Multinational Corporations & Their Effects on the Host Countries

Multinational corporations that invest in host countries can impact those countries in several ways. For example, developing countries are generally characterized by weak, technologically backward domestic enterprises. The entry of a multinational corporation into a backward market will result in an infusion of investment capital, advanced technology and expert knowledge, which may benefit the developing country if that knowledge and technology is transferred to the local population. One negative impact of an multinational corporation on a host country may be that local firms will be forced out of business because they can't compete.

The evolving economies of developing countries are attractive to multinational corporations because of their low labor costs, abundant resources and large customer bases. Host countries that are growing, open their markets to attract foreign investment that the corporations can supply. Economies in transition also may benefit from the infusion of intellectual capital, financial resources, best practices and technology that they otherwise would not have access to.

Foreign direct investment in host countries can help to improve productivity, growth and exports, but the relationship between multinationals and host economies varies based on the industry and specific country. For example, China has seen some of the positive benefits of foreign direct investment. In 1998, China ranked 32nd on the exporting scale, but by 2004, the country was ranked the 3rd largest exporter in the world. This export boom has been credited to substantial inflows of foreign direct investment from multinational corporations during this period.

Multinational companies sometimes pay higher wages to their employees compared to domestically owned firms. Multinationals generally tend to hire better educated, highly qualified workers, paying their staffs more while still benefiting from lower labor costs, but this varies significantly by industry. Some scholars have found that the demand for skilled labor by multinationals overseas has led to a shift in the demand for labor at home and abroad. This in turn has led to an imbalance in earnings between skilled and unskilled workers, leading to wage inequality in the host country and a reduction in the number of jobs needed in the home country.

Profit is the motivating force that drives multinational corporations, which also are driven to occupy larger market shares and to ensure long-term competitiveness in the host countries. Conflict of interest between these corporations and host societies arise on a range of issues including intellectual property rights, operational decisions that may affect the environment or human rights, and the repatriation of profits. While multinational corporations base their decisions on economics, many host countries want these decisions to be in sync with the country’s social and political needs.