Feb 212014

Multinational Companies (Corporations) are those enterprises whose management, ownership and control are spread in more than one country. They are very large industrial organizations which extend their industrial and marketing operations in several countries through their branches or subsidiaries.

We may define multinational companies as those enterprises which own control production or service facilities outside the country in which they are based. In other words, a multinational company is any firm (company) which performs its main operations like manufacture and provision of service in at least two countries.

Multinational companies set production units in several countries either under direct ownership and control of the original company or by incorporating separate companies in different countries. They are also called transactional corporations. The objective of these companies is to operate in a specialized field covering large number of products to be sold in various countries.

Multinational companies consist of the following elements: (a) Company should be operated in many countries (b) In the host country, research and production work should be conducted in order to increase the GDP of the country (c) Ownership must be multinational (d) Management should be in the hands of the parent company.

Some examples of famous multinational companies are Coca-Cola and Pepsi Companies of U.S.A., Sony Company of Japan, Nestlé Company of Switzerland, Honda, IBM Corporation of U.S.A., Mercedes Benz Company of Germany, Nepal Lever Limited, Asian Paints, Surya Tobacco Company of Nepal.

Multinational companies have the following characteristics:

  • Productive organization: It is a productive organization. This company produces various types of goods and services not only in their own country but also in many other countries. It uses its own technology, trademark and patent right for manufacturing goods.
  • Word-wide operation: It is the another characteristics of multinational company. The company extends its business world-wide by establishing branches or affiliating companies in various countries. Hence, its operation extends in more than one country.
  • Ownership and control: The ownership of multinational company remains both in parent and host country according to the investment. However, the parent company controls the management and its operation of the branches or affiliated companies. It control through capital investment, high technology, trademark, patent right etc.
  • Technology transfer: Multinational companies are established with a huge capital and advance technology. These companies transfer the advanced technology in the developing countries by establishing branches or affiliations. Its production system is based on mass production and the cost of production will not be higher. Developing countries can be benefited by transfer of the advanced technology.
  • Marketing superiorities: Multinational company is a large organization with international name and fame. It has a good network of distribution system and sells its products without any difficulties.
  • Higher efficiency: Multinational company is operated with higher efficiency due to advanced technology. It has greater capability for research and development work. It utilizes trained personal and mass production system. hence, it produces quality products with minimum cost of production.

Advantages and Disadvantages of Multinational Company

Multinational company has been helpful in transferring foreign investment and advanced technology from one country to another. The liberal trade and investment policy have facilitated multinational companies to invest in developing countries. The economic growth of the host country is feasible by the investment. The chief advantages of multinational company are as follows:

  • Industrialization: The economic development of a country depends upon the industrialization of a country. The developing countries have low level of saving and investment. Hence, multinational companies help in the industrialization process of a country. The untapped natural resources are tapped by them.
  • Quality and mass production: Multinational company is established with huge capital. It utilizes mass production system through advanced technology. It is operated in international standard. Hence, it obtains trained and qualified manpower and utilizes advanced technology by which qualitative products can be produced efficiently.
  • Lower cost of production: The lower cost of production is an important consequence of the mass production and marketing through multinational companies. The lower cost of production has benefited the developing countries.
  • Employment opportunities: Multinational company provides employment opportunities to the people of host countries in their production and marketing activities. Production enhances the purchasing capacities of the people and increase their standard of living. People are satisfied with new products of international standard. Employment in other countries is also increased by way of expanded markets in foreign countries.
  • Increase in government revenue: The multinational companies produce and sell products in large scale. Consequently, they can make more profits and pay excise duty, income tax, sales tax etc. which increases the revenue of the government.
  • Increase in export: Export of host country rises as per the multinational activities. It produces goods and services on the international standard. They are not produced only for local market but also are exported to other countries. So, it increases the export capacity.
  • Other benefits: The multinationals help private companies enter in the international markets by way of providing international market expertise, foreign exchange and financial management. The domestic businessmen and entrepreneurs get an opportunity to learn some new business skills from the. The high degree of marketability, competitive spirits, and fast action contribute maximum of profitability. The domestic shareholders are also benefited by the higher rate of dividend. The capital market of the host country is also improved by such activities and people at large are benefited.

Multinationals can damage the host country in various ways such as outflow of foreign exchange, economic exploitation, negative effects on local industries, social evils etc. The disadvantages of multinational company are given below:

  • Outflow of foreign exchange: In many cases, multinational companies use the local capital for their industrial development. They do not bring much capital from their countries. They earn huge amount of dividend. This requires sending dividend with royalties, managerial and technical fees etc. in the form of foreign exchange. By the foreign exchange, reserve is decreased in the country. A shortage of foreign exchange is greater problem to the developing countries.
  • Negative effects on local industries: Multinational companies have increased world competition. They enjoy international market, capital, technology and expertise. The competition from multinationals affect the local industries negatively. They can defeat any industries in the host country. Thus, the local industries and trade are adversely affected by them.
  • Economic exploitation: Multinational companies are mainly interested in making profits. Labor, raw materials and scarce foreign exchange are used for their self-benefits. Labor being cheap in developing countries are exploited to the maximum by them. The raw materials are purchased at cheaper rate. The producer of raw materials are purchased at cheaper rate. The producer of raw materials do not get adequate return. Thus, the cost of production is lower and charges higher prices on its product. Hence, multinationals earn maximum profits by unfair exploitation of the resources.
  • Exploitation of consumers: Multinational companies are monopolistic in nature and exploit the markets for their benefits. They use strong marketing and promotional techniques, product differentiation and other techniques to capture the market. They are in a position to increase prices and exploit the market. The consumers are suppressed with the higher prices. They exploit consumers at every front for their benefit.
  • Inequality in employment: Employment is not increased in host country as per anticipation. It provides only minimum employment to local people in practice. Usually multinational companies appoint top level personnel from their own country and local employment at the lower level only. Hence, multinationals create inequality in employment.
  • Social evil: Multinational companies produce goods mainly for rich markets for maximizing profits. The consumption patterns in developing countries are upset by luxurious production of multinationals. The gap between poor and rich increases, the latter purchases the product of multinationals, whereas the poor have no capacity to purchase them. The society experiences dissatisfaction and distortion. With heavy advertising expenditures, antisocial and vulgar advertisements are published for sales promotion by them for earning profits.