Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Why Are Multinational Companies A Particular Target For Regulation?

From the 19th century there was a prominent shift from separate national economies to a global economy with the emergence of multinational companies, particularly in the United Kingdom and later on in the US. Since then, multinational companies are constantly targets for regulation. However all countries, regardless of size or power, all face difficulties of different degrees when trying to regulate these corporations. This essay will discuss what makes multinational companies a particular target for regulation, the array of regulation used, and the many difficulties these national regulators face in attempting to regulate these multinational companies.

MNC definition.

In order to understand why multinational companies are targets for regulation, it is first necessary to understand the definition of multinational companies. A Multinational company (MNC) is a company that controls assets in at least 2 countries. This involves a parent company in one country, which then controls an affiliate or subsidiary company in another country. Dr. Tindall defines MNCs in his book "Multinational Enterprises" as "a combination of companies of different nationality, connected by means of shareholding, managerial control or contract and constituting an economic unit".

Economic harm

Lawmakers around the world have ambivalent views towards MNCs for many reasons. Many countries realise that MNCs have to be controlled because of the harm they can cause countries economically and politically. More often or not, the MNCs seem to be able to hold countries to ransom. These are not just the third world countries but also the developed countries. In the undeveloped countries there is undoubtedly more favourable laws for these corporations to operate in for several reasons. For example, the laws regulating labour in companies operating in undeveloped countries are very unfavourable towards the worker, and even if a victim did have a case they are unlikely to be able to afford to go to court or would not have access to justice in the first place. The International Labour Organisation (ILO) Declaration of Principles on Multinationals and Social Policy states,

"Wages, benefits and conditions of work offered by multinational enterprises should be not less favourable to the workers than those offered by comparable employers in the country concerned".

In developing countries comparable employers may not exist and the ones that do are likely to have a very low standard for workers so the Multinationals, even if they provide a better quality of employment are very likely not to offer anything close to what they offer in Western developed countries. This is attractive to MNC's as they would not have to worry about legal claims against them and could in turn pursue higher profits from spending less. Furthermore, many counties have had to drop the 'red tape' to multinational corporations to attract inward investment. A typical example of this is the United Kingdom, which, as Muchlinski describes, "has traditionally welcomed inward investment under successive Conservative and Labour administrations". Examples of this include the repealing of the Exchange Control Act in 1987, which removed the most significant restrictions on inward and outward investment under English law. The UK along with the US typically have to try and strike a balance with more favourable investment laws as they have typically higher corporation tax rates than other countries such as Luxemburg or Ireland which tend to be a favourite countries for incorporation for companies as they have very low rates of corporation tax. Author Dambisa Moyo of 'How the West was Lost' states that the poor economic policies and the loss of technological advantage over the rest of the world has led to the West's relative decline. The policies of the west, she predicts will cause the GDP of China to overtake that of the US and UK in the not too distant future. The multinationals have been acting as a vehicle for the transfer of technology to the west as they are generally western companies that operate in the east such as China as by doing so puts their costs down. This results in much more business, productivity, and amounts of exports happening in the east.

Harm - tax avoidance

Another evident harm that has been brought to attention of the public in recent months is the fact that in countries such as the UK, many companies operate, employ workers, and make profits while paying little to no tax at all. For many years they have been avoiding tax by using legal loopholes causing billions of pounds worth of revenues that should be going to the UK government to go to low tax rate countries. The publications from the UK Parliament show that while revenues of tax going to the government rose in value by £4.5b in the year 2011-2012 from the previous year, at the same time there was a decrease in corporation tax revenues of £6.3b. A major factor in this is major corporations such as Starbucks and Amazon using transfer pricing to send the money to a company belonging to them, which is located in a low tax rate country. Transfer pricing is where a subsidiary in a tax haven can over-invoice the charge the parent for use of patent technology or the supply of products. This effectively makes it seem as if these corporations are not making a profit, when actually they are being transferred out of the UK.

Environment harm

The harm to the economy of countries is not the only evident problem. There is a huge problem with the effects MNCs are having on the environment and the health of country's citizens. Such examples of this include the case 'Re Union Carbide Gas Plant Disaster at Bhopal, India. India tried to claim $3.3 billion for compensation for the gas leak, which caused several thousand deaths and to affect the health over half a million Indian citizens. The Union Carbide Corporation US 2nd circuit case ended up being resolved out of court with Union Carbide paying around $470m, 15% of the amount claimed by India. Another example is the BP Deepwater Horizon case that involved an oil spill causing dramatic environmental effects to the Gulf of Mexico in 2010. Litigation is still going today and is bound to come to a settlement between the US and the corporations involved. The dispute over who is liable continues between BP, Transocean and Haliburton.

Difficulty regulators face

Countries have problems trying to regulate the MNCs for several reasons.

