local operations. Moreover, the British invested in South and North America. The ‘free-standing’ company, as labeled by Wilkins (1988), was a peculiar form of investment that was quite prominent in many British colonies. This firm raised capital in the domestic financial market where its administrative office was located, but it operated no domestic activities. All operations were overseas. This form of company represents the advantage of western countries in being able to raise capital from efficient financial markets. However, it posed the same problem as facing the medieval agent relationship, namely, how could foreign investors be confident that they would recover profitably their investments if the assets were located overseas, often in countries with very poor legal infrastructures? Wilkins found that oversight occurred through the executive boards of the companies, where prominent people located in the home market faced the loss of reputation if the company should prove to be dishonest. The United States offers an unusual case. A rapidly growing country, it imported more capital than it exported up to World War I. However, whereas it imported largely portfolio investments, its outward flows were dominated by foreign direct investments. In other words, American companies showed an early penchant for expanding overseas (Wilkins 1970). The Singer Company built within two decades of its founding a large factory employing thousands of workers in Scotland. Oil companies, Kodak, Westinghouse, Ford, and mining and agricultural companies all invested overseas. Companies in oil, mining, and agriculture often invested in poorer markets where there were resources to be found. These early investors were often involved inextricably in the politics of the foreign governments, and the American military itself intervened aggressively numerous times in the Caribbean, Mexico and Central America, and South America. As in the British case, the history of American direct investment occurred in the context of an expanding military presence of the home government. Moreover, since many of these countries were poor, the multinational corporations responded to the demands of the host nation, especially in the form of concessionary contracts, to provide public services, e.g., hospitals, roads, and power (Robinson 1964). This complicated legacy of the early history of the multinational corporation created hostility on the part of the local population that persisted throughout most of the twentieth century.

It is important to underscore that the multinational corporation usually evolved in the context of specific national institutions. As many others have pointed out, the multinational corporation is a growing firm whose organizational borders have spilled across borders. Moreover, since this large firm is usually tied to a larger domestic network of suppliers and customers, its expansion overseas is accompanied by the co-investments of these other members. This is a pattern seen in American investments in the United Kingdom in the 1950s and repeated by Japanese multinational corporations investing in the United Kingdom in the 1980s and 1990s (Dunning 1993).

Chandler (1990) noted that these multinational corporations reflected the national characteristics of management. In comparing the cases of the largest firms in the United Kingdom, Germany, and the United States, Chandler found that differences in managerial capabilities, reflecting national institutions, explain their success and failure patterns. He particularly criticized the managerial capabilities of British firms, a point not shared by some British historians (Hannah 1999). But more importantly, Chandler’s thesis assumed that size itself constituted the realization of scale and scope economies instead of the outcome of success and growth. This observation is especially important for understanding the lack of large multinational corporations in Italy or in Taiwan, both of which have very successful small firm economies but do not have multinational corporations comparable to other countries of similar levels of economic wealth. Yet, both countries are relatively wealthy and successful, and their many small companies have achieved high rates of exporting. Even in the case of the United States, the evidence implies that American firms, large and small, came to Europe, riding on the back of the national organizing principles of standardization in work methods (Kogut 1992). Chandler’s larger point of the effect of national systems on firm capabilities is largely accepted; his belief that large firms reflect better management because they achieve scale is disputed far more.

 Organization of Multinational Corporations

The national origins of the multinational corporation influence their subsequent organizational evolution. In the United States, the great post-World War II expansion of multinational corporations coincided with the diffusion of their adoption of the multidivisional structure. Indeed, the refinement of ‘organizational technologies’ permitted American firms to manage their rapidly growing operations on a worldwide basis. The young American multinational corporation began with little knowledge and experience of the foreign market. Initial foreign sales are exports executed within the existing organizational structure. These structures could be functional (e.g., organized by production and sales) or divisional (e.g., organized by geographic area or product division). As foreign sales increased, an international division was created to make the sale and to provide customer support. In consequence, the domestic organizational unit would sell to the international division its products at an internal ‘transfer price.’ As this price was set by the domestic market, it was unlikely to reflect the competitive conditions in the foreign country. Moreover, the products were often not designed to the tastes of foreign demand. Because of this internal conflict, the American multinational corporation would replace the international division by transferring responsibilities to area divisions (e.g., Europe, Asia, South America) or to product divisions (Stopford and Wells 1972). While these structures diminished the internal conflict, they ran the hazard that the divisional managers across areas did not cooperate or that managers across product divisions tended to fall back upon focusing on the home market. European firms grew up in a different environment. Europe was a highly unstable continent during the twentieth century, with significant political and economic conflicts. Borders sometimes changed, and they also marked the necessity to pay commercial duties. The gradual creation of the European Union in the last third of the twentieth century eliminated tariffs and lessened national differences. This history marked their firms. The organizational technologies in most of  these countries were quite different to those foundin the United States. Holding company structures were common, banks or other financial institutions played powerful roles in ownership and cross holdings, and firms were tied together in complex financial webs. These structures, often called ‘mother–daughter’ organizations, reflect the linguistic terms used in northern Europe to describe headquarters and subsidiary. These mother–daughter structures consisted often of a headquarters that held a portfolio consisting of ownership control over dozens of companies, many of them in the same sector but located in different countries. Reporting relationships among these companies and headquarters was less formal than found in American companies, and control was often exercised through the movement of managers who were lifetime employees. These structures were often seen as inefficient, especially compared to the size and organization of American multinationals that were investing rapidly in Europe at this time. European critics called for the restructuring of European firms and industry along American lines.

The structure of Japanese companies reflected also their historical origins. In Japan, the trading company performed an extraordinary role in the exports during the first two-thirds of the twentieth century. These companies started primarily as wholesalers, but over time developed their own industrial companies located in Japan and eventually overseas. Though the forced imposition of American antitrust law after World War II disrupted these patterns, trading companies and other affiliated company networks, called keiretsu, reconstituted the earlier pattern of constellations of domestic companies competing in home and, through their trading companies, in foreign markets. As in the American and European cases, Japanese firms varied in their internal structures, with functional and even factory-based organization being the predominant structures. Still, a dominant trend emerged over time as the role of trading companies declined, especially for the exportation of industrial and high technology goods. This trend consisted of the appendage of an international division to the existing structure (Suzuki 1991).

These different national structures confronted an increasingly more globally integrated environment in the course of the twentieth century. This environment posed the classic organizational problem of balancing integration and differentiation. For the multinational corporation, this problem posed itself as meeting the demands to achieve global scale against the needs of national markets and governments. Given different national principles of organizing the activities of multinational corporations, there was not a rapid convergence to a global structure. The growth of multinational corporations, especially in Europe, was stymied by these traditions. Continuing national differences and the failure to develop harmonized European corporate law deterred the emergence of pan-European multinational corporations. Many of the most important cross-European mergers in the 1970s failed within a decade. Instead, American multinational corporations, less bound by these separate national traditions, were able to create integrated European strategies.

Nevertheless, it was in Europe where new organizational structures developed to resolve the conflict between integration and differentiation. Multinational corporations from smaller countries offered the laboratory experiments that influenced the evolution of multinational corporations from larger nations. Because of the small size of many European countries, large firms in Sweden, Switzerland, and the Netherlands quickly became multinational corporations, and these corporations had far more assets and employees outside their home countries than within. Over the course of the last two decades of the twentieth century, organizational structures developed, labeled as transnational corporations, that distributed global responsibilities to national subsidiaries, created global teams and projects, and encouraged the transfer of ‘best practices’ across borders.

Diffusion of Organizational Knowledge

In its evolution the multinational corporation is not without serious contradictions. Evolving from its national context, the multinational corporation employs large numbers of employees of diverse nationalities and ethnicities. Westney (1993) notes that a subsidiary is, thus, caught between the institutional pressures to conform to the company norms and values, as well as to the cultural and social influences of its local national environment. At the heart of the evolution of the multination corporation, thus, lies the tension between national institutions and the fragile emergence of a global culture. The international evolution of the organizational structures of American multinationals mirrored, as we noted above, the broader diffusion of organizational technologies in the home market. The initial investments by a firm took place, often, on the basis of opportunity and the extension to familiar countries. Much like the ethnic trading communities dating back to the earliest times, the inexperienced multinational corporation preferred countries that are culturally similar to what their managers know at home (Johanson and Vahlne 1978). In these countries, they often established foreign enclaves where their expatriate managers could live in the simulated familiarity of their home environments. The relevance of the second definition of foreign direct investment as the transfer of organizational knowledge is critical to understanding the powerful conflicts posed by the multinational corporation. The multinational corporation, competing often on superior technologies and managerial capabilities, serves as a conduit of knowledge across borders. Some kinds of technologies can be purchased on markets and the flow of licensing payments attached to the sale of the right to use a technology constitutes a nontrivial flow in international balance of payments. Technology can also flow by the movement of people. Just as English craftsmen were imported by continental Europe in the early industrial period, there exists an international market for managers and skilled workers.

However, some knowledge is embedded in organizations and can only be transferred as an organization across borders. The issue is more than whether knowledge is tacit or explicit, for this pertains to the knowledge held by individuals too. The central feature of the diffusion of knowledge by the multinational is that it transfers the knowledge of how to organize and how to coordinate people and across divisions. These organizing principles then provide the capabilities for the firm to achieve quality, speed products to the market, or lower costs (Kogut 1992). For this the multinational corporation is required, which through its own activities or in joint ventures with host companies, transfers the organizational knowledge.

The global market for knowledge extends also to consultants. The large American consulting practices often have their origins in their acquisition of American organizing principles that they then transferred around the world. The international diffusion of the divisional structure, for example, reflects the knowledge acquired in American consulting practices that was then sold in abroad. Channon (1973), for example, observes that half of the firms he observed as adopting the divisional structure relied upon the consulting services of the same American firm. Similarly, British and then American banks spread throughout the world on servicing the needs of their expanding home clients, and then on transferring their practices into these countries (Jones 1993).

It is important to realize that once this transition period passed, the multinational corporation and multinational service firms, such as those engaged in consulting, banking, and advertising, had permanently and historically changed the global economy. No longer was the flow from the US to Europe, or from one ethnic community to another. The network of connections developed by the multinational corporation permitted the flow of ideas and practices among and between countries. Thus, whereas it took half a century for American practices to diffuse to Europe, the introduction of quality circles from Japan happened within a decade or two of their original innovation. In Europe, Japanese innovations were often diffused by American firms, including consulting companies.

However, this image of the free flow of knowledge needs to be strongly conditioned on the continuing importance of national institutions. Nations consist of defined cultures and economic and social institutions, such as unions, financial systems, and religious values.These institutions interact and their complex interactions causally influence behaviors. For example, the German system of centralized bargaining, enterprise clubs, strong banks, and social welfare has, until recent times, composed a national configuration of institutions that influences the capabilities of resident firms to be able to manufacture high quality goods for export markets (Streeck 1995, Soskice 1990). The introduction of Japanese and American teams confronts in Germany the presence of existing work councils. These councils are fairly rigid features of the German environment. Since Japanese methods may not be effective without teams as complementary factors in organization, this institutional refusal can effectively deter the diffusion of these methods. In short, national organizing principles are embedded in the wider social institutions. Inconsistency between these institutions and principles, then, is an empirical question of the bargaining strength of vested powers.

