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How Multinational Firms Are Impacting Economic Growth And Tax Policy

Harvard Business School professor and corporate finance expert C. Fritz Foley on the Walker Webcast

Multinational firms have always been a major topic of discussion in the corporate world, from their power and influence to the amount of taxes they pay to the regulations surrounding them. 

On Tuesday, the European Union government and parliament negotiators reached a deal that will require multinational companies to disclose how much revenue and tax they pay in the EU and how much they pay in countries considered tax havens by the EU. This is part of the ongoing debate happening in the U.S. and abroad about the past, present and future of multinational firms. 

Harvard Business School professor and corporate finance expert C. Fritz Foley is no stranger to this debate. He has published papers on investment, capital structure, working capital management, dividend policy, joint ventures, intellectual property and corporate tax policy, and he is a research associate in the National Bureau of Economic Research’s Corporate Finance and International Trade and Investment programs. 

Foley, along with fellow economics experts James R. Hines Jr. and David Wessel, published the book Global Goliaths: Multinational Corporations in the 21st Century Economy.

On this week’s Walker Webcast, Foley went into detail about the state of multinational corporations, from common misconceptions to company turnover to criticism of whether they pay their fair share in taxes. 

When asked whether multinational firms are on the decline as the U.S. moves toward a more service-driven economy, Foley said that there is no shortage of multinational service firms, including banks, accounting firms and consulting firms, and even tech firms that were once U.S-centric are becoming multinational.

One example Foley gave to illustrate the growth power of multinational firms is China. On Fortune’s list of the world’s largest companies in 1988, of the top 15, nine were in the U.S., five were in Europe and one was in Japan, while there was not a single Chinese company in the top 50 companies in the world. In 2019, there were 12 Chinese firms in the top 50. 

“If you have a huge economy to begin with and you’re growing at 7% or 8% a year, you’re going to take up a larger and larger amount of global economic activity,” Foley said. “It’s been an attractive market for U.S. multinational companies. We will continue to see a large number of firms serve the world from there. It’s here to stay."

He added that doesn’t mean that each individual company is here to stay. In a 2018 meeting with Amazon staff, Jeff Bezos famously said, “I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their life spans tend to be 30-plus years, not 100-plus years.” 

Walker & Dunlop CEO Willy Walker on the Walker Webcast

Foley agreed that the half-life of successful strategies is not that long, that we are going to see more turnover. But he said he believes it is a positive thing for the economy that successful firms can raise resources to grow and eventually dominate companies whose approach is not as viable as it once was. 

As for multinational firms and tax policy, Foley said he believes that this is a thorny issue that deserves closer scrutiny, especially when it comes to claims that U.S. multinational firms are dodging taxes by operating out of tax havens. 

“I’ve read things that are unfair,” Foley said. “It’s easy to paint multinational firms as places that avoid their fair share of taxes or pay a low rate, but I think we need to be quite careful about casting those allegations and thinking about the issues behind them.”

He said that he recognizes that there is high demand for government services and that those costs need to be covered, and that it is important to think about how corporate taxes can meet the revenue needs of governments. However, he said it isn't as simple as it sounds to move to a tax haven. If it were, then 100% of multinational firms would operate out of them, instead of the actual figure, which is closer to 50%. He added that firms that do have a presence in a tax haven could be inspired to do more business in the U.S. and the U.K. as a result. 

Foley went on to discuss some common misconceptions about multinational firms, namely that they are job exporters. 

“The story in the press is that multinational firms expand abroad and cut jobs at home, but on average, they are expanding both [at home and abroad],” Foley said. 

He added that not everyone is a winner when it comes to multinational activity, however, and that the U.S. needs to be better as a country to provide assistance to people whose jobs are moved offshore or those who lose their jobs due to new technologies. 

Foley pointed out that some companies that have a wide range of multinational consumers still operate primarily out of the U.S., such as Facebook, and while that’s certainly a boon for the U.S., that doesn’t mean we should be fighting for every company to operate solely on American soil. 

“There needs to be some balance there,” Foley said. "I think about the production and consumption side, and I like to think that multinational corporations play a role in the economic development of companies where they do operate. I don’t know how I would feel if every company did everything in the U.S. and there was just some consumption throughout the rest of the world.” 

On June 9, Walker will host David Faber, co-anchor of CNBC's "Squawk on the Street." Register here for the event.

This article was produced in collaboration between Walker & Dunlop and Studio B. Bisnow news staff was not involved in the production of this content.

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