Multinational corporations have offices, factories and assets in different countries, as well as a centralized head office where global management is completed. We witnessed this international intertwining of business with the recent container ship blockage of the Suez Canal and its cascading global effects.
These companies tend to have budgets that exceed those of many small countries. (MNC, 2020) Over 50 of the world’s hundred largest economic entities are corporations and not countries, and the 500 largest corporations in the world account for 70 percent of world trade (Cheung, 2020).
The top 10 multinational corporations (Abiodun, 2019):
Procter & Gamble
But is this way of doing business hurting the world economy more than it’s helping?
Considering how astronomical the impact, we think it’s time to pause the modern acceptance of these global giants. Spoiler alert: multinational corporations provide both opportunities and obstacles. In this article, we will have two of our staff delve into each side of the argument.
In the end, you can decide for yourself what you think.
Lower Production Cost vs. Environmental Consequences
Advantages (Delaney): The first advantage of multinational corporations is that there are less production costs because of the production in developing countries. Outsourcing is used by setting up manufacturing plants in countries that are the most cost-efficient. It is also important to note that multinational corporations take advantage of economies of scale by growing their brand through strategic management. The corporations can take advantage of undervalued services in other countries, as well as use inexpensive supply chains and advanced technologies (Pettinger et al., 2019).
Disadvantages (Alexis): The first disadvantage of multinational corporations is their environmental impact. As mentioned previously, multinational corporations are able to produce goods using the least expensive methods possible given their worldwide environment. As a result, their desire to work cheaply and efficiently is often at odds with sound environmental practices. Due to their economic significance in their host country, they often end up in a power position when lobbying for advantageous environmental regulations that favor profit over nature. If host countries are at an economic disadvantage, their desire for increased revenue often overrides the need to regulate a company’s environmental impacts (Gitman et al., 2018).
Job Creation vs. Job Depletion
Advantages (Delaney): The second advantage is that multinational corporations create more jobs for people locally; the corporations set up branches in other countries, giving more people the opportunity for employment, especially in developing countries. When there are offices across the world, more customers can be reached as well. Companies limited to regional offices do not have this option.
With more customers being reached, this allows for more opportunities to develop products and services that will fit the needs of the potential customers. It is also an advantage that multinationals can specifically set up their businesses in countries where the target consumer market is located. This will lower transport costs, which saves money, as well as make it easier to access consumer feedback, information and intelligence. Finally, with there being international brand recognition of these multinationals, this allows there to be lower marketing costs because the brand vision is congruent around the world (Abiodun, 2019).
Disadvantages (Alexis): The second disadvantage of multinational corporations is their impact on smaller businesses and the job market. In developing economies, major multinationals can utilize their economies of scale to push local companies out of business. These corporations heavily control their industries because they have better products and can afford to offer them at lower prices.
This not only depletes jobs as these businesses close down, but also strays customers away from supporting these businesses. Also, as multinationals outsource production to cheaper labor-cost economies, job loss results in the developed countries where the business began. This has an impact on the local economy for the business (Pettinger et al., 2019).
Tax Cuts vs. Tax Avoidance
Advantages (Delaney): The third advantage is that multinational corporations have lower taxes in the countries where they export and import goods. In other words, these companies filter profits through countries that have overall lower corporation tax rates. For example, Google has set up their corporate office in Ireland to take advantage of the lower tax rates there.
Amazon has an important subsidiary in Luxembourg, which has allowed the avoidance of taxes. It has been seen that 33% of the U.S. Fortune 500 companies have subsidiaries in Luxembourg, according to a 2014 report from Citizens for Tax Justice and U.S. PIRG Education Fund (Bailey, 2019).
Also, some countries give tax cuts to the investors to attract more international companies to do business in these countries. Finally, wherever a company manufactures and sells their products, they are also exempt from import quotas and tariffs, saving resources overall (MNC, 2020).
Disadvantages (Alexis): The third disadvantage also speaks to the power multinationals hold to choose where they operate in order to reap the most financial benefits. Many multinationals expand their companies in countries with the lowest corporate tax rates.
In 2011, Google had £2.5bn of UK sales, but only paid £3.4 million UK tax. This is a tax rate of 00.1% despite having a global-wide profit margin of 33% (Abiodun, 2019). In addition, many multinationals partake in transfer pricing. This practice reduces tax liability in countries that have a higher tax rate and increases liability in countries with a lower tax rate.