MULTINATIONALS IN THE INDIAN CONTEXT TOWARDS GLOBALIZATION-THE NEW INDUSTRIAL POLICY

As a preparation to the New Industrial Policy (NIP) that was announced on July 24, 1991, the rupee was devalued twice leading to 20 per cent depreciation against the US dollar. A policy of trade liberalization was announced on July 4. But it was the New Industrial Policy that opened the business environment to global players. The NIP abolished licensing in all industries irrespective of the size of equity participation. Only 18 industr-es that were engaged in the manufacture of hazardous chemicals, national security related products, and items related to social well being and environment were closed to foreign companies. Other measures were talcen to attract MNCs, tone up domestic firms, facilitate capital, and integrate the domestic market with the global one. For example, automatic clearance was given for he import of capital goods up to 25 per cent of the value of plants and equipment with a ceiling of Rs 20 million. Foreign equity up to 51 per cent was approved automatically in cases where the equity inflow was sufficient to meet the costs of imported capital goods. Further, 100 per cent equity participation was permitted in the power sector. NRIs and their overseas corporate bodies were also allowed to have 100 per cent equity in high priorities industries, provided the outflow of money as repatriation covered the imports of capital goods and remittances. Proposals for investment did not necessarily require technology transfer. Automatic permission was granted to foreign technology collaborations in high priority industries. No permission was required to hire foreign technical consultants. MNCs were allowed to explore and develop gas fields, lay gas pipelines, and set up petroleum gas projects. A single window service was made available for attracting foreign investment. Indian companies were allowed to use foreign brand names that they produced domestically (Kumar, 1994). Non-priority public undertakings were open to disinvestment. 

In the following years, more incentives and concessions were offered. In 1992, foreign investments were protected by a mutual guarantee system, guidelines were provided to Indian companies that intended to enter the international market, and private entrepreneurs were allowed to offer cellular services. In 1992-93, partial convertibility of the rupee on trade accounts was introduced. A new liberal policy for participation in mining 13 minerals was introduced in 1993-94. In 1993, the exportimport policy was modified to encourage the export of agricultural products. Private sector participation was allowed in the road sector in 1994. The insurance sector was opened to foreign corporations in collaboration with Indian partners in 2000. In fact, some of the public sector undertakings were up for sale, although large disinvestments were made only intermittently in 1991-92, 1994-95, and 1998-99. It was after 2001 that the process began to gain momentum, but still faced stiff political resistance. The value out of disinvestments was to the tune of Rs 30.38 billion in 1991-93 that increased to Rs 66.48 billion in 2001 (Business Today, 2002, February 17, p. 48). The pace of liberalization gained further momentum in course of time. Its impact on the industrial landscape has been very impressive, although some sensitive areas such as labour laws, print media, oil, and airways are still protected from multinationals. 

FORMS OF INDIAN AND MULTINATIONAL WORK ORGANIZATIONS

Organizations are concerted societal efforts to meet their needs and realize their goals in the culturally preferred ways keeping in view the resources, the constraints, and the historical antecedents. Hence, organizational forms, particularly the management of people, are strongly "influenced by social, economic, moral, ideological, and political processes" (Nord, 1986, p. 439). Indian work organizaitions originated in a dissimilar cultural milieu with different types of considerations than those in the west (Sinha, 1994; 1997). 

INDIAN ORGANIZATIONS IN THE PRE-LIBERALIZATION PHASE

Indian organizations in the post-independence period were characterized by familisrn in the private sector, bureaupathic (bureaucratic, that becomes pathological) management in the public sector, and varying magnitudes of welfare orientation in both that in some instances facilitated employees' performance and well-being, but in other cases diluted the work culture for personal and. group gains at the cost of the organization.

FAMILISM IN THE PRIVATE SECTOR

In 1951,12 business houses dominated the Indian industrial landscape: Tata, Biria, Dalmia-Sahu Jain, Kirloskar, Shriram, Lalbhai, Walchand, Thapar, Mafatlal, Mahindra, Bangur, and Singhania. Their companies were listed among the top 100 Indian companies in 1997 (Business Today, 2002, January 20, p. 143).l. The members of their families occupied the crucial positions and succession to the top waSnormally synonymous with succession in t.' the family. For example, Kumar Mangalam B.iria, a fairly inexperienced young man, was appointed the chairman of the Aditya group of companies when his father, Aditya BirIa, passed away suddenly. A young inexperienced J. R. D. Tata at the age of 34 years was placed at the top of Tata Sons, the holding company of the Tata group. Again, a less experienced Ratan Tata succeeded JRD in 1991 despite the presence of reputed lieutenants in the group. There are numerous such examples and only a few exceptions (Tripathi, 2002, p. 143). This tradition fostered and continues to perpetuate a familiar pattern of management characterized by paternalism and patronage, personalized relationships, hierarchical orientation, and centralized decision-making. Only in some companies familism co-existed with professionalism.  

BUREAUPATHIC MANAGEMENT IN THE PUBLIC SECTOR

The public sector was created with a developmental role that inadvertently led to excessive bureaucratization in its organizations (Sinha, 1997). The developmental role implied that technological, strategic, and structural choices have to be made by the organization keeping in view not I only the interests of the organization, but also the developmental needs of the nation (Khandwalla, 1988, p. 102). These developmental needs included creating adequate and even surplus industrial capacity in a long term perspective, manufacturing essential commodities at higher costs and selling them at subsidized prices, protecting Indian enterprises from foreign competition through a restrictive policy, providing employment, serving as an ideal employer by giving decent wages and benefits as well as by creating reasonably good conditions of living for the employees.  

Although making profit was ritually mentioned as part of the objectives of public sector undertakings, the focus was invariably on nation building by fulfilling the developmental roles that were not always compatible with the organization's need to run efficiently and make profit (Sinha, 1994). Hence, the government had to intervene to set up factories, allocate resources, depute government officers or hire retired personnel to manage them, issue directives to ensure that the management followed the government's policy, and, by the same token, bail them out if they ran into losses. 

The lack of autonomy and the responsibility to become independent allowed the senior managers, who were largely government officers retired on deputation-to run these undertakings like government departments. Appleby (1956), who was invited by the government to examine the government administrative structure and its implications for public sector enterprises, observed, 

A deputy secretary is, of course, subordinate to the secretary, an under secretary is subordinate to the deputy secretary, and so on. But this tells only part of the story. The secretary of a ministry is, in a very real sense, subordinate to the lowest ranking officer in Finance, Home Affairs, or the Planning Commission, who writes a "note" on a proposal referred by him to Finance, Home Mfairs, or the Planning Commission for approval (p. 5).... Granted prior agreement in principle on kind and dimension of programme to be undertaken and the amount of money to be made available for the purpose, specific decisions incident to effectiveness of purpose in India are reviewed by too many organs of the government, in too detailed, too repetitive, and in too negative terms. Perhaps nowhere else have so many systematic barriers been erected to prevent the accomplishment of that which, it has been determined, should be done. 

Sinha(1973) reported an interesting case in which a file containing a proposal to buy broomsticks for the bathrooms of a public sector company moved vertically and horizontally among 27 clerks and officers in the different departments for nearly 3 years. Finally, the proposal was dropped, although the process had other fallouts such as suggestions for alternative ways of cleaning bathrooms, the need for hiring more hands, or setting up inquiries against individuals for various kinds of lapses, most of them were unrelated to the main Issue. 

The bureaucratic approach that often constrained the public administration as well as the public sector organizations also discouraged the growth of private enterprises. For example, when Aditya Birla, fresh from the MIT, applied in the 1960s for a license to set up a refinery, the bureaucrats did not approve it for 11 long years; and between 1960 to 1989, 119 proposals from the Tatas for establishing new business or expanding the old ones were turned down. 

In fact, the bureaucratic style degenerated into the bureaupathic way of management, partly as a result of the colonial worldview that Lord Kipling pronounced: "Indians are half-devil and half-child". The mode of managing subordinates, hence, was based on the mistrust of the subordinates who were believed to be inferior. Therefore, the colonial ruler maintained a great distance from the subordinates lest they sought undue advantages, kept tighter control over them so that they could not defy orders, and centralized decision-making because the natives were believed to be incompetent to make important decisions. As a large number of bureaucrats from the government, where they inherited this mode of functioning, were placed in public sector undertakings, they continued to function in the same mode (Sinha, 1973; 1997). 

WELFARE ORIENTATION

Welfare orientation emanates primarily from Indian familism. Organizations are conceptualized as an extended family where the superior is expected to take total care of the family members who must respect,' obey, and come up to the superior's expectations. The private sector organizations provided welfare to create a familial culture that facilitated work performance that, in turn, allowed the employers to give more generous benefits, to the employees. The organizations that blended welfare orientation with professionalism (e.g., the Tatas) recorded much better results than those that did not. Welfare orientation assumed a different form in most of the public sector undertakings. The government, by virtue of being the custodian of the public sector and committed to play the role of an ideal employer, provided welfare that was not contingent on the employees' performance or financial health of the organization. The employees in the majority of cases misconstrued it as a moral and virtually unilateral responsibility of the government to take good care of the employees irrespective of their performance. Thus, employees felt free to serve their personal interest and bleed the organization white. Once performance was de-coupled from the quantum of benefits, clouts and personal connections remain d the main basis for putting pressure to yield maximum benefits. Workers formed trade unions that became increasingly militant to extract more benefits for their members. Managers looked for patrons within the organization and cultivated political connections for extracting all kinds of due or undue benefits. Welfare orientation was virtually transformed into welfarism in many public sector undertakings with scant regard for the financial health of the undertaking.

MULTINATIONAL'S FORMS OF MANAGEMENT

Multinational companies adopted different ways of managing organizations. Those that entered the Indian market before liberalization, despite being managed largely by the parent companies, were smaller in number and restricted in their operations. Therefore, they had an insignificant impact on domestic companies. However, those that entered in the post-liberalization phase had far more freedom to adopt practices of management that their parent company had evolved over the years. Their number itself made them highly visible and a force to reckon with. 

By 2000, the Indian market was flooded with well known products,. brands, and over 3,000 M>JCs. The most visible among them were Akai, American Express, Apple, Asea Brown Boveri(ABB), AT&T, BMW, Coca-Cola, Electrolux, Ericsson, Ford, General Electric, General Motors, Glaxo, Roulunds, Honda, Goldstar, IBM, Kellogg, Kentucky Fried Chicken, LG, Marlboro, Matsushita, McDonald's, MercedesBenz, Microsoft:, Nestle, Samsung, SmithKline Beecham, Sony, Whirlpool, and Xerox. They either established fully owned subsidiaries, joint ventures, or entered into strategic alliances (Shukla, 1997). 

