A multinational corporation is an agency which owns assets in at least one country other than its domestic market. Anything of value qualifies for this label, ranging from a partnership, office space, or retail product. The only stipulation is that there must be something owned (not leased) in 2+ countries to qualify. A joint partnership could also transform a company into a multinational corporation under certain circumstances.
The nature of the multinational corporation is that it runs through a centralized hierarchy that focuses on the primary office in its home nation. Each office, product, or contract receives direct, local support from the organization to create revenues, but those who manage the foreign markets must still report to the C-Suite of the firm – which could be half of a world away.
This structure is what makes a multinational corporation different, by definition, from a transnational organization. The latter allows each market to operate independently from every other one – making it more like a DBA rather than a true satellite from the central office.
There are three regions of the world where most multinational corporations have their headquarters: Japan, the United States, and Europe. The advantages and disadvantages of operating under this structure involve the money and power that these organizations control. The top 5 largest companies in the world manage more than $1.5 trillion in revenues every year.
List of the Advantages of Multinational Corporations
1. Multinational corporations are often responsible for today’s best practices.
Most multinational corporates rely on merchants and distributors for their goods and services. Some even use these third-party entities to create additional sales opportunities. Because of their global presence and overall sizes, these organizations use leverage with their associates to produce a required action for each customer.
If the vendor fails to do so, then the multinational corporation can move to a different supplier immediately. This practice directly eliminates some distribution businesses overseas with a single decision, which is why this structure creates competences of scale that keep prices down while still ensuring reasonably excellent product quality.
2. Innovation happens because of the investments made by multinational corporations.
Most multinational corporations spend about 5%-10% of their yearly budget on innovative research and development projects. Most of the firms that invest richly into R&D are the organizations who are on the Fortune Global 500 list consistently.
Only two companies, Stanley Black and Decker and Apple, 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 almost $800 billion. Without these investments, the world would be a very different place.
3. The world has more cultural awareness because of multinational corporations.
When an organization decides to expand to a foreign market, then they are presented with brand-new sociological certainties. Multinational companies are amazingly diverse, giving them additional power because of this diversity. The current marketplace requires agencies to know what the pain points of the local market are before it becomes possible to create products or services for them.
When each person expands their reasoning to include new viewpoints, the planet becomes a healthier place because of that action. These organizations provide a resolute influence on cross-culture information when this advantage becomes a prime preference for them.
4. Multinational companies focus on consistency for the consumer.
Multinational companies work from centralized structures. That means there is a fundamental expectation that every asset will look and function as every other item does. Even though a company in China serves different products than one in Canada, the core ethics and values of the corporation are still displayed for all to see.
You’ll see similar designs, ordering procedures, and best practices implemented at all managed locations for a multinational company. Customers believe in these institutions because they realize what the value proposition is before they ever spend any money with that brand. This advantage works the same way for every business which excels because of their status in different markets.
5. Diversification becomes possible because of multinational corporations.
Most populations, developing nations, and marketplaces depend on a set of core products for their survival. Most of the items tend to link up with agriculture-based industries, such as farming. Multinational companies offer these economies more variety in product and price choice, which creates another layer of diversity for the local consumer. This advantage reduces their reliance on materials that often have volatile pricing structures due to their supply and demand levels frequently changing – sometimes daily.
6. Local infrastructures improve with the presence of multinational corporations.
The Coca-Cola Company developed a 2020 Vision Program to encourage more local infrastructure development in the Asia-Pacific region as a way to develop more middle class households. Over $30 billion is being spent on this effort to raise the standard of living in countries where some workers still make less than $2 per day. Other multinational companies have similar development projects in the works.
Multinational corporations must make infrastructure improvements to encourage local populations to develop skill-based workers that can take on their needed tasks. Communities must be able to access the local market and reach their employment opportunity. That’s why you will see businesses helping to fund local road projects, build bridges, and reduce other transportation barriers around the world.
7. Multinational companies offer employment opportunities at the local level.
Although multinational companies route command decisions through a centralized office at their domestic headquarters, all of them need to have boots on the ground in each local market. Because over 70% of the jobs people hold in the world today are tied to the agricultural industry, these companies can transform an economy quickly by providing new tools, educational resources, and financing that can shift the standard of living for the entire economy.
