On April 13, 2024, the Department of Digital Economy of Renmin University of China (RUC) held its inaugural meeting and the “Academic Forum on Future Economics in the Era of Digital Civilization”.

Professor Yan Bing, Deputy Dean of the School of Economics of NKU, gave a keynote speech titled Theoretical and Policy Research on Digital Multinational Corporations. This article is based on the content of Professor Yan Bing’s speech.

I present several inquiries and reflections derived from theoretical and policy research on digital multinational corporations (MNCs). My presentation today includes three aspects: the current state of development of digital MNCs, advancements in research about digital MNCs, and significant topics warranting further investigation.

The current state of development of digital MNCs

With the advancement of the digital economy, the international production of digital MNCs has expanded dramatically over the past decade. In comparison to traditional industries, products and services within the digital domain exhibit characteristics such as virtualization and low marginal transaction costs. Consequently, the ownership structure, internal governance methods and costs, and external transaction costs of digital MNCs have undergone significant transformations. As a result, the content of and approach to foreign direct investment (FDI) and international investment differ substantially from those of traditional MNCs. The World Investment Report 2017 was the first to summarize the characteristics of digital MNCs: a small international footprint with a substantial impact, indicating their propensity for light asset structures. Previously, the World Investment Report would release a top 100 list for traditional MNCs; however, in 2017, it began issuing a top 100 list for digital MNCs. Its list comprises two indicators: foreign sales and the proportion of foreign assets. It is evident that the ratio of domestically produced assets to foreign sales for digital MNCs stands at 1:1.8, whereas traditionally, these ratios hover around 1. This clearly demonstrates that digital MNCs differ from FDI in their international production and operations.

Digital MNCs can be classified into four categories: e-commerce, digital solutions, digital content, and internet platforms. In terms of geographic distribution, the 2017 report revealed that MNCs are concentrated in a select few developed countries, with roughly two-thirds or more of their parent companies and 40% of their subsidiaries situated in the United States. However, this situation has transformed. The Global Investment Trends Monitor Report 2022 updated the list, revealing that in comparison to 2016, the total sales of the world’s top 100 digital MNCs surged by 158% in 2021, with an average annual growth rate exceeding 21%. The growth rate of net income in 2021 reached as high as 60%. However, it is important to note that this is a unique circumstance, as the year 2020 was heavily impacted by the epidemic, resulting in a relatively low base, and thus, a rebound in 2021. While the United States continues to serve as the primary headquarters location for digital MNCs, there are clear distinctions in geographical distribution. It can be observed that China and certain developing economies have gradually become strategic choices for digital MNCs.

Following the epidemic, a notable trend emerged wherein global FDI plummeted by more than 40% in 2020 but experienced a significant rebound in 2021. However, global FDI entered a downward trend in 2022 and 2023. Nevertheless, compared to total FDI, digital MNCs demonstrated resilience, particularly in terms of greenfield investment. Despite being impacted by the epidemic, the greenfield investment of digital MNCs for 2022 and 2023 globally surged by up to 120% to 130% compared to the levels of 2019, 2020, and 2021. Amidst the sluggish global FDI trends, the growth rate of digital MNCs is exceptionally rapid, reflecting the current state of economic development.

Advancements in research about digital MNCs

The first part is the theoretical research of MNCs in the digital age. As the economy transitions into the digital era, the theory of MNCs has evolved from the traditional paradigm to emerging economies and, subsequently, to the theory of platform MNCs in the digital age.

Among the literature studying digital MNCs, the first category of literature studies the investment motivation of digital MNCs. Some studies indicate that the motivations for digital enterprises to invest internationally are diminished due to their reliance on Internet technology, which enables them to easily transcend geographic and national boundaries to deliver services to their target markets. So, there is diminished motivation to establish branches in international target markets. However, some research suggests that digital enterprises also engage in international investment. This is attributed to the global operational network facilitated by the Internet, which alters the cost and ease of international investment, making expansion more accessible. In this process, scholars have identified technology-seeking motives as a significant motivation for digital enterprises to partake in cross-border mergers and acquisitions.

The second category of literature studies the competitive advantages of digital MNCs. Traditional MNCs have advantages for international investment in the following three aspects: ownership, internalization, and location. During the industrial era, it was primarily the internalized advantages that mitigated the disadvantages faced by traditional MNCs as outsiders in the host country. In contrast, digital MNCs overcome the challenges of being outsiders in various countries and regions predominantly by externalizing the competitive advantages of the ecosystem. Moreover, such digital MNCs demonstrate agility and the ability to rapidly acquire new knowledge. The ability of rapid learning enables enterprises to bypass the traditional stage of accumulating knowledge and experience over extended periods in international investment, facilitating rapid internationalization. In contrast to the traditional ownership advantage rooted in asset transactions, contemporary digital MNCs witness the emergence of ownership advantage centered around digital networks. The global user network of digital platform-based enterprises emerges as a pivotal factor in international expansion.

The third category of literature examines the disparity between the location choices of digital MNCs and those of traditional MNCs. Jiang Dianchun found that the host country’s market size and geographic distance traditionally considered important for international investment, are no longer the most critical. Host countries can attract digital MNCs by establishing IT-skilled personnel as a distinct category of human capital. Furthermore, stability in the policy framework for digital investment, the digital philosophy system, and the cultural environment serve as additional important factors influencing location choices for digital MNCs. Additionally, intellectual property protection, which used to be an important factor for traditional enterprises, has become even more crucial for contemporary digital MNCs.