The MNCs had deep pocket to operate, advertise their brands, and even incur initial losses. They had advanced technology, an established network in the international market, etc. They attracted the best graduates from B-schools and paid them much more than the best paying Indian companies, although the amounts were far less than that paid to their counterparts in advanced countries (Box l.I). They, in fact, appeared as role models for many large Indian companies that were either looking for some kind of alliances with them or trying to become international players. 

MULTINATIONALS' WORLD VIEWS

The forms of management of the MNCs are based on the belief that the principles and practices of management that they had evolved in the process of growing up in their home countries are universally effective and may be transplanted to the host country organizations. Underlying this belief is the worldview that all societies, although located at different levels of economic development and modernization, are evolving to become alike. Initially, almost all MNCs developed in the west, particularly in the USA. Therefore, the belief actually implies that as societies outside the west get industrialized and modernized, the people's values, attitudes, habits, and lifestyles would converge into a single pattern characterized by the industrialized cultures of the west (Kerr, 1983; Meyer, 1970; Weinberg, 1969): The world is becoming one polar and the MNCs, the carriers of the industrialized culture of the west, will show the nature of future work organizations. 

However, there was a slight dent in this western worldview when Japanese work organizations integrated their collectivist cultural values and social habits with the western principles and practices of management in order to achieve better results. Consequently, there were now two-western and Japanese-models for designing and operating multinational corporations. Some Pacific Rim countries such as South Korea, Taiwan, and Hong Kong gravitated to the second one (House, Wright, & Aditya, 1997). The management practices in South Korea (Amsden, 1989) and Taiwan (Wade, 1990), for example, were somewhat similar to Japanese practices. 

Another factor that produced some variations in the monolithic model of effective organization was the dispersion in the location of the largest MNCs. Briscoe (1995, p. 2) reported that only six of the largest 50 international industrial corporations in 1959 were non American. By 1993, 60 per cent of the 100 larg:est corporations were other than American representing 15 countries. On the basis of market value, only 23 per cent of the top 50 corporations were American. In the top 500 global service businesses, 25 countries were represented. Not only has there been a wider dispersion, but also the national identities of MNCs have been diluted. For example, Holiday Inn, a traditional American corporation, was taken over by the Britisli corporation Bass; Whirlpool acquired the appliance division of the Dutch Philips; Renault acquired a significant stake in Nissan and Ford took over the automobile operations of Volvo. Corporations crossed national boundaries to set up manufactuing facilities, For example, Honda manufactured cars in the USA and exported them back to Japan, and IBM built computers in Japan and exported them back to the USA ,(Bnscoe, 1995). There were famous mega-mergers of Exxon and Mobil, BP and Amoco and Atlantic Richfield, Daimler-Benz and Chrysler, and the most recent one worth US$ 180 billion of two pharmaceuticals, smithKline Beecham (5B) and Claxo. Changes in national ownership, dispersed manufacturing facilities In several countries, and cross-national mergers blurred national identities and created many complexities in managing MNCs. 

MNCS' PRINCIPLES AND PRACTICES

In order to cope with the new conditions, the MNCs converged on a set of common principles and practices that can be efficiently evoked to leverage their management. The guiding principles were profitability and market share. They made efforts to maintain their competitive edge by setting goals of highest quality of products and services at the lowest possible costs for the maximum satisfaction of the customers. They realize these goals by adopting macro level measures such as acquisitions, mergers, joint ventures, alliances,, and networking supported by micro level management practices. For effectively managing MNCs, senior managers from 15 countries (Bain & Co, 1997, reported in Business Today, 1998, September 22-October 6, p. 120) ranked the importance of the following practices (percent, ages of managers endorsing the practices are given in parentheses):

(a)Strategic Planning (90 per cent);

(b) Mission & Vision Statements (87 per cent);

(c) Benchmarking (86 per cent);

(d) Customer Satisfaction Measures (79 per cent);

(e) Pay for Performance (78 per cent);

if) Strategic Alliance (68 per cent);

(g) Core Competencies (61 per cent);

(h) Re-engineerring (64 per cent);

(i) Growth Strategies (61 per cent);

k) Total Quality Management (TQM) (60 per cent).

Other measures that are often mentioned in literature are downsizing, outsourcing, ERP (Enterprise Resource Planning), 6- Sigma, 360-degree appraisals, etc. Some corporations are known to ease out 10 per cent of the lowest evaluated employees, irrespective of their performance, replacing them with new ones in order to induce keen interpersonal competitiveness and inflow of fresh ideas. Underlying these practices are a set of values and orientations that are generally associated with the rise of capitalism in the west, particularly the USA, Among these values are work discipline, punctuality, meritocracy, equity in pay and perks, rationality, individualism, egalitarianism, risk taking, creativity, and impersonal relationship orientationsal oriented to serve "enlightened self-interest" (Adam Smith, 1937/ 1976), although some of the Japanese values underlying teamwork, quality circles, total quality management, and kaizen are also incorporated in managing multinationals. 

EVOLVING FORMS OF MULTINATIONAL ORGANIZATIONS

There are stages in the development of organizations (Briscoe, 1995). As the foreign sales of a domestic company reach over 10 to 20 per cent of total revenues, the company needs to set up an international division that is entrusted with the responsibility for all international transactions. The company opens offices in other countries that serve as sales subsidiaries for importing CBUs (completely built units) for sale or for granting license to a domestic manufacturer. The exporting company often places one of its managers for promoting sales either directly or through some domestic companies. It does not become deeply involved in management that is invariably entrusted to local managers who operate in indigenous ways. The company shifts its focus on setting up its own organization when it finds it more profitable to opt for local assembly or manufacture products with sub-contractor non-core components or provide services with partial assistance from locally available expertise. ,A number of expatriates are appointed for supervising this transition from sales to manufacturing or service. They ensure that the local employees achieve the targets set for them by the head office, maintain quality, follow work procedures, and function like an extension of the parent organization. 

A natural outcome of this arrangement is the emergence of multinational companies that fiinction like separate entities in a number of countries in the form of either joint ventures or fully owned subsidiaries. Each of them engages in significant operations such as assembly, manufacturing, service centres, R&D, and branch offices. The size of operations requires that half or more of its sales are made in the host country and majority of employees are drawn from the host country. Key personnel are, however, deputed from the parent company that sets the targets, provides capital and technical know-how; standardizes procedures for maintaining records and reporting to the head office, audits quality, arranges training for local, employees, and so on. Nevertheless, they have to be receptive to the local conditions such as market, government laws, and human resources. The twin concerns of adhering to the standards of the parent company and simultaneously responding to the local imperatives demand a complex nature of coordination and management of cultural interfaces. According to Laurent (1986), In order to build, maintain, and develop their corporate identity, multinational organizations need to strive for consistency in theii ways of managing people on a worldwide basis. Yet, and in order to be effective locally, they also need to adapt those ways to the specific cultural requirements of different societies. 

The next stage in the development of MNCs is the internationalization of operations that are decentralized and are primarily guided by global market forces, and consequently become blind or indifferent to. National boundaries. Then they become transnational organizations (TNOs) which may be oblivious to national boundaries, but are still required to retain local flexibility while achieving global integration (Bartlett & Ghoshal, 1988). While MNCs operate as "decentralized federations of units that respond to diverse international needs anE opportunities" within the strategic framework of the parent organization :6on, TNOs need to have capabilities to link different countries' operations with each other as well as to the centre in a flexible way and thereby leverage local as well as central capabilities (Bartlett & Ghoshal, 1988)

The TNO tends to cope with large flows of components such as products, resources, people, and information among its subsidiaries, and as a result, "it demands a complex process of coordination and cooperation involving strong cross-unit integrative devices, a strong I corporate identity, and a well-developed woridwide management perspective" (Dowling, 1999, p. 48). Because of the emphasis on building local capabilities by drawing on location specific resources, the local culture appears as a potent force to reckon with. The TNO may aim at the following (Killing, 1983, p. 47):

1. To search the globe for best opportunities.

2. To invest around the world to achieve highest return at the lowest risk.

3. To purchase partially or fully processed raw materials from wherever they are available most economically.

4. To produce components or finished products wherever they can be produced most productively.

5. To market the products wherever they can be marketed most profitably.

6. To search talents worldwide.

7. To conduct R&D wherever it can be conducted at the optimum costs capitalizing on the technical capabilities existing anywhere in the world.

The Economist (1997,) reported a survey of the -United Nations Conference on Trade and Development (UNCTAD) in which an index of "transnationality" was computed as an average of the sum of the ratios of foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment. The top most among the transnational companies was Nestle with 87 per cent of assets, 98 per cent of sales, and 97 per cent of employees outside of Switzerland. Among others were Asea Brown Boveri (ABB of Sweden! Switzerland), Electrolux (Sweden), Uniliver (Britain,The Netherhncls), and Philips (The Netherlands). American giants such as Coca-Cola and McDonald's ranked 31st and 42nd respectively. They all operate in the Indian market either through fully owned subsidiaries, joint venture or other kinds of alliances. 

In short, the incoming multinational and transnational organizations are presenting radically different forms of management than Indian companies have traditionally manifested so far. It is likely that the former would have an increasingly greater impact on the latter in the coming years. However, the Indian cultural preferences for familial forms of relationships, welfare of employees, and bureaucratic mode of functioning are not likely to disappear over night. They are likely to interface with market-driven and strategicallyoriented forms of management for creating complex forms of management in Indian organizations. 

Economics and Politics of Multinational Corporations

Since the multinational corporation is definitionally equivalent to foreign direct investment, theories of foreign direct investment must account for why one country invests in another and why this investment is carried out within organizational boundaries of a firm (see Buckley and Casson 1976, see Foreign Investment: Direct). In distinguishing between portfolio and direct investment, Hymer noted that firms operate at a disadvantage in foreign markets and hence they must have an offsetting competitive advantage to compete overseas. These advantages for overseas investments are the same ones that allow a firm to compete and grow in the home market. These observations have important implications. The first is that direct investment is the growth of the firm across borders and hence the firm expands internationally on what it has learned at home. This observation is the basis for the evolutionary theory of the firm. The second observation that Hymer made is that firms that expand overseas, because they have competitive resources, are also likely to be large and to belong to oligopolistic industries. In these observations, we can understand the ambivalence expressed in popular and policy debates regarding the multinational corporation. Competition among multinational corporations often is the extension of their home domestic and oligopolistic rivalry that spills across national borders. In many global industries, the same company names dominate each country’s list of the largest firms inside their national frontiers. No matter if it is Poland or France, Singapore or Mexico, the same multinational corporations will be found in the local oligopolistic industries (e.g., consumer goods or automobiles).Because they are large even in their home markets, investments by multinational corporations can have a large impact on a host country (Caves 1974).

