MULTINATIONAL COMPANIES

What Is a Multinational Corporation (MNC)?

A multinational corporation (MNC) has facilities and other assets in at least one country other than its home country. A multinational company generally has offices and/or factories in different countries and a centralized head office where they coordinate global management. These companies, also known as international, stateless, or transnational corporate organizations tend to have budgets that exceed those of many small countries. 

Advantages of Multinational Corporations in developing countries

• Multinationals provide an inflow of capital into the developing country. E.g. the investment to build the factory is counted as a capital flow on the financial account of the balance of payments. This capital investment helps the economy develop and increase its productive capacity.
• The Harrod-Domar model of growth suggests that this level of investment is important for determining the level of economic growth. One of the best ways to increase the level of economic growth is to provide an inflow of capital from abroad.
• The inflows of capital help to finance a current account deficit. (Basically, this means that foreign investment enables developing countries to buy imports.)
• Multinational corporations provide employment. Although wages seem very low by Western standards, people in developing countries often see these new jobs as preferable to working as a subsistence farmer with even lower income.
• Even liberal economists like Paul Krugman and Jeffrey Sachs have defended ‘sweatshop labour’ arguing that although employers are paying too low wages. Often sweatshop labour is better than the alternative of scavenging or no paid employment. Economies in south-east Asia have seen rising wages in recent decades – showing that low wage economies can develop.
• Multinational firms may help improve infrastructure in the economy. They may improve the skills of their workforce. Foreign investment may stimulate spending in infrastructure such as roads and transport.
• Multinational firms help to diversify the economy away from relying on primary products and agriculture – which are often subject to volatile prices and supply.

Disadvantages of Multinational Corporations in developing countries

• Environmental costs. Multinational companies can outsource parts of the production process to developing economies with weaker environmental legislation. For example, there is a trade in rubbish, which gets sent to developing economies like India for disposal and recycling.
• Profit repatriated. Although multinationals invest in developing economies, the profit is repatriated to the location of the multinational, so the net capital inflows are less than they seem.
• Skilled labour. When undertaking new projects, the multinational may have to employ skilled labour from other economies and not the developing economy. This means best jobs are not received by local workers and the investment is diffused.
• Raw materials. A large component of multinational investment in developing economies is seeking out raw materials – oil, diamonds, rubber and precious metals. The extraction of raw materials can cause environmental externalities – polluted rivers, loss of natural landscape. Also, there is only a short-term inflow of money to pay for the materials. In many cases, the payments have not effectively filtered through to the wider population – with money syphoned off by corrupt officials and politicians. Therefore, local communities in developing economies can face widespread disruption, but only limited compensation for the precious materials.
  • However, it is not all one way. Chinese companies have built new roads and railways in Africa to gain better access to raw materials in Central Africa. This infrastructure investment will leave a long-term legacy – even if firms leave Africa.
• Sweat-shop labour. Not all economists are convinced sweat-shop labour is a good thing. Critics argue that weak labour conditions allow multinationals to use their monopsony power and pay lower wages to workers than they should get paid.