16 Advantages and Disadvantages of Multinational Corporations

A multinational corporation (MNC) has assets and facilities and at least one other country other than the one which holds its domestic headquarters. These companies have factories, offices, or other locations in different nations around the world, utilizing a centralized head office to coordinate their global activities. It is not unusual for the largest multinational companies in the world today to work with a budget that is larger than what many small countries have at their discretion.

Walmart led the world in 2017 with revenues of $485.9 billion. State Grid Corporation of China receive $315.2 billion in revenue. The Sinopec Group earned $267.5 billion. Other top multinational companies include the following.

• Berkshire Hathaway earned $223.7 billion in 2017.
• Apple Inc. reported $215.6 billion in earnings for that 12-month period.
• Exxon Mobile had $205 billion in revenues for the year.

In comparison, Tuvalu has the world’s smallest national economy with a value of just $45 million annually. If Exxon Mobil were its own country, then it would rank 54th in the world for GDP, just behind New Zealand in total value. Walmart would be ranked 26th, just behind Thailand according to the latest data produced.

It is no wonder then that multinational corporations are an integral part of the domestic and international economy. Their success or failure often leads to individual growth or financial decline.

List of the Pros of Multinational Corporations

1. Large international companies create a lot of jobs for the global economy.
Multinational companies create a significant level of employment opportunities at the local level around the world. Even in small nations, the number of jobs which are attributed to organizations with an international headquarters is quite large. Over 700,000 jobs in the Netherlands each year come from agencies which do not have their central offices located in the country. It is not unusual in Europe to have 1 in 5 employment opportunities present because of the transnational nature of the modern business world. That is why their presence is such an essential component of the global economy.

2. Companies can provide consumers with better consistency when they exist internationally.
When you walk into a McDonald’s restaurant anywhere in the world, you will receive a similar experience compared to what you enjoy at home. There might be different menu items advertised on the big board and you might see changes to the seating arrangements, but the cleanliness and service expectations are always the same. The presence of multinational companies can give consumers confidence in the end product they receive because there are more chances to add predictability to each transaction.

3. Larger companies with an international presence invest more into research.
About 10% of the world’s countries today are responsible for 80% of the spending that occurs in the research and development sector of each industry. That number is reflective of the presence of multinational companies basing their domestic headquarters in a similar number of locations. Larger organizations always provide more to R&D than smaller companies, reaching a level of 6% across all industries in 2017. The pharmaceutical sector invests nearly 20% of what they earn each year into innovative new products.

We like to think that startups, entrepreneurs, and similar companies are more innovative, but that is simply not true. Organizations which hire more than 500 employees produce 5.75 times more research and development than smaller ones. Larger businesses also see their R&D as being 13% more productive.

4. Multinational companies can do more to guarantee the quality of their work.
Even though multinational companies have an international presence, their efforts work toward a continuous improvement in the quality of their goods or service purchased by local consumers. It creates an economy of scale that reduces the final price of an item without discouraging vendor relationships. People want to do business with the Walmarts of the world because it puts their products in a place where millions of consumers can see it. Distributors, suppliers, and even small business owners want relationships with MNCs because it allows them to expand to new markets too.

When you have a multinational company working to grow, this process helps to create more MNCs that can benefit the local, national, and global economy too. It is a positive cycle that encourages product diversity without forcing consumers to make choices based on their geographic location.

5. It is a structure which can guarantee the quality of competitive products.
Multinational companies create opportunities every day to improve the quality of what they offer. These organizations walk a tight balance between the cost of the item relative to how good it is for a consumer. This emphasis on price creates a competitive factor in all industries which forces the competition to seek ways to improve how well their goods or services are too. This advantage creates a situation where the standards start rising across the entire industry, allowing consumers to choose what they want based on the price they can afford.

6. Larger companies help to promote diversity.
MNCs define success based on their ability to be active in multiple markets simultaneously as a primary provider to their targeted demographics. This presence leads to a growing level of diversity within the organizational structure that can benefit the consumer and the employee. Because the focus is an outward movement from a centralized office, the local markets dictate what interactions occur at the consumer level. Centralized management systems do not typically exist with these companies. This advantage allows the business to grab a larger share of the local market without forcing them to compromise on their internal systems.

7. An international presence creates a patchwork of regulatory requirements.
Different countries around the world have unique regulatory requirements to follow. What may not be possible in a multinational company’s domestic headquarters could be strongly encouraged by another government. The Bangladesh garment industry is a prime example of this advantage.

The minimum wage in the Bangladeshi garment industry rose 51% in December 2018 to about $95 per month. These employees were being paid just $63 at the minimum before the increase occurred. If your business is involved with this industry, then which option is cheaper? Paying a wage of $11.50 per hour in Washington State to get a day’s worth of work? Or to offer an entire month of salary to an employee in Bangladesh?

8. Tax policies favor multinational companies in several ways.
Multinational companies can keep a significant amount of money offshore when operating in multiple nations simultaneously. For organizations who hold a central office in the United states, the profits which stay outside of U.S. borders reached $2.6 trillion in 2017. That means there is a final tax bill of $752 billion that they owe if the money were made domestically, but do not since there is no requirement for repatriation. Even legislation proposed by the Trump Administration to bring these funds back offer a $413 billion tax break, which is something that smaller businesses, sole proprietors, and freelancers are not privy to receiving.

9. There are multiple types of multinational corporations that exist.
MNCs are not a single classification. There are four different categories which currently exist when evaluating the pros and cons of MNCs. A decentralized corporation offers a stronger presence in its domestic country than where it exists abroad. The traditional MNC uses a centralized location that acquires cost advantages where cheaper resources are available. A global company that builds on its parent corporation research and development also qualifies as one, as does a transnational organization which utilizes all three of the previous categories.