As a consequence, the multinational corporation has often been the subject of debates concerning national sovereignty and welfare. In recent decades, acquisitions have generally been the primary way by which multinationals invest in wealthy foreign countries, where the vast proportion of direct investment is concentrated. Given the size of a multinational corporation and occasional national importance of the targeted acquisition, even wealthy countries frequently evidence discomfort, if not outright public hostility, to multinational investments. Moreover, multinational corporations are sometimes the vehicles for foreign policies of their home or host country. The decision, for example, of the US to embargo technology and investment flows to Cuba, the former Soviet Union, Iran, and other countries periodically has caused conflict with other countries. Multinational corporations are especially problematic in developing countries.

By definition, developing countries are relatively poor, thus both in need of capital and yet concerned over their loss of independence. As discussed above, the history of multinational corporations in developing countries is marked by its origins in policies of imperialism and colonialism. Especially in Latin America, where a school of thought labeled Dependencia has been influential, the concern over dependence on the United States resulted in efforts to curb the power of the multinational corporations by restricting the amount of equity ownership a foreign firm could hold in a domestic company or by prohibiting investment in certain sectors. Mexico’s constitution forbids foreign investment in the oil industry; Brazil pursued for a long time a policy to restrict foreign participation in the electronics industry.

The other side of the coin is that multinational corporations bring investment and technology to the foreign country. Vernon (1966) hypothesized that innovations start in wealthy countries. As the market is saturated and as oligopolistic rivalry increases, multinational corporations are pushed out from their home markets to expand abroad in new markets and to locate less expensive places. Thus, Vernon seized both sides of the debate, recognizing the value of the transfer of technology but also emphasizing the oligopolistic nature of multinational investment.

It is, in fact, difficult to draw simple conclusions regarding the relationship of foreign investment and national growth. Countries such as Singapore, Malaysia, and Thailand have encouraged foreign direct investment actively. The growth in China’s coastal sector is indisputably linked to the massive investments by multinational corporations. However, historically Japan and Korea have pursued more cautious policies regarding investments by multinational corporations. In these countries, the state has often negotiated the terms for entry by multinational corporations, sometimes requiring licensing to domestic competitors as a price. The efficacy of such policies for these countries is much disputed. However, for many other countries, the intervention of the government in demanding licenses unquestionably leads tointernal corruption and toinsufficient domestic competition.

There are many channels by which a country can absorb foreign technology and managerial techniques. Most of the evidence shows, however, that prohibitions on the in-flows of direct investment can be very costly for many countries. With their domestic industries still to be developed, a developing country requires substantial investment. Some countries, primarily in Asia, have been able to achieve very high savings rates to finance their industries without direct investment. Moreover, high savings rates, plus political stability, create growth, and growth attracts foreign portfolio capital. A poor country that prohibits foreign direct investment but does not have high rates of saving is entirely dependent upon portfolio capital. The history of debt and currency crises in the 1990s convinced many poor countries that foreign direct investment was a preferable means of attracting capital, because it could not be easily pulled out of a country on short-notice in response to a financial crisis.

However, multinational corporations also respond to the volatility in the global market. This volatility derives from changes in exchange rates, politics, and productivity. Once having achieved sufficient experience and having established subsidiaries around the world, the multinational corporation might choose to close a plant in one location and open plants in new locations. Of course, such actions might provoke a response by labor, but historically, labor has been organized by national, not by international, organizations (Martinelli 1975). Yet, there is also the possibility that locations lose some kinds of plants but gain more sophisticated investments. Cantwell (1999) proposed that some regions and countries pull multinational investments. Yet, it has long been noticed that foreign direct investment among developed countries flows to high cost locations. Regions such as Silicon Valley, Baden-Wuertemberg, and Singapore attract multinational investments not because wages are low, but because productivity levels are high and workers are well trained. In many cases, developing countries have given rise to their own multinational corporations acting in the region and sometimes globally (Lall 1983). In this sense, the multinational corporation acts as a training center in the developmental strategies of emerging economies.

Globalization

The peculiar conflict in the world economy is the growing trend toward economic integration without a concomitant growth in global political and social institutions to regulate and arbitrate this trend. Multinational corporations are rapidly adopting advanced information technologies to increase the efficiency and capabilities of their operations. Valuable information, such as software or financial services, is transmitted digitally. Governments are often unable to tax the value of these services or control their content. Moreover, information technologies, often supported by private telecommunication networks, permit, for example, a unit in Germany to control the manufacturing operations located in Brazil. Digital technologies permit a high degree of integration and, in the short run, aggravate the gap between countries that are rich and those that are poor and do not have the infrastructural capabilities. However, these technologies are beginning to have profound effects on some regional economies. In parts of China, India, Israel, and elsewhere, advanced satellite transmission transmits digitally encoded work between their sites and other organizational units of multinational corporations located elsewhere. Whereas before the Indian engineer from Bangalore might have tried to migrate to the US to bring his human capital to a more attractive labor market, the increasing wages and job prospects in India are encouraging many to stay at home and participate digitally in the world economy. These trends have unclear effects on multinational corporations. They permit more easily the development of projects that are in continual development, as work passes from one unit to the next as the day advances. They also allow more easily the coupling of less expensive labor in one country with more expensive skilled labor in another. At the same time, the origins of the multinational corporation laid in its ability to organize labor on a worldwide basis on principles other than ethnic and cultural identities. This organization has never been without cost and risk. The growth of a world digital economy permits alternative ways by which labor can cooperate and be coordinated on a world basis. The intriguing question at this point in history is whether the multinational corporation, though still a vital presence in the world economy, nevertheless will recede relatively in importance as information technologies reduces the meaning of geographic distance.

The Political Influence of Multinational Corporations

 The roles that MNCs play in both economic and political marketplaces. To begin, we discuss their unique economic characteristics compared to other firms that primarily serve domestic market and how these differences will affect MNCs’ policy preferences. We then discuss MNCs’ political activities in affecting foreign policy-making that have been documented by many social scientists. 

Firm-level Heterogeneity and the Policy Preferences of MNCs A first step in understanding the political influence of multinational corporations (MNCs) is to differentiate them from other firms. In fact, there exists ample empirical evidence that MNCs differ in a number of important ways from purely domestic firms: they tend to be large and highly productive (e.g., Bernard, Jensen, and Schott 2009). They also tend to be the largest exporters, the most integrated into GVCs, employers of the most high skilled workers, and the largest spenders on R&D (Autor et al. 2017). This gives them a valuable position in any economy. The uniqueness of MNCs has a close theoretical connection to the studies that examine firmlevel heterogeneity in their engagement in international trade. In earlier work, Bernard, Jensen, and Lawrence (1995) show that exporters in manufacturing are very different than purely domestic firms. While exports from the US only account for about 12.2% of GDP, exporting firms overall play a large role in the US economy. Exporting firms are larger, more productive, more capital intensive; and they pay higher wages and employ many workers, especially the most productive ones. Bernard et al. (2007) point out that this evidence about exporting firms supports the new, new trade theory and its focus on productivity differences among firms. As heterogeneous firm models predict, these firms benefit from trade and its liberalization; they tend to grow bigger and more productive while less productive firms exit the market. That is, a very small number of firms within an economy dominate export markets and tend to export many different goods to many other markets. Moreover, roughly half of the firms that export also import and thus are probably part of global value chains (GVCs).

While not all importers or exporters are multinational firms, almost all MNCs export and/or import (Yeaple 2009), accounting for over 80 percent of US trade (Bernard, Jensen, and Schott 2009). These MNCs sit atop the productivity ladder of all firms, being the largest, most capital and skill intensive, and the most innovative (Tomiura 2007; Bernard, Jensen, and Schott 2009; Doms and Jensen 1998; Slaughter 2004). Among MNCs, as theory implies, there exists variation in where they invest and how much. A “pecking order” arises where only the most productive firms invest in all types of foreign locations while the least productive firms invest in only the most productive locations (Yeaple 2009). Although their numbers are small, they have a large presence within any economy. And because of these characteristics, they have been viewed as powerful actors within any country where they operate, whether their host or home one (Prakash and Potoski 2007; Luo 2001; Jensen et al. 2012).

A second important step is to identify the preferences of MNCs in terms of foreign policy overall, and especially economic policies such as trade, foreign investment, immigration, and exchange rates. To understand if firms have political influence, researchers have studied what they want (especially ex ante) and whether it differs from what other groups want. In International Relations, for example, a long standing question has been whether business favored war or peace. Indeed, the so called security preferences of business have been an important issue from Karl Marx’s time onward, and many scholars saw business or capitalism itself as a driver of war and conflict, especially colonialism (Cohen 1973; Staley 1935). The claims about the “military-industrial complex” and its benefits from war are part of this tradition. On the other hand, more recent research has cast mostly doubt on this claim. In particular, Brooks (2005) argues that business firms in the modern period are strong proponents of peace, not war. Building upon this, a literature now exists on the capitalist peace, arguing the capitalism and its agents are central to peace among countries (Gartzke 2007; Kirschner 2007; McDonald 2009).

Others have studied firm-level preferences regarding foreign economic policies, such as trade, foreign investment, and immigration. In the trade area, it has long been recognized that firms will have different preferences depending on their ties to the international economy. Domestic firms that face import competition will opt for protectionism, while big exporters and multinationals will want freer trade (Milner 1988; Gilligan 1997; Kim and Osgood 2019). The preferences for freer trade at home and abroad are reinforced for multinationals if they are part of global value chains. In more recent work, Jensen, Quinn, and Weymouth (2015) argue that MNCs in GVCs should not use trade remedies like antidumping as much as domestic firms and that trade disputes in their sectors should be less. In terms of foreign investment and financial markets, many of the same divides are expected. Small domestic banks and firms should care most about protecting the domestic market and keeping large foreign firms and banks out. Big banks and multinationals, on the other hand, should press for open capital markets, protection for foreign investments, and greater capital mobility (Frieden 1991). Recent work also links firms’ preferences to immigration. Peters (2017) argues that firms will press for open migration policies especially if they face strong international competition and are limited to operating in their home country; once firms can move production anywhere in the world, their concerns about immigration end and they no longer press for open immigration policies.

Finally, MNCs are also the main proponents of preferential trade agreements and bilateral investment treaties, according to numerous studies (Manger 2009; Kim 2015). And MNCs have been the main advocates of the inclusion of provisions protecting investment and intellectual property rights and liberalizing services in preferential trade agreements, as means to gain an edge over MNCs from other countries, which are excluded from the trade agreements (Baccini 2019; D¨ur, Baccini, and Elsig 2014; Rodrik 2018). Baccini, Pinto, and Weymouth (2017) argue that intra-industry political divisions over preferential trade agreements exist and they show that large and productive firms engaged in offshore production are the biggest beneficiaries and the most ardent supporters. Some research also suggests that MNCs increasingly prefer to have decisions made at the supranational level — that is, in international institutions like the WTO and IMF or at international tribunals like International Centre for Settlement of Investment Disputes — where they may have even greater influence than domestically (Prakash and Hart 1999; Levy and Prakash 2003). Other studies show that they are the most likely to lobby for national compliance in WTO Dispute Settlement rulings (Kim and Spilker 2019; Yildirim 2018). Generally, much of the recent literature sees a large divide between domestic firms and large, global ones in terms of their foreign economic policy preferences. Firms may also have significant preferences about more domestic policies, especially tax, regulatory, and labor ones. Whether preferences regarding these break down along domestic vs international lines seems less clear. The next question, however, is whether all firms pursue political influence to secure their preferences and then how the battle among firms and with other groups plays out in the political arena.

