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The contemporary capitalist system is led by a relatively small group of companies, numbering in the thousands. These companies are known by various names, including multinational corporations, transnational corporations, and multinational enterprises (MNEs).
It is estimated that these organisations are responsible for 33 % of global output, 49 % of exports and 23 % of global employment.
“There are however certain dimensions to these organisations that are particularly puzzling,” notes CORPLINK project coordinator Ronen Palan, professor of International Political Economy at City, University of London, United Kingdom.
“Although we speak of the likes of Apple and Amazon as singular powerful economic organisations, these organisations actually consist of separate corporate entities and subsidiaries, each of which is treated as an independent corporation,” he explains.
Another puzzling factor is that, rather than developing lean, efficient structures, modern multinationals appear to embrace organisational complexity. Palan points out that the top 100 non-financial firms in the world each possess in excess of 700 subsidiaries on average. These subsidiaries are held in organisational structures that often consist of complex branches and chains of ownership.
“While we suspected that this complexity was connected to costs, such as taxation, we really didn’t know exactly why MNEs are becoming more organisationally complex,” adds Palan. “We also didn’t know exactly how these organisations evolve.”
Undertaking equity mapping
The EU-funded CORPLINK project, supported by the European Research Council, sought to better understand the character and behaviour of MNEs by mapping out this organisational complexity. This was achieved via a technique called equity mapping. Around 200 equity maps were generated, including 100 of the largest non-financial firms in the world.
This process involved carrying out extensive interviews with lawyers and accountants, to identify specific common structures and financial arrangements. The overall causes and consequences of these structural features – such as establishing subsidiaries in low-tax jurisdictions – were then analysed, to help the team achieve a better understanding of the modern MNE.
“We wanted to be able to use this mapping dynamically, to show how organisations evolve year by year, and how they transfer funds between different arms of the organisation,” says Palan.
Explaining global economies
Palan and his team confirmed that MNEs are clearly structured in part to effectively interact with political systems, i.e. with national rules and regulations. “Certain structures embedded in these organisations are used for specific purposes, such as dealing with tax, liability, or to support the corporative narrative,” he explains.
“Nonetheless, each organisation is unique. Even the best lawyers and accountants we talked to couldn’t explain everything we were seeing.”
In addition, certain national characteristics have become apparent. For instance, American firms tend to be far more organisationally complex internationally than at home. “Put simply, the US is encouraging tax avoidance by the US corporate sector abroad,” says Palan. A follow-on conclusion from this is that Europe has become the playground of global tax avoidance strategies.
“What we found was that the modern MNE optimises price and costs by playing national rules off of one another,” remarks Palan. “They do so by controlling the direction of investment, dividends and other flows through various jurisdictions in ways that exploit gaps, loopholes or omission in laws of one country against the other.” In other words, arbitraging rules has become a key competitive weapon for the modern MNE.
These findings could help academics to reconceptualise and better explain the global economy. This in turn could lead to better policymaking, and the closing of loopholes. The equity mapping approach has already been used to support the research of a European parliamentary group and the Organisation for Economic Co-operation and Development (OECD) and to aid investigative journalists.
“Economists tend to think of markets as abstract smooth spaces without boundaries,” he notes. “As this mapping exercise has shown, the real global market is dissected among jurisdictional authorities, each with their own rules of contract, property, governance and taxation.”