Multinational corporations own assets in their home market and at least one foreign nation. Any asset held by the company outside of its domestic borders qualifies for this classification. Many focus on manufacturing or production assets, but it could be a joint venture contract, an administrative satellite, or even research and development efforts.
These assets are centrally managed by the corporation from their headquarters. Local staff receives direct support from the company, but each managing director must report to the executive team which oversees the entire operation. That structure is different from a transnational corporation, which allows each satellite to work independently of one another with only guidance, not oversight, offered for progress.
Most multinationals are located in either Europe, the United States, or Japan. Several of them are ranked consistently in the Fortune Global 500 rankings.
The advantages and disadvantages of multinational corporations are essential to review because of the monetary power these companies wield. Every company in the Fortune Global 500 Top 10 earned more than $240 billion in revenues during 2017. The Top 5 all earned more than $311 billion. If Walmart were its own economy, it would have a GDP value ranked 25th in the world, just above Belgium.
List of the Advantages of Multinational Corporations
1. Multinational corporations provide an inflow of capital.
Most multinational corporations have their headquarters in the developed world. They rely on the resources of mature markets to maintain their supportive revenue streams. These companies must move into the developing world to earn profits through investments made there. Multinationals are a leading source of capital inflows to the developing world, building factories, investing in training centers, and supporting educational facilities with the intention of improving their productive capacities overseas.
2. Multinational corporations reduce government aid dependencies in the developing world.
Since the 2000s, the reliance on foreign aid throughout the African continent is thought to be responsible for the overall weakness of the local economies. Some nations rely on foreign aid for more than 40% of their annual budget. Creating new assets in the developing world allows multinationals to begin improving the amount of trade which occurs in the developing world.
The current level of trade for Europe is at 60%. North America experiences a 40% level of trade, while the Southeast Asian Nations achieve 30%. The current level of trade for African countries, however, is just 12%. Multinational corporations could boost this rate in the developing world by up to 50%.
3. Multinational corporations allow countries to purchase imports.
The issue of economic development in non-developed countries is an overall lack of resource access. What is available to the average consumer in the United States is very different when compared to what is accessible in a country like Somalia. When multinationals build a presence in the developing world, their capital inflows help countries have more access to the import/export market. That allows them to access better goods, create more opportunities, and eventually raise the standard of living for everyone.
4. Multinational corporations provide local employment.
If you step outside of the developed world for a moment, the average person works in an agriculture-related position. Almost 70% of the jobs found in the poorest countries of the world are based on this industry, compared to less than 5% which is located in the wealthiest nations in the world. Multinationals come in, offer higher wages (which are still low compared to global standards), then shift the standard of living.
The average real wages have almost tripled since 2018 in the developing and emerging G20 countries since 2008. India had the highest levels, achieving an index rating of 5.5 compared to the regional 3.7 average.
5. Multinational corporations improve the local infrastructure.
Companies must have employees who can access job sites to become productive. That means an investment in the local infrastructure becomes necessary before operations even begin. Roads, bridges, and technology access are three of the largest barriers taken down when multinationals become active in a developing country. You’ll see education investments to improve labor skills, along with public transportation development and other unique needs that some nations may require.
The Coca-Cola Company is spending $30 billion during its 2020 Vision development program to double its revenues as more people transition to the Middle Class. Similar spending occurs with other multinationals too. It’s more than just a marketing effort. The only things large multinationals cannot overcome are corruption and war.
6. Multinational corporations diversify local economies.
Many communities, developing countries, and economies all rely on primary products for subsistence. Most of the products tend to be related to agriculture-based industries. Multinationals provide these economies with more variety, creating diversity in local production levels. That reduces reliance on commodities which often have volatile prices because their supply and demand levels waiver so often.
7. Multinational companies create consistent consumer experiences.
Multinationals work from a centralized structure, which means there is a basic expectation that every asset will look and perform as every other one does. Even though a McDonald’s in India serves different products than one in the United States, the core values of the company are still on display. You’ll see a similar interior, ordering procedure, and set of best practices followed at both locations. Consumers trust these businesses because they understand what the value proposition is for them before they ever walk through the doors. The same is true for Walmart, Volkswagen, and every other company which made the Top 10 in the Fortune Global 500.
8. Multinational corporations encourage more innovation.
The average multinational corporation spends between 5% to 10% of its annual budget on innovative research. Many of the companies with the most intensive research and development intensity are the multinationals who are on the Fortune Global 500. Only two companies, Apple and Stanley Black and Decker, qualify as high-leverage innovators because of their investments today. The world’s largest spenders increased their investments by 11.4% in 2018 to total $782 billion.
9. Multinational corporations enforce minimum quality standards.
Most multinationals rely on vendors for their distribution work. Some even use them for sales opportunities. Because of their size and influence, these companies put leverage on their partners (including their suppliers) to provide an expected experience to each customer. If there is a failure to do so, the corporation can move to a different vendor immediately, which instantly kills some distribution businesses overseas. This structure creates efficiencies of scale that lower customer prices while still ensuring reasonably good product quality.