Political Influence of MNCs

The means of political influence that MNCs employ may differ from issue to issue and country to country. In this regard, scholars as exemplified by Nye (1974) have identified three main channels. through which firms may exert their influence over foreign policy-making: direct influence through lobbying, indirect influence as an instrument of the state, and unintentional influence via their agenda-setting power. First, firms may directly engage in political activities such as lobbying and campaign contributions to affect policy making or to press political leaders to address their demands. In doing so, they can also work with industry associations and political action committees to advance their interests. MNCs can leverage their bargaining power by offering both “inducements” or promises of new investment and “deprivations” or threats of withdrawal of investment (Nye 1974). Grossman and Helpman (1994) in their famous “Protection for Sale” model show how lobbying activities of interest groups may change trade policy. In addition to direct lobbying, firms can leverage informal ties to to political leaders that enable them to provide information and persuasion (Bauer, Pool, and Dexter 1972; Denzau and Munger 1986). While this is inside pressure (Culpepper 2011), these influence attempts can also involve the public. Outside lobbying includes the use of public communication channels rather than exchanges with political elites, and involves tactics such as contacting journalists, issuing press releases, establishing public campaigns, and organizing protest demonstrations (Kollman 1998; De Bruycker and Beyers 2018). 

Second, other scholars have argued that MNCs hold an unintended role in foreign policy as instruments of the state (Gilpin 1975). In this view, governments have used MNCs to further the national interest by strengthening the effects of sanctions through MNC production networks, facilitating capital transfers through firms to strengthen monetary policy, or enabling MNC’s foreign affiliates to assist in intelligence gathering (Nye 1974, p. 157). Finally, firms can hold considerable agenda-setting power from their mere presence abroad. Firms’ “privileged position” in the view of governments (Lindblom 1977) assists political leaders’ in defining problems, devising policies, and prioritizing objectives. As Ray (1972, 82) long along noted, “[t]he influence of corporations on American foreign relations stems primarily from their ability to shape the external environment from which problems, conflicts, and crises grow, and their ability to define the axiomatic.” While indirect and incidental lobbying are important avenues of influence, our empirical analyses below focus on the first type of political influence, firms’ lobbying activities.

The literature on firms’ political influence points out that the most consistently interesting explanatory factors of political activity in home countries have been firm size, degree of government regulation, and the amount of firm or industry sales to the government (Mitchell, Hansen, and Jepsen 1997; Drope and Hansen 2006). Countering the pressures of other groups that oppose their interests (so called counter-mobilization) has also been an important reason for influence attempts by firms (Austen-Smith and Wright 1994). The larger the firms, the more they try to exercise political influence (Ansolabehere, de Figueiredo, and Snyder 2003; Hansen, Mitchell, and Drope 2004; Drope and Hansen 2006; Bombardini and Trebbi 2012; Naoi and Krauss 2009). The more firms interact with the government and its regulations, the more political action they seem to take. These large firms also tend to act on their own and not in coalitions or industry associations (de Figueiredo and Richter 2014). There remains debate over whether connections or expertise and information matter more for lobbying. In addition, the target of influence attempts has been studied. Research suggests that firms target supporters and allies of their positions mostly and some wavering groups in the middle of the political spectrum (Hall and Deardorff 2006; Gawande, Krishna, and Olarreaga 2012). They are less likely to try to convince opponents to change their positions.

The literature at least for the US shows that business lobbying entails far more funds than do campaign contributions. Milyo, Primo, and Groseclose (2000) demonstrate that lobbying expenditures at the US federal level are five times those of campaign contributions to political action committees. Firms of all sizes may suffer from collective action problems that deter political action which is costly; however, large firms and hence MNCs may be less affected by this problem (Alt et al. 1996). Firms’ political activities may lead to actual policy changes.5 Gordon and Hafer (2005) and Blonigen and Figlio (1998) demonstrate that lobbying by firms can affect national policies and influence on individual legislators. Fisman (2001) and Faccio (2006) also find that politically connected firms benefit economically from these ties, and that larger firms, which are more likely to be MNCs, are more likely to have such connections. Furthermore, there is additionally some evidence that firms which lobby become bigger as a result, thus underscoring their successful influence (Huneeus and Kim 2018; Akcigit, Baslandze, and Lotti 2018). 

A key finding of the research on business political activity is that large firms lobby the most. Numerous studies demonstrate that large firms spend the most on direct lobbying (Boies 1989; Grier, Munger, and Roberts 1994; Ansolabehere, de Figueiredo, and Snyder 2003; Hansen and Mitchell 2000; Hansen, Mitchell, and Drope 2004; Drope and Hansen 2006; Bombardini and Trebbi 2012; Naoi and Krauss 2009). This arises for several reason. First, these firms have the most resources. The size of the firm reduces the “two primary costs of lobbying”: the initial costs to establish a lobbying presence and the actual amount spent to influence policy (Kerr, Lincoln, and Mishra 2014; Hafner-Burton, Kousser, and Victor 2015, p. 10). Bigger firms have a greater capacity to pay the upfront costs of establishing a lobbying presence (Bertrand, Bombardini, and Trebbi 2014; Kerr, Lincoln, and Mishra 2014; Kerr et al. 2017). Therefore, large firms “select into” lobbying whereas smaller firms cannot (Blanga-Gubbay, Conconi, and Parenti 2019; Alt et al. 1996).

Moreover, larger firms utilize their resources to actually spend more (Kim 2017; Dellis and Sondermann 2017; Igan, Mishra, and Tressel 2012) and forge closer ties with politicians (Fisman 2001; Faccio 2006). Because bigger firms have more expendable resources to influence politicians whereas policymakers are resource-poor (Drope and Hansen 2006), these firms hold an advantage. The biggest firms are also able to leverage considerable informational advantages (e.g., expert and technical information) which help to reduce uncertainty for policymakers (Helleiner 2011; Lall 2012; Young 2012).

By shouldering the initial upfront costs and engaging in lobbying, firm lobbying usually begets more lobbying. Kerr, Lincoln, and Mishra (2014, p. 166) “report a 92% probability that a firm will lobby in a given year conditional on lobbying in the prior year” (de Figueiredo and Richter 2014). Bigger firms may also hold a first-mover advantage where regulators become more amicable to protecting the firm to preserve the reputations of the firm and the bureaucrats. This leads to “protection without capture” or consistently favorable treatment by regulators (Carpenter 2004).

A second reason for larger firms to be more politically active is because policies are becoming increasingly granular (e.g., product-specific trade policy), and therefore lobbying becomes a costbenefit analysis of individual firms. In fact, scholars have consistently found that large firms and MNCs often choose to lobby alone and lobbying is becoming increasingly “particularistic” (Mizruchi 2013). Gilligan (1997, p. 455) argued that since firms involved in “intra-industry trade are monopolists, lobbying essentially becomes a private good” and thus they are willing to lobby alone and bear the costs. Further, as Johns, Pelc, and Wellhausen (2019, p. 732) demonstrate growing globalization has led to not “only an overall increase of lobbying but more lobbying by individual firms rather than through industry associations, thus contributing to what Drutman (2015) has described as ‘growing particularism’ in corporate lobbying.”

To be sure, lobbying through industry associations still serves as an important channel through which firms exert their political powers. However, there are other reasons why firms might choose to lobby alone. Large firms are more likely to have in-house lobbying offices which reduces the importance of trade associations (Vogel (1996) as cited in Walker and Rea (2014, p. 11)). Finally, lobbying alone can be more effective than a coalition of strange bedfellows with a cacophony of voices, diluting the overall message (Nelson and Yackee 2012) or a large coalition when the salience of the issue among policymakers is low (Junk 2019). Following these findings about the importance of lobbying by firms themselves, our research focuses on this particular aspect of political activity.

As pointed out above, much of the research on the political activity of business has shown that big firms are distinct. But are MNCs different from big firms in general? Recent work on MNCs and foreign economic policy shows that these firms are very active and powerful political actors, maybe even more than big domestic firms. They may have different preferences in foreign policy, be more active, and more likely to act on their own. In particular, the new, new trade theory with its heterogeneous firm models of trade has changed our understanding of trade politics. The largest, most productive firms within an industry tend to be the main exporters and multinationals and hence should favor trade and other forms of engagement with the world economy since they benefit hugely from this. Furthermore, these pro-trade firms may have sizable advantages in terms of political action, both in association with other large firms and on their own. Large global firms have both greater financial resources to invest in political influence and the scale to make those investments profitable given that political investment has fixed costs (Kim and Osgood 2019). Because of their large benefits from trade and their small number, they also may avoid collective action problems (Gilligan 1997; Kim 2017).

MNCs may have distinct preferences from domestic firms and they may be focused on different issues. Studies also show that large global firms are significantly more likely to support trade liberalization and to lobby for it in a variety of countries, including the US, Japan, and Costa Rica (Plouffe 2017; Osgood et al. 2017).6 Osgood (2018) points out that the gains from trade are highly concentrated in a few firms in the US and that these firms have GVCs that are specific to certain countries or regions. These facts mean that MNCs in the US lobby extensively in a pro-trade direction and support strongly trade agreements with the specific set of countries they deal with. These MNCs outweigh and out lobby domestic firms that oppose trade and they overcome collective action issues because each firm gains greatly from trade and lobbies on different agreements according to their GVC partners. Further, Kim (2017) shows that international firms lobby individually to reduce trade barriers on highly specific products, again because they anticipate large gains from such liberalization on their products. 

Other research also shows that MNCs have particular preferences in trade that probably shape their attempts at influence. Kim et al. (2019) demonstrate that for many types of firms, the standard trade policy measures of the past —tariffs and subsidies— are no longer their most important concerns; instead, the nature of firms’ involvement in global value chains shapes their preferences so that other policy issues, such as the protection of foreign investments, are most important for multinational corporations these days. These distinctive preferences and outsized resources mean that MNCs, even more than big domestic firms, may prefer to be very active and to operate alone in the political arena. It also suggests that MNCs may be interested in different issues than domestic firms.