It’s the “rising tide lifts all boats” analogy, but then put into practice in real life. This advantage is helping some developing countries to triple their GDP over the past 10 years. With more multinational companies entering new markets all over the world, it will not take long for there to be more developed than developing nations.
8. The import-export market is present because of multinational corporations.
The issue of economic development in undeveloped nations occurs because there is an overall lack of resource access to these countries. What is available to the average customer in the U.S. is quite distinct when compared to what is accessible in a country like Sudan. There are even differences between markets like Canada and South Africa to manage.
When multinational corporations build a presence in the developing world, their capital inflows help each country to develop better access to the import-export market. This advantage gives each marketplace better access to valuable goods, creates more opportunities for trade, and it ultimately raises the standard of living for the entire economy.
9. Multinational companies reduce the need for foreign aid.
African countries often rely on foreign aid as a way to balance their domestic budget each year. Some nations in the past decade have receive 50% to almost 80% of their GDP from contributions made by the developed world. Because government processes are typically inefficient when compared to the private sector, the presence of multinational companies in each marketplace makes it easier to build profits and improve conditions even if the overall value of each transaction is not high on a global scale.
The presence of multinational corporations could boost the levels of trade on the African continent by up to 50% in the next decade, which would put this region into the same category as Southeast Asia for trade opportunities in the global market.
10. Capital inflows occur because of the presence of multinational corporations.
Most multinational companies have their headquarters in the developed world, which means Europe, the U.S., or Japan for most organizations. These companies rely on the resources of those mature marketplaces to maintain the diversity of their revenue streams because it is cheaper to develop production assets outside of their domestic market.
These agencies must move into the developing world to earn profits through the investments that they make there to maintain the value of their overall portfolio. Multinational companies are a leading source of capital inflows to the developing world because they build manufacturing centers, investing in workforce training, and support institutions of learning to advance their productive capacity in foreign markets.
List of the Disadvantages of Multinational Corporations
1. Multinational corporations can use their structure to form monopolistic markets.
Most countries treat the assets of a multinational corporation as an independent structure, like a transnational company, instead of looking at the hierarchy of the business for what it tends to be. This disadvantage allows each firm to have more flexibility in how they handle the local marketplace with their presence. Global monopolies do not currently exist, by firms like Alphabet, Illumina, and Broadridge all manage a 50% share or more of their industry.
When these structures are present and treated in this way, then the benefits of scale allow the multinational corporation to price everyone out of the market. There might still be local competition, but the average consumer will work with the cheapest offer whenever if provides a similar amount of value for them.
2. Because of their size, multinational corporations put SMEs out of business.
Did you know that 9 out of 10 companies will eventually fail? The most critical time for any small business is during the first five years of operation. About one-third typically fail in their first 12 months of existence. One of the contributing factors to this problem is the size and scale of multinational corporations. Bigger companies can produce larger bulk orders, which means they can see a per-unit price savings when compared to SMBs and SMEs.
“Multinational corporations do control,” said California Governor Jerry Brown. “They control the politicians. They control the media. They control the pattern of consumption, entertainment, and thinking. They’re destroying the planet and laying the foundation for violent outbursts and racial division.”
3. Multinational corporations often take advantage of the international standard of living.
Many states in the U.S. are approaching or exceeding $12 per hour for their minimum wage. Several of the 2020 Presidential candidates for the Democratic party are pushing for a $15 per hour minimum wage. The goal of this legislation is to provide a “living salary’ for workers who are putting in full-time hours to support their families, but it is also an effort that encourages more offshoring.
Did you know that the minimum wage in China is the equivalent of less than $1 per hour? Some African countries have a minimum wage that pays workers less than a nickel per hour for the work that they do. If a multinational company can transfer hundreds of jobs and save $10 per hour in wages without a harmful drop in quality, then that cost savings can go straight into their budget and the pockets of their C-Suite.
4. Political corruption typically rises with the influence of a multinational corporation.
“The multinational corporations are now developing budgets that are often bigger than medium-sizes countries,” said Paddy Ashdown, a British diplomat and politician who served as the leader of the Liberal Democrats for over a decade. “These live in a global space which is largely unregulated, not subject to the rule of law, and in which people may act free of constraint.”
Legal lobbying is a multi-billion dollar industry, even if you were to only take the spending that happens in the United States. According to data published by Open Secrets, the U.S. Chamber of Commerce spent $94.8 million on lobbying efforts in 2018. The National Association of Realtors spent $72.8 million, while the Pharmaceutical Research and Manufacturers of America spent $27.9 million. When you add in the under-the-table deals that happen internationally, corruption occurs because companies have the power of the purse.
