Multinational corporations are the drivers of global value chains The significant contributions of multinational corporations to global

Multinational corporations are the drivers of global value chains

Multinational corporations (MNCs) are firms that conduct direct business activities and own assets in at least two countries (Dietrich and Krafft 2012). Although cross-border direct business activities date back a long time (for example, the British East India Company began its operations in the early seventeenth century), the real forerunners of MNCs were the nineteenth century’s joint stock companies. Early MNCs invested abroad primarily to seek raw materials from developing countries. After World War II, many MNCs began operating in manufacturing, and the past three decades have seen more geographically fragmented activities in both manufacturing and services.

The internal organizational structure of companies evolved alongside developments in their activities and geographic scope as well as progress in communication and transportation technologies. Most early companies operated in a single sector with a functional structure. The multidivisional form, in which divisions are established along product lines, emerged only in the twentieth century. A further development, the matrix structure, allowed product lines and geographic lines to be considered simultaneously. Advances in information and communication technologies (ICTs) greatly reduced communication costs; transportation costs also fell dramatically in the past few decades, spurring a wave of globalization. MNCs increasingly outsource to and develop business activities with a variety of external partners, ranging from subcontractors to suppliers to partners in research and development (R&D) or production activities. New structures have been developed to account for these external networks as well as for networks of affiliates internal to the companies (Dietrich and Krafft 2012).

Because of these developments, MNCs have proliferated since the 1970s. Global estimates indicate that there were roughly 7,000 parent MNCs in 1970; this number had jumped to 38,000 by 2000 (OECD 2018) and was estimated at more than 100,000 in 2011 (UNCTAD 2011). Together, these MNCs had close to 900,000 affiliates in foreign countries. Most MNCs originated in developed countries (70 percent according to UNCTAD [2011]), although more and more MNCs are headquartered in developing countries, and those MNCs are growing rapidly. In 2019, 12 companies headquartered in developing countries were among the world’s top 100 nonfinancial MNCs as ranked by foreign assets, compared with only 2 such companies in 2003 (UNCTAD 2005, 2020).

Foreign direct investment (FDI) is the primary form of global expansion for MNCs, and until recently it was their defining type of investment. The IMF (1977) sets a threshold of 10 percent as the minimum equity ownership necessary for a parent company to be considered to have a controlling interest in a foreign affiliate. Foreign investment involving a lower percentage of equity is classified as portfolio investment.1 FDI flows consist of equity capital (assets and liabilities), reinvested earnings (net), and other capital (such as intercompany loans). A direct investment enterprise may be (a) a subsidiary (an enterprise of which more than 50 percent is owned by a nonresident investor), (b) an associate (an enterprise of which 10 percent to 50 percent is owned by a nonresident investor),