Foreign multinationals in the US are also involved in political activity. Mitchell, Hansen, and Jepsen (1997) shows that foreign-owned firms in the US form and join fewer PACs and give smaller campaign contributions than do similar sized domestic firms. In later work Lee (2018) studies foreign multinational corporations in the US and concludes exactly the opposite. She shows that they seem to use their subsidiaries in the US as local political agents who can influence the US government. Using PAC contribution data, she finds that US subsidiaries of foreign firms have a greater likelihood to sponsor a PAC compared to similarly sized American firms, and to also give much greater amounts of campaign contributions. These studies also show, however, that foreign MNCs tend to be large, powerful political contributors in the US.

While our research is more focused on the US, it is very likely that MNCs play similar roles in other countries and perhaps exert even more influence there because of their even greater presence in smaller economies. There has been a long literature on MNC influence in developing countries which are hosting their investments. The dependency literature, as its name suggests, focused attention on how MNCs could realize their preferences and obtain better deals with these host countries because of their bargaining advantages (Biersteker 1978; Moran 1973, 1978; Evans 1979). Other early research indicated that foreign investors could be at a disadvantage over time and that they faced an obsolescing bargain where the host country could expropriate them once they had invested (Vernon 1971, 1980). Much evidence now suggests that the obsolescing bargain is not very evident and that firms have developed lots of strategies to prevent this from occurring (Hillman, Zardkoohi, and Bierman 1999; Eden, Lenway, and Schuler 2005; Henisz and Zelner 2005). The stress more recently has been on how MNCs protect their investments in host countries and what characteristics of host countries are most propitious for safeguarding them. The business literature notes how foreign firms can use alliances with domestic partners and host governments to mitigate risk (Malesky 2008; Eden and Molot 2002; Stopford and Strange 1991; Pinto 2013; Pinto and Pinto 2008). They can also integrate into global supply chains (Johns and Wellhausen 2016), build political ties with host-state policy makers (Henisz and Zelner 2005), ally with politically powerful multilateral institutions (Nose 2014), and threaten and pursue investor-state arbitration using the global network of bilateral investment treaties (Salacuse 2010; Allee and Peinhardt 2011; Simmons 2014; Johns and Wellhausen 2016).

Another branch of the literature focuses on choices of MNCs about which host country to invest in. This range of choice is often seen as giving MNCs great leeway to negotiate better deals with host countries and to influence their politics. In particular, the number of veto players in the government, the degree of private property protection, and the extent of democracy all may affect whether MNCs can protect their investments and hence whether they invest in the first place (Jensen 2003; Li and Resnick 2003; Henisz and Williamson 1999; Henisz 2000). First, more veto players, on the one hand, makes it harder for governments to change policies and thus reduce any ex post attempts to change the bargain with MNCs. However, more veto players may also mean more access points for MNCs and make it easier for them, especially in combination with other foreign and domestic firms, to influence policy (Ehrlich 2007, 2008; Pyle 2006; Gillespie 2006). Second, more democracy and better private property protection, on the one hand, enable MNCs to be more likely to find allies in the host country that will help them. On the other, more political competition and more space for different interest groups in vigorous democracies seem to weaken MNCs and lessen their influence (Jensen et al. 2012). Finally, MNCs can call on their home country government for assistance (Krasner 1978; Lipson 1985; Fisman 2001; Wellhausen 2014; Truex 2014; Lee 2019; Gertz 2018). When political leaders desire foreign investment, this ability to choose locations enables MNCs to exercise important influence over the host country and its politics. The conditions that maximize MNC political influence are still much debated, however.

In particular, a large number of studies have pointed out how MNCs have shaped the economic reform process in many developing host countries. They show that MNCs can affect local policy decisions in host countries by providing information and policy expertise about regulations in other countries, by lobbing officials, especially in alliance with local actors, by promising benefits such as more employment and access to new technology, by threatening to cut employment or withdraw, and by helping leaders to overcome entrenched local interests by offering more revenue or employment (Li and Reuveny 2003; Rudra 2005; Mosley and Uno 2007; Malesky 2009; Jensen et al. 2012). Many of these influence techniques for host countries are the same as noted for home countries.

It is also important to note that MNCs may influence international institutions as well as domestic governments; Hanegraaff et al. (2015) point out that the most organized domestic interest groups such as MNCs are also the most potent actors in many international organizations like the WTO. Indeed some studies claim that MNCs are now more powerful than ever in their influence due to globalization and the capital mobility it creates (Vernon and Spar 1989; Strange 1996; Levy and Prakash 2003). These studies suggest that MNCs have a plethora of means to exert powerful influences over the countries they choose to operate in. These issues and forms of influence are very important to keep in mind when assessing the power of MNCs. But here our attention is on their political activity in the US. In some ways this is a hard case for finding MNC influence since the US political system is highly institutionalized and filled with checks and balances.

 What are MNCs?

MNCs are firms those own and control production facilities in two or more countries. They produce and distribute goods and services across national boundaries; they spread ideas, tastes, and technology throughout the world; and they plan their operations on a global scale. Such companies have offices and/or factories in different countries and usually have a centralized head office where they coordinate global management. Nearly all major multinational corporations are American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda, and BMW.

Since the study is of MNCs in a developing country, it is appropriate to first define the term to dwell on the possible source of confusion. The imperative to control resources and know-how as well as to secure access to overseas markets has driven some firms to engage in FDI and gradually or potentially to become MNCs. Widespread use of this term MNCs commenced in the early 1960s (Hymer, 1979; Jones, 1996). Since then, a variety of definitions have been offered and are widely known and used in the literature

In fact, Lilienthal (1960), who was a Director of the Tennessee Valley Authority and Director of the Atomic Energy Commission at that time, was first to introduce the term ‘Multinational Corporation’ in 1960. At a symposium held on the Occasion of the Tenth Anniversary of the Graduate School of Industrial Administration, Carnegie Institute of Technology, Lilienthal (1960), distinguished between portfolio and direct investment and then defined “multinational corporations – which have their home in one country but which operate and live under the laws of other countries as well...”

The MNC is commonly defined as an enterprise which controls and manages assets in at least two countries. MNCs can be divided into three types. One turns out essentially the same lines of goods or services from each facility in several locations, and is called the horizontally integrated MNC. Another, the vertically integrated MNC, produces outputs in some facilities which serve as inputs into other facilities located across national boundaries. The third is the internationally diversified MNC, whose plants' outputs are neither vertically nor horizontally related (Caves, 1996; Teece, 1986).

Most scholars and researchers in international business (e.g. Buckley & Casson, 1976; Caves, 1996; Dicken, 1998; Dunning, 1993a; 1993b; UNCTAD, 1997; Vernon, 1971) have provided various definitions of the term ‘multinational corporation’. The adoption of different definitions is clearly understood that there are different objectives/functions by individual researchers. Among those who took up the challenge of analyzing MNC operations, Vernon (1971) eventually emerged as the most influential. He stated that MNCs represent a cluster of affiliated firms located in different countries that are linked through common ownership, draw upon a common pool of resources, and respond to a common strategy. All this means a high degree of integration among different units of the firm.

Bucklay and Casson (1976) define the multinational as a firm in which the coordination of production without using market exchange takes the firm across national boundaries through FDI. The focus here is on legal ownership of operations in at least two countries as the defining features of what constitutes a multinational. Dunning (1993b) describes MNC as an enterprise that engages in FDI and that owns or controls value-added activities more than one country. MNCs have many dimensions and can be viewed from several perspectives such as ownership, management, business strategy, structural, and so on. On the perspective of business strategy, Perlmutter (1969) states that MNCs may pursue policies that are home country-oriented or host country-oriented or world-oriented.

Similarly, Dicken (1998) defines MNC as “a firm, which has the power to co-ordinate and control operations in more than one country, even if it does not own them” (p. 8). Generally, MNCs do own assets in foreign countries. This definition on the other hand, implies that multinationals do not have to own productive assets abroad in order to be able to control. They however, can have control by getting involved in legally collaborative relationships across national boundaries.

The United Nations prefer the term "multinational" that signifies the activities of the corporation or enterprise involve more than one nation. They assert that certain minimum qualifying criteria are often used in respect of the type of activity or the importance of the foreign component in the total activity of an MNC. The activity in question may refer to assets, sales, production, employment, or profits of foreign branches and affiliates (UNCTAD, 1997).

The term ‘Multinational Corporation’ is distinct from ‘International Corporation.’ The latter term was used to designate a company with a strong national identification. A MNC consists of the parent company, (normally the head office based in their home country) and its affiliates (either subsidiaries or associates in other countries abroad). The  parent company owns some percentage of the share capital in order to be able to exercise control; that is, its overseas activities were an extension of its domestic functions and its decision-making centre remains at home (Wilczynski, 1976). Rugman and Collinson (2009), who prefer to use the name multinational enterprises, say that the concept of the MNE is that “the difference between Domestic Corporation and the MNE is that the latter operates across national boundaries” 

Do MNCs help or harm developing countries?

The presence and activities of MNCs in developing countries have been a subject of controversy in discussions on development. According to Borensztein, Gregorio, and Lee (1998) “Governments are liberalizing MNC regimes as they have come to associate MNCs with positive effects for economic development and poverty reduction in their countries” (p. 115). Of course, in practice, objectives to attract MNCs differ from country to country and the impact of MNCs is not always desirable. However, economic growth and industrialization trigger globalized world that enables MNCs to become a useful tool for economic growth. 

 Positive impact of MNCs:

The role of MNCs varies from country to country. In some countries, it is relatively insignificant, whereas in others it plays a key role. The positive case stresses the net positive benefits of FDI. The negative case coming out of radical and dependency analyses places the focus on the negative impact of foreign firms. This paper focuses on both the impacts of MNCs operation, especially in developing countries. The descriptions of the positive impact are presented as follows:

 Economic Growth: MNCs can be considered as a major stimulus to economic growth in developing countries.  According to orthodox liberals, inward FDI provides external financing to compensate for inadequate amounts of local savings and foreign aid. In general, FDI inflows are more stable and easier to service than commercial debt or portfolio investment. In the 1990s, FDI in developing countries accounted for average $150 billion a year. However, in 2005, net flows of FDI to developing countries averaged around $334 billion annually, which shows a dramatic increase of FDI in developing countries. According to UNCTAD World Investment Report, FDI in developing countries increased in 2010 and stands as nearly $574 billion annually (UNCTAD. 2010). FDI is thought to bring certain benefits to national economies. It can contribute to gross domestic product (GDP), gross fixed capital formation and balance of payments. There have been empirical studies indicating a positive link between higher GDP and FDI inflows. For example, in Bangladesh the inward FDI inflow as a percent of gross fixed capital was 3.5%, which was attributed to lead higher GDP growth as 6.27% in 2004 (BBS 2006). However, according to BBS (2011) the GDP growth rate slightly decreased in 2010 and stands as 5.83% in Bangladesh (p. 387).   