The second part is the research about the economic benefits of digital MNCs. First of all, some literature in this part has found that digital MNCs give rise to new economic formats, such as new retail, new finance, and new entertainment. Moreover, digital MNCs can empower international trade by reducing information asymmetry, transaction costs, and user search costs. The third category of literature finds that digital MNCs significantly impact the global value chain due to the trends of digitization, disintermediation, customization, and servitization. Digital technologies transform previously long, multi-layered value chains into shorter, more integrated ones by merging production stages. The fourth category of literature finds that digital MNCs also impact the business models and investment paths of traditional MNCs. This is because digital MNCs have led to international investment being characterized by asset-light operations overseas, low employment, changes in location determinants, a rising proportion of investment in services, more non-equity investment, and a more flexible global layout for MNCs. The fifth category of literature finds that digital MNCs can offer new solutions in corporate governance. Traditional MNCs primarily control parent companies and subsidiaries through equity arrangements and the division of asset ownership based on the principal-agent model. However, within the digital platform framework of digital MNCs, overseas business operations often involve minimal physical investment, relying instead on transactional data and information technology managed by the platform. Consequently, the core issue of ownership shifts from traditional physical assets such as plants, machinery, and equipment to virtual online data. As a result, the principal-agent relationship undergoes a significant transformation. Unlike traditional MNCs, which typically operate along a single line between subsidiaries and parent companies, digital MNCs consider multiple relationships, including various market participants, data providers, and platforms.

Significant topics warranting further investigation

There are four significant topics on the theoretical side.

The first topic is the location choice of digital MNCs. Just now we mentioned that although some scholars have found that factors such as host country market size and distance are no longer as critical. However, due to the divergence between choices of countries and financial market models for MNCs and traditional FDI theory and the location preferences of traditional MNCs, there is substantial research space in this area warranting further exploration.

The second topic is the research on digital platforms. In contrast to traditional economics, which emphasizes export platforms in the analysis of international economics, our investigation of digital platforms includes a significantly broader spectrum. Digital platforms serve as intermediaries, capable of reducing intermediary friction and barriers, thereby lowering transaction costs and disrupting traditional theories of internalization advantages in economics. They enable the externalization of platform advantages, facilitate global supply-demand connections, and may even integrate third-party and fourth-party entities to form extensive markets, thereby enhancing efficiency. These emerging market forms will significantly influence the future business models of MNCs, making them a subject worthy of study.

The third topic is the restructuring of global value chains and services trade. We find that the expansion of emerging digital MNCs, in terms of the previous smile curve, may flatten the curve, extending traditional production stages toward both ends. As a result, the reshaped industry chain may extend further in both upstream and downstream directions, giving rise to more types of service trade. Research on digital FDI and related service trade also has important theoretical and practical significance.

The fourth topic is knowledge dissemination and innovation. FDI spillover effects are a long-standing topic, and articles on FDI continue to appear in top journals. However, with the advent of digital MNCs, their knowledge dissemination differs from that of traditional MNCs. Thus, the new issues related to knowledge dissemination and innovation in digital MNCs warrant further study.

There are three policy issues that we should consider.

The first issue is the policy research on the multinational flow of data elements. Investment, trade, and finance are all involved in this area. Effective policies for transnational data flow include systematically assessing the current global governance system concerning data flow and storage, analyzing countries’ competition and cooperation dynamics, and upholding data security, and regulating the business conduct of digital MNCs will be a crucial policy agenda.

The second issue is antitrust policy research on multinational digital platforms. One challenge in antitrust regulation for digital MNCs stems from the winner-takes-all characteristic inherent in data, compounded by the dynamic nature of data development. In this regard, the difficulty in policymaking lies in maintaining market fairness while striking a balance between incentivizing technological innovation for enterprises and fostering industrial development. Therefore, it is worthwhile to study policy issues such as analyzing the economic analysis framework for antitrust, conducting horizontal and vertical comparisons of antitrust policies across nations, and conducting multifaceted research on the impact and welfare assessment of antitrust interventions on platforms. These efforts will provide the groundwork for reforming our antitrust policymaking.

The third issue is the research on tax rules of digital MNCs. The problem of tax havens in the registration and market locations of digital MNCs has become more pronounced in the digital economy era. The problem of tax base erosion and profit shifting between countries has become more pronounced, and enterprise income tax systems with tax jurisdiction determined based on the principle of territoriality are likely to be more heavily restructured. In 2021, a two-pillar policy for international taxation was introduced, including the following two aspects. Pillar One transcends the limitations of physical presence in international tax rules, reallocates the taxing rights over the global profits of large MNCs, and redistributes excess profits, which are often shifted to tax havens and low-tax jurisdictions, back to their home countries based on specified criteria. Pillar Two establishes a global minimum tax rate, mandating that the effective tax rate for large MNCs in any jurisdiction worldwide shall not be less than 15%. Pillar One and Pillar Two together form a multilateral solution to address the tax challenges of the digitalized economy. In this context, how our domestic tax system aligns with the international two-pillar global tax plan for MNCs is also a crucial issue for our policy research to consider. These are my brief remarks on the considerations for FDI MNCs in the digital economy era. Thank you!

Source: WeChat Official Account of Center for Digital Economy Research, RUC