5. Multinational corporations can cause harm to the environment.
Most developing countries do not have the same level of regulation and oversight that the developed world maintains to protect the environment. When these firms decide to do business in the international market, they are subject to local laws – not the ones that govern their domestic headquarters – when working to obtain raw materials.
Smaller, less developed governments often trade an increase in revenues for access to their natural resources. The lower standards create better pricing structures for each customer, but it also creates environmental damage that could have future generations paying the price for today’s decisions. Some nations even trade in recycled materials and trash, which can place even more stress on local resources.
6. Profits often go back to the multinational company instead of staying in the local market.
Multinational corporations might provide job opportunities in each local market, but they also funnel out many of the profits back to their centralized office. Some might see this as a return on their infrastructure and educational investments, but it can also be a decision that further weakens an already underperforming government or economy. When you compare how much goes into foreign markets with what comes out of them, the difference is usually minimal and can sometimes be a negative return.
7. Nothing stops a multinational company from importing their skilled labor.
There are even times when a multinational corporation will not hire local workers, opting instead to import positions from the centralized office to get things up and running. This process will still provide contributions to the local economy and provide a handful of jobs that fall outside of this disadvantage, but it tends to benefit the company and the workers more than the local community.
The best jobs, especially the ones which become available in a developing country, are therefore given to someone who may not even live in the local community. That means their wages will not have the same economic impact that they would have if a local employee was in that position.
8. Multinational corporations remove raw materials from the local economy.
Although infrastructure benefits do occur when a multinational corporation moves into a developing country, the construction efforts are usually meant to benefit the business and not the local market. Roads and bridges are built to access raw materials, distribute goods, and manage processes more than they are to improve the livelihood of those living in the region. Once all of the goods are removed, then the agency might decide to abandon the project, leaving the government with no way to manage the situation.
“Multinational corporations and a market economy have transformed human beings into instruments of making money,” said Satish Kumar. “Human beings should be the end, and money should be the means to the end.”
9. Individual influences are virtually impossible to create with multinational corporations.
Because multinational corporations can sometimes be larger than a nation in terms of size and monetary value, these companies have a lot of influence on global trade. Their presence places the average person out of reach from any decision that could impact their local economy. Even homesteading or “going off-the-grid” requires help from these agencies to create a successful experience.
“The largest 100 corporations hold 25% of the worldwide productive assets, which in turn control 75% of international trade and 98% of all foreign direct investment,” said Peter Drucker. “The multinational corporation… puts the economic decision beyond the effective reach of the political process and its decision-makers, national governments.”
10. It creates a dependency on the business that can be unhealthy for an economy.
Because a multinational corporation can control a majority of the decisions that people make thanks to the size and scope of their structure, their presence can create dependencies that are unhealthy for the local marketplace. Consumers might think that they have choices when shopping, but the reality of their situation is that one company is pulling all of the strings of their transaction. That’s why Zbigniew Brzezinski said that the people, governments, and economies of each country must serve the needs of this entity.
Unilever sells everything from soap to olive oil and has products selling in over 190 countries. Coca-Cola and PepsiCo sell a combination of beverages and snacks that encompass hundreds of different brands – sometimes competing with each other for the same shelf space. Anheuser-Busch InBev controls a lineup of more than 200 different beer brands. Over 2 billion people use the products from these companies on any given day.
Verdict on the Advantages and Disadvantages of Multinational Corporations
Multinational corporations provide us all with a series of advantages which are challenging to ignore. These firms give us access to cheaper goods, provide jobs, and generate a robust economy that creates numerous indirect opportunities from which we all typically benefit in some way. Even if these businesses consolidate over $1.5 trillion in spending each year, there is a direct return for that investment.
The only problem is that many of the returns happen in the developed world at the expense of workers caught in a subpar living situation. When you compare the middle class in the United States to the developing one in India, the differences are profound.
That’s why the advantages and disadvantages of multinational corporations are essential to review periodically. We would not be where we are today without them and their interest in innovation, research, and development, but their quest for profits might also be what holds us all back from our full potential in the future.
Natalie Regoli is a seasoned writer, who is also our editor-in-chief. If you have any questions about the content of this blog post, then please send our editor-in-chief a message here.