 Export-based Industrialization: Building export capacity is very important for developing countries if they want to benefit fully from international trade and investment opportunities. Therefore, the government must seek to develop a regulatory framework that could assist local and regional areas in designing and implementing active policies for building export competitiveness. The countries in East and Southeast Asia, who had attracted MNCs as part of their export-oriented strategies, 

provided clear evidence that MNCs could vitally assist in export-based industrialization in developing countries. MNCs helped such successful integrators, for example, Malaysia and Thailand become a part of “global commodity chains” linking developing country producers to advanced-country consumers. Thus, during the 1980s and into the 1990s, many developing-country governments liberalized their policies on foreign direct investment (Grieco & Ikenberry, 2003). Singapore effectively tailored industrial policies to attract multinationals and successfully managed MNCs productively to complement indigenous industry. Singapore benefited from neither rich natural resources nor proximity to large economic markets. Strong leadership, pro-active industrial strategy, and a consistent and favourable policy towards MNCs, enabled it to capitalise on MNCs investment (Velde, 2001).

Capital Formation: Capital represents an essential economic asset in developing countries. A significant benefit of MNCs is their injection of capital into a developing country, bringing financial resources otherwise unavailable through their own capital and access to international capital markets. An important share of the total capital flow to developing countries comes from MNCs’ investments; estimations vary from 14.9% to 51.5% of the total flows to developing countries (UNCTAD, 1994; p. 409).  Studies show that foreign multinationals are indeed more productive, pay higher wages and are more export intensive than local firms (Markusen, 1995). MNCs contribute important foreign exchange earnings through their trade effect of generating exports. By producing goods for export, the balance of payments of the developing countries enhance the economic growth, becoming a more attractive prospect for further investment as well as contributing to the growing role of developing countries in world trade. MNCs provide immediate access to foreign markets and customers which would take domestic firms years of investment and effort to acquire for themselves (Strange, 1995).

Technology/R&D: Technology development and work processes improvement differ greatly in developing countries, and even in some cases between regions. For example, Bangkok or the South of Thailand is more developed than some Northern areas. MNCs contribute greatly in providing the foundation for technological development. A vital resource gap filled by the MNCs, as proponents say, is technology. The desire to obtain modern technology is perhaps the most important attraction of foreign investment for developing countries. MNCs allow developing states to profit from the sophisticated research and development carried out by the multinationals. They make available technology that would otherwise be out of the reach of developing countries (Spero & Hart, 2010). MNCs train local staff, stimulate local technological activities, and transfer technology throughout the local economy. Accordingly, technology improves the quality of production and encourages development (Page, 1994).

 Cleaner Environment: FDI through MNCs may help increase the level of overall domestic environment. MNCs are more likely to produce a cleaner rather than a more despoiled natural environment. MNCs from developed countries, preferring to have a single set of rules for all competitors, may consequently prefer that developing countries have environmental standards similar to those in the developed countries (Garcia, 2000). In addition, MNCs tend to bring their higher pollution control and energy-efficiency standards with other countries when setting up operations overseas. It can be evident from a study on 300 Indonesian enterprises which conducted in 1996. In this study, comparison of the pollution levels in waste streams confirmed that the enterprises that had foreign 

ownership had superior performance compared to the private and state owned firms (GEMI, 2006). 

Poverty Alleviation: MNCs are the key to poverty reduction. The multinational corporations encourage people to produce a certain product, and these products make the workers’ life improved. For example, the DaimlerChrysler project in Brazil. DaimlerBenz, in 1991, looked for ways to use renewable natural fibbers in its automobiles. For the Brazilians, life changed dramatically for the better; children were able to attend school, health facilities have improved and people are more active in local politics. The liberals believe that industrialisation through MNCs combined with a free market economy has allowed many previously agrarian based economies to grow out of poverty. “The international operation of these corporations is consistent with liberalism but is directly counter to the doctrine of economic nationalism and to the views of countries committed to socialism and state intervention in the economy” (Gilpin, 1987; p. 248). Liberals show that for those that have chosen to become integrated into the world economy, the rewards have been significant. In fifty years, Taiwan has transformed from an agrarian economy which was poorer than much of Sub-Sahara Africa to a country now as rich and prosperous as Spain. From 30 million people entrapped in absolute poverty in the 1950s, it now has virtually none absolute poverty and real wages are now ten times higher than they were fifty years ago (Norberg, 2003).

 Employment Generation: MNCs play a role in creating new kind of jobs and therefore can contribute to employment generation and the increase of quality of life of the employees in developing countries. Those who argue for MNCs, state that MNCs generate employment worldwide. Of the 73 million jobs created through MNCs, only 12 million are located in developing countries amounting to 2% or 3% of the world’s workforce. MNCs account for one-fifth of all paid employment in non-agricultural sectors and creates a large number of jobs in the manufacturing industries, especially where technology is concerned (UNRISD, 2010). In addition, MNCs have a positive impact on welfare of the employees. Supporters say that the creation of jobs, the provision of new and better products, and programs to improve health, housing and education for employees and local communities improve the standard of living in the developing countries. Moreover, having a closer look at empirical data it gets clear that foreign-owned and subcontracting manufacturing companies in developing countries tend to pay higher wages than the local firms. Furthermore export oriented companies pay higher wages the non exporting ones. In Mexico, for example, exporting firms (i.e. 80% of all sales are for export) paid wages at least 58% higher than non export oriented firms. In 2001, a study found that foreign-owned plants paid 33% more for blue-collar workers and 70% more for white-collar workers than locally owned firms in Indonesia (Lozaday, 2001).

 Building Competence and Skill: Building skills of local workers has proved to be essential to the successful transfer and diffusion of technologies and knowledge. Foreign investment provides managerial skills and competence that improve production. Whenever it is possible, MNC’s prefer to hire local people than the use of expatriate employees. However, the lack of an adequately skilled workforce in the developing countries presents a challenge to overcome. Low education levels of potential employees are a particular impediment to maximizing a local employee base. Therefore, MNCs are often engaged in capacity building efforts and sometimes deliver education and training to groups in order to help them increase production levels and to perform work routines more efficiently. There is a recognized need to adjust approaches to education and 

training based on local conditions and local knowledge and skill levels. It has clear benefits to engaging local based trainers, and thus local Universities are seen by MNCs as a good pool of competencies that will help ensure the sustainability of the technology transferred. Universities and R&D institutions understand the local context and possess the knowledge that is valuable to MNCs. Thus they are considered as the right partners for conducting joint research projects for technology maintenance or improvement, leading in some cases to new and innovative products or services (Worasinchai & Bechina, 2010)

 Negative impact of MNCs:

In reverse, this positive role of MNCs can be disputed by those who claim that the net effect of MNCs investment is negative for host countries. Critics of the multinationals have challenged this positive view of the role of MNCs. The discussions of negative impact of MNCs are presented as follows:

 Prevent Autonomous Development: “Dependency is a situation in which a certain number of countries have their economy conditioned by the development and expansion of another…placing the dependent countries in a backward position exploited by the dominant countries” (Santos, 1970; p.180). Dependency theorists understand the current underdevelopment of developing countries to be a process within the framework of the global capitalist system. They understand global capitalism as a process that generates wealth and development in the industrialised world at the expense of creating poverty as an intentional by-product of the West and perpetuating underdevelopment in developing countries. According to dependency theorists, MNCs prevent the developing countries from achieving genuine autonomous development. For example, MNCs prevent local firms and entrepreneurs from participating in the most dynamic sectors of the economy; they use local capital rather than bringing in new capital from the outside; they increase income inequalities in the host country; and they use inappropriate capital-intensive technologies that contribute to unemployment (Moran, 1978).

 Outflow of Capital: Some critics believe that FDI in developing countries actually leads to an outflow of capital. Capital flows from South to North through profits, debt service, royalties, and fees, and through manipulation of import and export prices. Such reverse flows are, in themselves, not unusual or improper. Indeed, the reason for investments is to make money for the firm. What certain critics argue, however, is that such return flows are unjustifiably high. Critics point out that the average return on book value of U.S. FDI in the developed market economies between 1975 and 1978 was 12.1%, whereas the average return in developing countries was much higher as 25.8% (Moran, 1978).

 Exploit Worker: Critics charge that many MNCs enter developing countries in order to exploit their cheap labor and abundant natural resources. Companies such as Reebok, Nike, and Levi Strauss have exploited the human labor in Indonesia. Workers live in deteriorating, leaky, mosquito – infested apartments and only earn a mere $39 a month for producing thousands of products worth well over $100 each. Indonesia’s economy is booming because of massive direct foreign investment while the cheap labour is suffering from inhumane living conditions and illegal wages (UNCTAD, 2006). MNCs adversely affect their workers, provide incentives to worsen working conditions, pay lower wages than in alternative employment, or repress worker rights (Drusilla, Alan, & Robert, 2002). Critics also argue that MNCs do not benefit developing countries labor. MNCs 

make only a small contribution to employment, and they discourage local entrepreneurs by competing successfully with them in local capital markets by acquiring existing firms, by using expatriate managers instead of training local citizens, and by hiring away local skilled workers.

 Environment Pollution: With regard to the environment, international big business is both the creator of pollution and the only resource available for its cleanup. The MNCs' record on pollution pales in comparison with those of many local businesses and state-owned enterprises: Critics allege that MNCs have – in part due to their sheer size – caused significant environmental damage in developing countries. Because MNCs have operated for a long time and in so many countries, there undoubtedly have been cases where these criticisms are accurate (Stopford, 1998). In all parts of the world, mining operations have generated severe environmental degradation and pollution, including the discharge of toxic substances into river systems, large volume waste disposal, the inadequate disposal of hazardous wastes, and the long run impacts of poorly planned mine closure.   Multinational oil companies have been the target of protest and criticism for widespread pollution and human rights violations in the developing countries, for example, Nigeria, Indonesia, and, increasingly, the Caspian region.

 Tax Evaders: The issue of tax evasion by MNCs continues to generate acrimonious debate, despite guidelines produced by the Organisation for Economic Cooperation and Development (OECD). Multinational corporations protest that they pay their taxes responsibly. For example, the U.S. Chamber of Commerce in Bangkok claimed a few years ago that MNCs paid 70% of Thailand's corporate taxes, implying considerable tax evasion by the locals. But even this seemingly simple claim was clouded by the intricate workings of the local tax code.  The debate will most likely continue as a hidden technical subject, leaving public opinion unaltered in its negative perception (Stopford, 1998).

Organized Crime: The introduction of famous brands into developing countries by MNCs has provided an irresistible lure to criminal organizations to branch out into this lucrative area of crime. In East Asia - the hotbed of counterfeiting - criminal organizations involved in gambling, prostitution, smuggling, narcotics, and human trafficking have now migrated to counterfeiting because of its highly lucrative rewards and the low-risk nature of the crime. Penalties for trafficking in narcotics are notoriously severe in Asia. Long prison sentences and capital punishment are common for narcotics violations (Chow, 2011).  Organized crime is a serious global problem. It existed long before counterfeiting at its current levels emerged. But the emergence of the global trade in counterfeit goods has provided organized crime in developing countries a new and highly lucrative means to earn profits.

