Understanding the convoluted structures of modern multinational companies
Historically, the political sciences have described the state-market relationship as being an intricate balancing act. On the one hand, you have companies trying to advance the interests of their shareholders. Balancing this out is the government who, through regulations, works to ensure companies can produce goods and services without doing harm to the public. But globalisation has shifted that balance of power. “The rise of the multinational company has produced firms with turnovers comparable to the GDP of many midsize states,” says Ronen Palan, a researcher at City, University of London. According to Palan, these companies are responsible for a remarkable 33 % of the world’s output, 49 % of its exports, and nearly a quarter of all employment. “Because multinational corporations are extremely complex, traditional paradigms for understanding them no longer apply,” he explains. “That means a relatively small number of companies have a huge – and largely unchecked – influence over the global economy.” With the support of the EU-funded CORPLINK project, Palan is working to develop a new approach to studying what he calls ‘arbitrage power’. “Arbitrage power refers to the capacity of an organisation to shape the framework of the global economy in a way that benefits their own interests,” notes Palan.
Introducing equity mapping
Because this dimension of economic power is not yet recognised in political science literature, the CORPLINK team had to start from scratch. What they came up with is equity mapping. “Equity mapping allows us to dynamically show how a multinational company evolves year by year and, most importantly, how they are able to transfer funds between the different arms of the organisation,” remarks Palan. The European Research Council supported project created 200 such maps, including for the world’s 100 largest non-financial companies. “We used these maps to guide us as we tried to understand the purpose and function of these companies’ complex ownership structures,” adds Palan.
Giving governments the tools they need to push back
Following exhaustive analysis and countless interviews with lawyers and accountants, the equity maps started to become a little less convoluted. “We started to see how these complex organisational structures were indicative of the way companies interact – or avoid acting – with national rules and regulations, including taxation,” explains Palan. Specifically, researchers concluded that certain types of structures embedded within an organisation are used for specific purposes. “Multinational corporations will establish an entity specifically for tax or liability arbitrage purposes,” says Palan. “Sometimes these entities are for nothing more than to support a certain narrative the company wants to tell the market or public.” The advantage of such a structure is that it allows multinationals to optimise price and costs by controlling the direction of investment, dividends and other flows in ways that exploit gaps, loopholes or omission in the laws of one country against the other. “Arbitraging rules has become a key competitive weapon for many companies, making the modern multinational as much of a political actor as they are an economic one,” concludes Palan. “But with the new framework developed during the CORPLINK project, governments should be better positioned to push back.”
Keywords
CORPLINK, multinational companies, multinational corporations, multinationals, global economy, political science, globalisation, arbitrage power, equity mapping, taxation