10. Multinational corporations increase cultural awareness.
When companies expand overseas, they become exposed to new cultural realities. Multinationals are incredibly diverse, which gives them added strength because of this necessity. One must know the pain points of the local market before you can produce goods or services for them. When anyone expands their thinking to include new perspectives, the world becomes a stronger place because of it. These companies offer a positive influence on cross-culture communication if this advantage becomes a top priority for them.
List of the Disadvantages of Multinational Corporations
1. Multinational corporations create higher environmental costs.
One primary advantage which multinationals see in doing business in the developing world is a lack of robust environmental legislation. Weaker governments tend to exchange environmental harm for additional profits. When these companies can outsource their production to countries with these lower standards, it does lower prices, but it also creates more damage. Countries like India even trade in waste and rubbish because of the revenues they earn from recycling and disposal, creating the potential for harm to local soil and water supplies.
2. Multinational corporations don’t always leave profits local.
There is evidence to show that the investments made by multinational companies improve the local infrastructure. Additional education and job training offer new opportunities for domestic workers. Once the investments are made, however, the profits earned by the company tend to be repatriated for use in other areas. If you were to look at the net inflow of capital instead of the gross, you usually find that the actual benefit offered by multinationals is quite low (and sometimes even negative).
3. Multinational corporations import skilled labor.
The amount of time necessary to create local skills that encourage high productivity levels is measured in years, not weeks or months. Multinationals invest in local workers to develop their skills, but they also need to get their venture off the ground quickly. Most companies in this position will import the skilled labor they require from other economies to meet their needs. That means the best jobs, especially in the developing world, are given to people who don’t even live in the local economy. Those wages do not offer the same economic benefits because spending occurs internationally instead of at the local level.
4. Multinational corporations create one-way raw material resource consumption.
There are exceptions to this disadvantage. Some Chinese companies are building roads to help them access raw materials in Central Africa, creating infrastructure benefits which should last for years, if not decades, to come. Many multinationals go into a new country looking to extract raw materials without infrastructure considerations, taking oil, rubber, or precious metals to create products.
Those extraction efforts may cause several environmental concerns over time, from the pollution of rivers to the loss of landscape. The investments pay for the materials, but they don’t always pay for the damage left behind.
5. Multinational corporations encourage political corruption.
The developing world struggles with income generation, with many workers earning less than $2 per day. When multinationals enter the region, promising to pay for access to raw materials and other needs, those in charge politically often prevent the investments from filtering down to the general population. Money usually gets siphoned off by politicians and officials, which creates massive disruption at the local level with only minor compensation (if any) from the government working with the corporation.
6. Multinational corporations support “sweatshop” labor.
Sweatshop labor is typically seen as a disadvantage to local economies. Although some experts suggest that any job and income is better than nothing at all, weak labor conditions allow multinationals to lower wages to the greatest extent possible to pad their own profit margins. Even when minimum salaries are legislated by the government, what workers earn in the developing world is very small.
According to ConvergEx Group, Sierra Leone has the lowest minimum wage in the world at just $0.03 per hour. China requires an $0.80 per hour minimum. Even countries considered to be developed, like Brazil, offer an hourly wage of less than $2. Who benefits the most from this relationship: the worker or the multinational corporation?
7. Multinational corporations remove jobs from their home country.
Several jobs are more economical for multinationals to outsource or offshore the positions than hire domestically. Manufacturing jobs are outsourced most often, with multinationals focusing on Southeast Asia because of the lower labor costs involved. Call centers are outsourced frequently too, again because wages are lower overseas than in their home market. Writers and graphic designers are often outsourced because contract employees are cheaper than full-time staff. These companies might help other economies grow, but they can also create employment difficulties at home.
8. Multinational corporations build legal monopolies.
Even though the assets controlled by multinational corporations are managed by a centralized structure, governments treat each location as its own entity. That gives the companies more leeway in how they handle their consumer markets. Although no absolute monopoly exists on a global stage, there are some companies which come pretty close. Google currently owns a 63% share of search engine traffic handled, for example, compared to 24% for Bing and 11% for Oath.
Illumina owns a 90% market share of the genome sequencing market. Sirius XM holds a virtual lock on the satellite radio industry. Broadridge Financial Services owns a 50% global share and 80% of the U.S. share of administrative outsourcing work. These structures ultimately limit consumer choice instead of expanding it.
9. Multinational corporations put other companies out of business.
Walmart offers a relentless push for profits. One doesn’t earn $500+ billion in revenues each year without it. That means the retailer puts constant pressure on suppliers to offer the lowest prices possible. On essential products which don’t change, the price Walmart pays must drop year after year. That places a squeeze on the suppliers because the sheer size of the retailer allows it to receive concessions that kill local profits. Instead of “Buying American,” as the brand used to trumpet, the company is now responsible for 10% of all Chinese exports to the United States.
The advantages and disadvantages of multinational corporations show us how the global economy tries to balance itself with their efforts. Cheaper goods are produced, infrastructure is developed, and skills are encouraged when investments go into the developing world. Does it really help the global economy if wages are increased, but still kept low, and high-wage workers are left without a job due to relocation? Multinationals have a lot of power which is often taken for granted, and that is a mistake which many of us make.