 Health and Safety Risks: Another type of secondary consequences suffered by developing countries is health and safety hazards caused by the proliferation of substandard counterfeit medicines. According to some recent media accounts, 10% of the world’s drugs are counterfeit; fake baby infant formula, cough syrup, and other medicines have led to serious illness or death. However, almost all of these harms to human health and safety occur in developing countries, which have weak border control systems that allow counterfeits that are mostly manufactured in China to pass through undetected (Chow, 2011). Almost no serious health or safety incidents have occurred in advanced industrialized countries, such as the United States and many European countries. Consumers in these countries are too savvy and distribution networks are too professional to allow low-quality medicines to penetrate distribution channels to reach consumers. As with the other harms associated with counterfeiting, developing countries tend to suffer the most harm.

. Case Studies of MNCs

This part discusses three case studies that reflect the positive, negative, and mixed impact of MNCs on developing countries.

Case 1: Phillips Petroleum Company: Environmental Excellence in China-A concern of GEMI[1]

Phillips Petroleum Company has a long standing tradition of protecting the environment in areas where it has business operations. In 1997, Phillips decided to share its environmental commitment with the people of China by developing a multi-year environmental initiative entitled “Search for Solutions,” in conjunction with the State Environmental Protection Agency (SEPA) and non-governmental agencies from the United States. Over the course of five years, students from five major cities in China will take part in activities designed not only to raise their awareness but to stimulate new ideas on ways to protect natural resources. To support the environmental initiative, Phillips has committed $500,000 to be distributed in five communities where Phillips operates: Beijing, Lanzhou, Shanghai, Shenzhen, and Tianjin. Although the overall program will be coordinated by Phillips, the environmental protection bureaus (EPB) from each of the five cities will help administer the activities. The funding provided:

i. Environmental awareness handbooks for high school students,

ii. Earth Vision posters,

iii. Phillips Environmental Partnership (PEP) Grants in which students actively participate in such things as water quality testing, air sampling, and other hands-on activities, and

iv. Children’s work/coloring books.

Additional activities will likely include field trips, environmental awareness videos, exchange programs with U.S. educators, and additional PEP grants. Phillips kicked off the environmental initiative in China on Earth Day 1998 with a water quality testing program. Students from schools in Beijing performed water quality testing of estuaries with test kits purchased by Phillips. Also, SEPA distributed Phillips-funded Earth Vision posters as part of a national environmental awareness tour on World Environment Day. The “Life Engineer” program is another Search for Solutions activity supported with Phillips funding and employee volunteers. Life Engineers is a special, experiential, out-of-class- room program that provides Chinese high schools students opportunities to learn about local environmental conditions and contribute to community environmental projects. In one 1998 activity in Lanzhou, more than a thousand students toured the Lanzhou Chemical Industry Company, and participated in monitoring activities. Under Phillips’ leadership, Search for Solutions has established itself as a national initiative that helps Chinese youth become good environmental citizens through education and community service. During the past year, strong working relationships were established with local EPBs in the five major municipalities where Phillips has business operations. The Search for Solutions initiative was featured as a model program in the June 30, 1998, China Daily editorial. Search for Solutions continued to build on the successes of 1998 by continuing three core programs in 1999, PEP grants, environmental handbooks on local environmental conditions, and Earth Vision posters. Members of Phillips’ Health, Environment, and Safety team join Beijing school children as they celebrate Earth Day ‘98. 

Case 2: The Abidjan Tragedy and Trafigura

In August 2006, disaster struck the Ivory Coast having been devastated by years of civil war, which has been trying to recover under a fragile government established under the supervision of ONUCI, the United Nations peace process for the Ivory Coast. A Panamanian flagged ship unloaded a toxic waste shipment in Abidjan, having been unable to unload the shipment in the Netherlands, reputedly because of cost implications. There have been reports of deaths and thousands requiring treatment following the dumping on open-air sites (Greenpeace, 2006; An African dumping ground, 2006). Missions from the World Health Organisation and the United Nations Disaster Assessment and Coordination have been dispatched to Abidjan. This ship was reported to have been leased to a MNC, Trafigura Ltd. It specialises in the energy and base metals markets. Trafigura maintains 4 data centres in addition to the 55 trading offices in 36 countries in Europe, North, Central and South America, Africa, Asia and Australia. Trafigura had a joint venture agreement with Emirates General Petroleum Corporation and BP Singapore PTE Limited to construct a new gasoline storage and blending facility at Jebel Ali Free Zone in UAE at a total investment of US$ 33 million (Energyme, 2004). By entering a tripartite agreement, the state controlled corporation, with its 60% interest, was able to retain an element of control over the project and also the employment opportunities. It has been stated by the Chairman of Trafigura that once the project has been completed, UAE will be benefited from the international trading opportunities created by Trafigura. However, these real benefits that accrue to UAE, i.e., a developing country must be weighed against the disadvantages. The environmental disaster at Abidjan gives a clear example of a developing country suffering from the dumping of dangerous waste in an ill-equipped and unregulated economy, which led to death, suffering and the dismissal of a fragile government.

 Trafigura case study shows that, while it has brought substantial benefits to host countries, it will attempt to circumvent regional, national or international regulations in order to realise greater profit for its shareholders, even at the expense of the host countries.

Case 3: Mixed Record: The Mexican Experience

For Mexico, FDI was the prize of the NAFTA integration process. The hope was that FDI inflows would increase economic growth and bringing social and environmental benefits by absorbing rural migrants - displaced from by agricultural liberalization - into new, higher paying urban-based jobs, and by transferring cleaner technologies and better environmental management practices.

In the event, the results have been mixed. U.S. FDI into Mexico has increased by a factor of ten since 1985, reaching $24 billion in 2001, contributing to a massive influx of  internal migrants to urban areas. Between 1980 and 2000, population more than doubled in FDI-laden areas, while the population of Mexico as a whole grew by less than forty percent.

What is less clear is whether the lives of Mexico’s working and poor people have substantially improved. According to the OECD, the swollen urban population far exceeds the infrastructure capacity of host communities to manage sewage and waste, provide sufficient water, and protect air quality. Wages in foreign firms are lower than the mean wage in Mexican manufacturing as a whole--and have fallen in real terms by more than 10% since 1987. Moreover, the large FDI inflows of the last decade may not be sustainable. From the middle of 2001 through the end of 2002, foreign-owned firms dismissed 287,000 workers or one in five of all such workers. The environmental benefits of FDI have also been elusive. A World Bank study found no correlation between foreign-ownership and firm-level environmental performance in Mexican industry. Rather, the key variable was the strength of state regulation (Dasgupta, Hettige, & Wheeler, 2000).

These trends mask some “best practices” that can serve as models for a more comprehensive sustainable investment strategy. Some foreign firms, including Dutch steel companies and U.S. chemical firms, have offered higher wages, better working conditions and/or better environmental standards. Some have also negotiated relationships with host communities for public infrastructure and social services (Gentry, 1998).

Unfortunately, these sustainable development success stories are an exception rather than the rule. Between 1985 and 1999, rural soil erosion grew by 89%, municipal solid waste by 108%, and urban air pollution by 97% (Gallagher, 2003). The Mexican government estimates that the economic costs of environmental degradation have amounted to a staggering 10% of annual GDP, or $36 billion per year. These costs dwarf economic growth, which amounted to only 2.6% on an annual basis.

Unless economic integration is coupled with strong environmental regulation and enforcement, pollution is likely to worsen.  Since NAFTA took effect, however, real spending on the environment has declined 45%, and plant-level environmental inspections have shown a similar drop.

CONCLUSIONS AND POLICY IMPLICATIONS

Studies over a period of years indicate that the impact of MNCs on host States is neither as positive nor as negative. It is true that MNCs play an important role in the developing countries. They can create more employment opportunities for huge labour force, train them and promote the development of high level skills. Moreover, MNCs help increase GDP growth and capital formation, reduce poverty. However, MNCs can be guilty of pollution or human rights abuse. Critics of MNCs alleged that MNCs want to reduce their production costs, seek out developing countries with flexible environmental regulations and undertake in those countries productive activities that exacerbate both local and global environmental problems. Instead of adhering to either, a positive or negative overview this perspective recognizes that the costs and benefits of FDI by MNCs will vary from country to country and also that what constitutes costs and benefits will vary depending on the values of the observer.

Available evidence suggests that the impacts of FDI in developing countries may be positive or negative, depending on a variety of variables, mostly having to do with host country policies. One study found that the impact of FDI is significantly positive in “open” economies, and significantly negative in “closed” economies. Others have found that positive impacts depend on the effectiveness of domestic industry policies; and on tax, financial or macroeconomic policies. A World Bank study found that the impacts of FDI depend on the industry, as well as host country policies.

Both economic theory and recent empirical evidence suggest that FDI has a beneficial impact on developing countries. But recent work also points to some potential risks. Therefore, a tentative conclusion of this essay is that MNCs may promote economic development by contributing to productivity growth and exports in developing countries. However, the exact nature of the relation between foreign MNCs and economies of developing countries seem to vary between industries and countries. It is reasonable to assume that the characteristics of the developing country's industry and policy environment are important determinants of the net benefits of FDI. Policy recommendations for developing countries should focus on the following issues to improve the investment climate for all kinds of capital, domestic as well as foreign:

1. Reduction of Bureaucratic Complexity:  Governments of the developing countries should reduce the restrictions in establishing the MNCs. They should simplify the industrial sanctioning procedure and keep free all the foreign investors from unnecessary harassment while registration of firms is going on.
2. Development of Infrastructure: Governments of the developing countries should take all out efforts to develop infrastructure facilities. Problems of gas, water, electricity, warehouse, port, and transport should be removed.
3. Continuation of Policies: For attracting MNCs, continuation of economic policies despite changes in governments must be maintained in the developing countries.
4. Avoidance of Confrontational Politics: Political consensus among political parties is essential for establishing MNCs in the developing countries. Political stability is a critical consideration to foreign investors when they think about investment in any country.
5. Reduction of Corruption: In order to uphold their position in the world as the destination of MNCs, developing countries should take positive initiatives to reduce massive corruption. They should make judiciary services independent and encourage good governance as well.
6. Improvement of Law and Order Situation: Improved law and order situation is one of the pre-conditions for MNCs sustainability.
7. Development of Skilled Labor: Developing countries should ensure available skilled, experienced, trained, and educated labor force to attract foreign investors in establishing the MNCs.
8. Stability of Macro Economic Situation: Over all macro economic stability and its continuity is also important for not only attracting MNCs but also ensures profitability from it.
9. Political Stability: Stability means progress. Developing countries, therefore, should be sincere and committed to ensure their political stability to attract MNCs within their boundaries.
10. Foreign Exchange Reserve: Developing countries should increase the foreign exchange reserve and keep currency value more or less stable to keep the benefits from MNCs.