One problem is that there are territorial limits of national and regional regulation. This stops powerful counties being able to impose laws in different countries where the MNCs are making advantaging from while harming them at the same time economically. This can be shown from the case of Lonrho v Shell Petroleum where the defendants refused to give up documents in the possession of their wholly owned subsidiaries in Rhodesia and South Africa where the directors of those subsidiaries refused to disclose them. The Lonrho case is an example of extraterritorial enforcement being used. This is where the enforcing jurisdiction makes direct orders against the foreign units of the MNC, or takes non-judicial measures within its jurisdiction against the assets of the foreign entity, or denies it certain privileges usually given to enterprises engaged in the same business such as import licenses or tax credits. The extraterritorial application of law can have serious political effects. It can be seen as either an attempt by the regulating state to impose its policies on others. Also, the target's state's exclusive territorial sovereignty will have been infringed. This can lead to diplomatic conflict. Developing countries who rely on foreign aid are more likely to accept extraterritorial jurisdiction by power regulating states such as the US, China or the UK.

Race to laxity- Delaware states.

As it is quite evident that national and regional regulation has its limits, there is possibility of an international agreement between nations to try to come to a solution. In February of 2013, the G20 leaders met in Moscow to try to crack down on tax avoidance. The main support for this was UK, France and Germany. If successful, it could cause the profits of many corporations that enjoy low tax rates to decrease by a large amount. The actions they are trying to stop are the transfer pricing and what David Charny explains to be the race to laxity. This is where when one country lowers its tax rates or tries to make itself more attractive for Foreign Direct Investment (NYSE:FDI), there are certain countries who will always do one step further, therefore making it ever more attractive to MNCs. Charny explains a note able example of this in "An American perspective on the 'Race to the Bottom' in the EC". In the US, New Jersey became the most popular place in the first great merger wave in the 19th century with very favourable rules on the formation of trusts. The second wave of incorporation came 1920s and 30s. However, by this time Woodrow Wilson had tightened the state's corporate law that led to a huge shift of companies reincorporating in Delaware-drafted with the help of the multi billionaire DuPont family in a way to protect managerial and shareholder interests- appeared favourable to managers of corporations. Even now Delaware remains at the forefront of incorporation in America, with over 40% of NYSE companies and over 50% of Fortune 500 companies incorporated there. What the G20 leaders are trying to do is to stop the East becoming the international Delaware with very lax rules on incorporation that favour managerial and shareholder interests over those in the West, therefore taking away a large amount of money that was originally going to the Governments in the West.

Difficulty- separate corporate personality

Another problem that regulators have when trying to regulate MNCs is that of corporate personality. It is a very strong founded principle stemming from the UK case of Salomon v Salomon that stated that subsidiaries of a parent company are a different legal entity and have a different legal personality from their parent. This has a profound impact on the regulation of multinational companies as they can escape the consequences of negligence and liability to great extents by using many subsidiaries. An example of this can be seen in the case of Adams v Cape Industries where a victim of asbestos related cancer tried to sue the parent for 20m as the subsidiary only had 5m in assets. It was held he could not claim from the parent, as it was a separate legal entity. However, an important point was made in the Amoco Cadiz case, which came before the Adams case, which held that basically if the subsidiaries are wholly exercised and controlled by the parent company, the parent company will be liable for the actions of it's subsidiaries.

"Creative compliance" idea

It has been apparent that when national regulators try to impose certain regulations this can cause lobbying between the MNCs and politicians, or they reorder their business by shifting resources to other, more favourable jurisdictions. In turn they are, in the view of Professor Doreen McBarnet, avoiding regulations by following the letter of the law but are conflicting with the spirit of the law. This is what she calls "creative compliance".. It involves practices that might be illegal, indeed criminal, if legally structures in one way could be legally repackaged and claimed to be lawful.

Self Regulation has become increasingly active among MNCs. Self-regulation or self-monitoring involves internally produced company codes of conduct and industry codes for groups of MNCs in the same industry, for example, the Code of Marketing Practices developed by the International Federation of Pharmaceutical Manufacturers and Associations. This type of regulation is distanced from the existing centres of law-making such as national parliaments, global legislative institutions and inter-governmental agreements.

To conclude, multinational companies are particular target for regulation as nations try to strike a balance. They do this by having incentives to entice them to incorporate and produce jobs and bring wealth to their country. While at the same time, they try to protect the rights of their citizens and to bring wealth in through taxes. MNCs have been able to cause difficulty to the regulators as they have bargaining power from the wealth they offer and the competition from the East. The future ability of multinational company's to do this may disappear with international talks in the G20 and such proposals in the UK. These are highlighted by Professor Fiona MacMillan such as the UK Corporate Responsibility Bill, which proposes that companies with more than 5m in revenue are obliged to carry out its activities in accordance with laws and administrative practices of the countries within it operates.