Because there are so many differences that can exist from one MNC to the next, there can still be a variety of goods, services, and approaches used to ensure that each consumer has access to the choices they want when shopping.

10. MNCs provide numerous financial benefits to each country.
When a corporation becomes an MNC, then they expand their tax base to include revenue provisions to other governments. They become a funding resource that can help with infrastructure improvements, social programs, and educational services while they provide affordable goods to local markets. It is a way to help communities save some money on the things they need while providing another layer of financial support. That is why many governments use tax breaks or subsidies as a way to lure a company into a specific market. Jobs are not the only economic benefit.

List of the Cons of Multinational Corporations

1. Multinational companies can reduce employment opportunities.
It is possible for MNCs to add jobs to local economies around the world, but they can also take them away at will. Even when a company decides to expand their operations to a different nation with their first effort, a transfer of jobs from the central headquarters to the new location occurs. It is not unusual for these organizations to send jobs to the cheapest possible geographic community for wages, which means domestic jobs are lost to make way for offshoring activities.

This process occurs domestically as well. If a company decides that labor is cheaper in a different U.S. state, then they can transfer to the new location to pay less without sacrificing the quality of the work received.

2. The presence of MNCs creates monopoly-building opportunities.
Multinational corporations are unique because of their central structure that treats every market as part of the overall whole. That approach is different than a transnational company that looks at each community as an individualized enterprise. When a large company generates enough profits to start buying out their competition, then the mergers and acquisitions process can begin to develop monopolistic opportunities.

Monopolies are a naturally occurring effect in a capitalist economy, so government intervention to prevent such an action creates a mixed economy instead. ABInBev produce and distribute over 200 different types of bear around the world. Microsoft owns a 75% share of the personal computer market. Simmons Pet Food Inc. uses a Chinese supplier to encompass a majority of animal brands. Google owns a significant majority of search engine traffic. YKK, Monsanto, Unilever, and Luxottica have all worked toward this issue as well.

The reason why monopolies are a disadvantage of MNCs is that a single provider creates the potential for price manipulation. If you can only purchase an item from this one company, then they are free to set whatever price they want for it because there is no competition.

3. Offshoring happens more often with multinational corporations.
Because labor is cheaper overseas, offshoring happens quite frequently when an MNC begins to expand its operations. Although there are new job opportunities globally when this occurs, the ethics of exploiting the labor costs of their markets can be a significant disadvantage. The goal of these operations should be to provide a livable wage for their workers. With most of the world earning less than $10 per day, it is arguable that this is happening. Even an IT worker in India with the same knowledge and qualifications only makes 25% of what someone in the U.S. earns.

4. It limits the number of choices that are available to consumers at the local level.
ABInBev might offer 200 different beer choices to the consumer, but you are still sending your money to that one company when you purchase an item. The Coca-Cola Company has more than 1,000 different brands which are available in almost every country around the world. PepsiCo sells snacks and beverages under several brand names as well. Even though there are multiple choices available on store shelves or in local markets, it really isn’t a choice if every product is controlled by the same C-Suite at the end of the day.

Because these larger companies can out-price the local competition with their economies of scale, it can become almost impossible for small businesses to stay competitive. That is why today’s business structure has mom-and-pop shops specializing in niche products while the larger companies provide everything else.

5. MNCs tend to operate as a local business even though they are not one.
Walmart decided that one of the ways that it could start to expand its brand was to create a marketplace that was similar to local neighborhood stores. That idea became the foundation of the Walmart Neighborhood Market. Their goal was to compete with Trader Joe’s and Whole Foods, but these stores are a significant challenge to traditional supermarkets and independent shops too. Since the pricing at these stores operate on the same economy of scale with the competitive advantage of fresh produce, their presence as a “local” company works to put all of the competitors out of business.

6. There are hidden costs to consider with multinational corporations.
Let’s go back to Walmart as an example of this potential disadvantage of MNCs. A company like this one can cost a local community several billion dollars in supplemental assistance funds because of the low wages they provide. Even with a commitment to pay their employees more, Forbes reports that taxpayers provide $6.2 billion in public assistance.

Even that expense pales in comparison to the taxpayer cost of corporate support for the world’s largest companies that are based in the United States. Almost $100 billion in total subsidies is handed out each year to MNCs, which is about 50% more than the cost of public assistance in any given year.

7. Environmental concerns can develop with the presence of MNCs.
Another issue with capitalist economies is the fact that profit occurs at any cost. That means there is a potential threat to the environment when these agencies are usually significant levels of non-renewable resources. This issue was first raised in 1989 when multinational companies in the U.S., Japan, and Europe (numbering 300 of them) began producing agricultural products on lands obtained in the developing world. Because there were fewer regulations in place, the growth rate of these organizations was estimated to be 10%, while the rise in GDP over the rest of the world was only 5% at the time.

“Of course, the main concern of the MNCs is profit-making, and anything like the welfare of the people or the well-being of the environment will not be taken up by the corporate executive if it leaves his company in an unfavorable position,” wrote Sumitra Sripada in the Journal of the Indian Law Institute in Q4 1989. “He will trade anywhere irrespective of the regime and will pollute the environment even when privately supports the environmentalists.”

These multinational corporation pros and cons offer a glimpse at why the world is structured in the way that it is today. Having access to cheaper goods can help households financially while providing consistently good product qualities, but it can also decrease wages and opportunities around the world while limiting choices. That is why knowing who you purchase products from each day is important. Are you supporting someone local? Or are you doing business with a single MNC even though you might purchase dozens of different brans?