We all have heard a lot about multinational companies operating these days in the field of business. Before we look at the advantages and disadvantages of MNCs, lets have a brief introduction about what is a MNC.
What are MNCs
- As the word very well suggests, MNC is a company that owns or controls production in more than one nation.
- MNCs set up its offices and factories for production in regions where they can get cheap labor and other resources.
- MNCs go for such multi nation location so as to avail low cost of production thus earning greater profits.
A “multinational corporation” is also referred to as an international, transactional or global corporation. For enlarging the business firm, multinational is a beginning step, as it helps you become transnational thus leading you to go global.
Features of MNCs
Following are the main features of MNCs:
- Location – MNCs have their headquarters in home countries and have their operational division spread across foreign countries to minimize the cost.
- Capital Assets – Major portion of the capital assets of the parent company is owned by the citizens of the company’s home country.
- Board of Directors - Majority of the members of the Board of Directors are citizens of the home country.
- MNCs are large-sized corporation and exercise a great degree of economic dominance.
We all are quite aware of the bottom line of any business. Every business has the ultimate goal of making profit. Businesses always seek to sell more products and services so as to bring in more revenue and generate profits for its owners.
Advantages of MNCs
- Access to Consumers – Access to consumers is one of the primary advantages that the MNCs enjoy over companies with operations limited to smaller region. Increasing accessibility to wider geographical regions allows the MNCs to have a larger pool of potential customers and help them in expanding, growing at a faster pace as compared to others.
- Accesses to Labor – MNCs enjoy access to cheap labor, which is a great advantage over other companies. A firm having operations spread across different geographical areas can have its production unit set up in countries with cheap labor. Some of the countries where cheap labor is available is China, India, Pakistan etc.
- Taxes and Other Costs – Taxes are one of the areas where every MNC can take advantage. Many countries offer reduced taxes on exports and imports in order to increase their foreign exposure and international trade. Also countries impose lower excise and custom duty which results in high profit margin for MNCs. Thus taxes are one of the area of making money but it again depends on the country of operation.
- Overall Development – The investment level, employment level, and income level of the country increases due to the operation of MNC’s. Level of industrial and economic development increases due to the growth of MNCs.
- Technology – The industry gets latest technology from foreign countries through MNCs which help them improve on their technological parameter.
- R&D – MNCs help in improving the R&D for the economy.
- Exports & Imports – MNC operations also help in improving the Balance of payment. This can be achieved by the increase in exports and decrease in the imports.
- MNCs help in breaking protectionalism and also helps in curbing local monopolies, if at all it exists in the country.
Disadvantages of MNCs for the Host Country
- Laws – One of the major disadvantage is the strict and stringent laws applicable in the country. MNCs are subject to more laws and regulations than other companies. It is seen that certain countries do not allow companies to run its operations as it has been doing in other countries, which result in a conflict within the country and results in problems in the organization.
- Intellectual Property – Multinational companies also face issues pertaining to the intellectual property that is not always applicable in case of purely domestic firms
- Political Risks – As the operations of the MNCs is wide spread across national boundaries of several countries they may result in a threat to the economic and political sovereignty of host countries.
- Loss to Local Businesses – MNCs products sometimes lead to the killing of the domestic company operations. The MNCs establishes their monopoly in the country where they operate thus killing the local businesses which exists in the country.
- Loss of Natural Resources – MNCs use natural resources of the home country in order to make huge profit which results in the depletion of the resources thus causing a loss of natural resources for the economy
- Money flows – As MNCs operate in different countries a large sum of money flows to foreign countries as payment towards profit which results in less efficiency for the host country where the MNCs operations are based.
- Transfer of capital takes place from the home country to the foreign ground which is unfavorable for the economy.
Applicability to Businesses
MNCs are suitable for only a set of business categories. Following are some of the suitable cases where the MNC mode of operation could succeed:
- Businesses where the Government itself wants to avail foreign technology and foreign capital
- Where foreign management expertise is needed
- Where an increase in employment opportunities in the country can be seen as a national interest
- Where it is desirable to diversify activities into untapped areas which include core industries and infrastructure
- Pharmaceutical sector.