To do so, these companies ship partly finished products between different factories in different countries; transferring expensive goods from countries with a high tax rate to make their bottom line look more healthy while transferring goods at a lower price to markets with a lower tax rate to decrease their final tax bill. The result is two or more countries losing valuable tax revenue because of financial loopholes in the tax laws (Abiodun, 2019).
Economic Certainty vs. Economic Uncertainty
Advantages (Delaney): The fourth advantage is that multinational corporations have an immense impact on the economy and the state government. This is because multinationals are efficient in allocating scarce resources, which, in turn, maximizing profits/returns to shareholders.
The profit maximization is always necessary for any company to be successful in a competitive market; multinationals are able to do so on a global scale. Finally, multinationals capitalize on volatile exchange rates and time dependence (investing in plants in different geographical locations) and creating managerial judgment by setting beneficial practices (Gitman et al., 2018).
Disadvantages (Alexis): The fourth disadvantage concerns the volatile economic impact of multinationals. Since these corporations are not tied to any one country, they often have no reason to feel loyal to one country over another. This fosters economic uncertainty, both for the workers and for the community in which a multinational bases their production.
Compounding on the previous obstacles mentioned, if any laws change and a multinational determines it can produce the same goods elsewhere for a fraction of the price, they have no good reason to maintain their original factory. These sudden changes can leave certain communities financially devastated (Abiodun, 2019).
Cheaper Labor vs. Worker Exploitation
Advantages (Delaney): The last advantage of multinational corporations is the ability for cheap labor to be used in the countries involved. Multinationals are able to set up their offices in several countries where the demand for their products and services is high, which is not a characteristic of smaller countrie
For example, in slow-growing, developed economies like Europe and Japan, there is a benefit because the cheaper products sell into those markets, and profits earned in those markets translate into more dollars in the US. Multinationals have a huge influence in the international system, and participate in the majority of economic growth, with a high asset and turnover ratio (Abiodun, 2019).
Disadvantages (Alexis): The last disadvantage of multinational corporations is the prevalence and tolerance of unethical labor standards. For many multinational corporations, profit is their primary goal and the financial power they hold allows them to pick and choose where their products are manufactured.
Even though a company’s head office may be in a country with strict employment laws, often companies may set up branches in developing countries where there are no stringent policies regarding the health and safety of labor. In these areas people are eager for work and these multinationals can demand cheaper labor and less healthcare benefits. Many MNCs have been criticized for using ‘sweat-shop’ or ‘slave’ labor – workers who are paid a pittance by Western standards (MNC, 2020).
What side are you on?
As you can see, there are many factors to consider when understanding if multinational corporations have a positive or negative impact on the world and economy. Multinational corporations provide us with cheaper goods and provide jobs, as well as generate a robust economy that creates numerous indirect opportunities which many benefit from. On the contrary, these same corporations operate at the expense of workers’ living situations and wellbeing, ability to operate small businesses, and the stability of local economies.
That is why it is necessary to review the opportunities and obstacles of multinational corporations before you take a side. We would not be where we are today without multinational corporations in regards to the innovation, research, and development that they invest, but their quest for profits might also be what holds us all back from our full potential in the future. (Pettinger et al., 2019)
We want to know your thoughts – leave a comment below.
Abiodun, O. (2019). An investigation of multinational corporation management, on the example of the Coca-Cola Company. Retrieved from http://elartu.tntu.edu.ua/bitstream/lib/30007/1/MASTERS%20THESIS%20PROJECT.pdf Bailey, V. (2019). Negative impacts of multinational corporations. Retrieved April 16, 2021, from https://bizfluent.com/info-8110394-negative-impacts-multinational-corporations.html Gitman, L., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B., & Hyatt, J. (2018). The impact of multinational corporations. Retrieved April 16, 2021, from https://opentextbc.ca/businessopenstax/chapter/the-impact-of-multinational-corporations/ Multinational corporation (MNC) - Overview, Characteristics, Advantages. (2020). Retrieved April 16, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/strategy/multinational-corporation/ Pettinger, T., Yeabsira, H., S., Zan, B., Terpercaya, B., Line, N. (2019). Multinational corporations: Good or bad? Retrieved April 16, 2021, from https://www.economicshelp.org/blog/538/economics/multinational-corporations-good-or-bad/
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