MULTI-NATIONAL COMPANIES (MNC)
A multi-national company is a company that has its production bases in other countries apart from their
home country. It is called “multi-national” because it has its branches in many countries. Examples
of multinational companies include Mc Donald, Burger King, KFC, Pizza Hut, Coca-Cola …etc.
Multi-National Companies are very large scale companies, and most of the time when they select another
country to produce, they usually select developing countries so as to enjoy the lowest average cost.
Why Would a Business Want to Become a Multinational Company
The primary goal of a business is to increase profits and growth. If it can grow a global customer base
and increase its market share abroad, opening offices in foreign countries is worth the expense and
effort. Companies may also see a benefit in certain tax structures or regulatory regimes found abroad.
Advantages to the MNC by operating abroad (Home
Country)
➢ Reduced transportation cost.
If the company produces the product in the host country (the country which the MNC select to
operate other than the home country) it will reduce, the transport cost of delivering the
products to a large market.
For example, the Coca-Cola Company saves a lot on the transport cost to the Maldivian market
by producing the products in Maldives compared to if they had shipped the bottles from the USA.
➢ Can avoid import restrictions.
When a country import (buy) goods from other countries they have to pay import duties to the
government. Import duty is an amount paid to the government on the imported product. But
when the company produces the product in the country they don’t have to pay any import duties.
For example, the Coca-Cola Company is producing in the Maldives not importing it; therefore,
they don’t have to pay any import duties to the government.
➢ Can take advantage of government’s regional assistance.
Normally, the developing countries welcome the MNC’s as these foreign investments gives lots
of advantages to the country. Therefore, in order to promote the foreign Direct Investments (FDI,
governments of those host countries might give preferential treatments (such as no import
duties on the raw materials imported) to those MNC’s operating in their country.
➢ Can take advantage of lower wage rate in the host country.
In developing countries the wage rate of the workers are very low compared to those of
developed countries. Therefore, the MNC can take advantage of the low wage cost by
operating in developing countries.
For example, Japanese automobiles manufacturer Toyota produces in the lower wage countries
in Asia such as China and Indonesia.
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➢ Export and other legislations might be more liberal in the host country.
As MNC’s mostly select developing countries as their host countries, the export rules and other
regulations might be more free then their home country.
➢ Health and safety standards might be more liberal in the host country.
As most of the MNC’s come quite highly developed countries their home country’s health
standards are stricter than those of the host country, hence, the MNC can take advantage of the
liberal health and safety standards in the host country and reduce their cost of production.
Disadvantages to the MNC by operating abroad (Home
Country)
➢ Threat to Domestic Industries
MNCs can be threat to local industries that are still growing due to their tremendous economic
power. MNCs are too powerful for domestic industries to compete with. Threats from MNCs have
forced the closure of some local businesses. MNCs impede the host countries’ economic progress
as a result.
➢ Loss of Natural Resources
MNCs rely on their home countries’ natural resources to make great profits. Yet doing so depletes
those resources, which hurts the economy by limiting the number of natural resources available.
➢ No Benefit to the Poor
MNCs only make products for the wealthy because the poor cannot afford them. As a result,
MNCs often do not aid the impoverished in host countries.
➢ Insufficient Technology
Technology transfer by multinational firms might not be appropriate for the host nation. It might
not be current. It might be too sophisticated. They can also fail to impart new technology skills to
the people. As a result, unemployment rises.
➢ Uncertainty
Multinational firms cut back on or shut down their manufacturing facilities during unstable
economic times. Because they hire and fire people, MNC employees experience job loss.
Advantages of MNC to the Host Country
1. Increase in employment and output
When a new company (MNC) establishes their production bases in the host country, the people
in the host country gets more job opportunities as the company would need labourers to run the
company hence, it increase employment in the country. Also by the additional production in the
host country, it will also increase the national output of the increase which would result in more
income.
2. Brings in new technology
Most of the time the MNC is from a highly developed country, and when they come with their
production bases to a developing country they bring with them the modern machineries and new
technological methods of production. Hence, the cost country can now have access to modern
technology and new approaches of management.
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3. Increased competition
When a new company establishes themselves in the host country, it brings more competition
among the producers, resulting in more choices for consumers with better quality and lower
prices.
4. Inflow of foreign currency
When the foreign company comes, initially they will be bringing with them foreign currency.
Therefore, there will be inflow of foreign currency.
Disadvantages of MNC to the Host Country
➢ May affect the domestic producers
As MNC’s are quite large companies in size, they will be able to produce their products at very
low cost, but the domestic producers might not be able to compete with the MNC, hence the
domestic producers might be driven out of the market.
➢ May cause an outflow of currency
The MNC usually takes back the profits from their company to their home country. This causes an
outflow of foreign currency in the host country which is not good for the economy of the host
country.
➢ MNC’s might dominate
Sometimes they MNC’s might start to dominate the host country’s economy and influence the
government for its benefit.
➢ The host country may get too dependent on the MNC
Too much dependence on MNC’s might have an adverse (negative) effect on the economic
development. For example, a larger proportion of the country’s labour and other resources might
be employed in the MNC and other sectors of the economy might be neglected.
➢ Top management positions might not be given to the host country
Even though MNC’s provide lots of employment opportunities to the host country, the top
positions in the management might be occupied by the MNC’s home country people, hence,
giving them more power in the control of the company.
➢ Major unemployment if MNC leaves
For some reason if the MNC decides to leave the host country, it will result in major increases.
GIS/Economics/GR 8
Globalization
Globalization is the process of interaction and integration among people, companies, and
governments worldwide. The world economy is being globalized. The whole of the world is
increasingly behaving as though it were a part of a single market, with interdependent
production, consuming similar goods, and responding to the same impulses. An increasing share
of consumption consists of goods that are available from the same companies almost anywhere
in the world. The technology that is used to produce these goods is increasingly standardized
and invariant to the location of production. The ideas have increasingly become the common
property of the whole of humanity.
Globalization is much less of a reality in other fields than it is in the economic one. Culture still
displays strong national, and even regional and local, variations. While English is clearly in the
process of emerging to be a common world language, at least as a second language, minority
languages are making something of a comeback, at least in developed countries. Sport is still
very different around the world.
➢ CAUSES
Globalization has grown due to advances in transportation and communication technology.
With the increased global interactions comes the growth of international trade, ideas, and
culture. The costs of transport, of travel, and above all the costs of communicating information
have fallen dramatically in the postwar period, almost entirely because of the progress of
technology. There was no fax or internet or email or world-wide web, no PCs or satellites or
cellphones. These are same factor is important in nurturing the growth of multinational
corporations, since it is this which enables them to exploit their intellectual property efficiently
in a variety of locations without losing the ability to maintain control from head office. But in
this context I would surmise that other factors are also at work, such as the spread of consumer
knowledge about what is available that comes from travel and from advertising, itself
encouraged by the communications revolution and its children like CNN. The reduction in
transport costs is also a key factor underlying the growth in trade.
➢ CONSEQUENCES
Globalization certainly permits an increase in the level of global output. Globalization must be
expected to influence the distribution of income as well as its level. Economists have long
predicted that trade is mutually beneficial. Similarly, most FDI (Foreign Direct Investment) goes
where a multinational has intellectual capital that can contribute something to the local
economy, and is therefore likely to be mutually beneficial to investor and recipient. But it is
surely also true that globalization is bringing new danger
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