Advantages & Disadvantages of Multinational Corporations

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Corporate executives at work
Corporate executives at work (Image: Vstock LLC/VStock/Getty Images)

A multinational corporation is an enterprise that has operations in one or more countries other than the home country where it's headquartered or managed. Companies opt to expand into the global arena for several reasons, including increased market share and the resulting economies of scale -- cost reductions due to expanded output levels and a consolidation of management. Despite their benefits and advantages, multinational corporations have disadvantages and have often been criticized for exploiting their host countries for their resources.

Enhanced Investment in Host Country

Multinational corporations can be an invaluable dynamic force for employment as well as the wider distribution of capital and technology. By establishing a subsidiary, your investment helps the host country with critical financial infrastructure for both economic and social development. Your operations lead to improved balance of payments and job creation, raising levels of employment for the locals. You contribute to the host's exports and corresponding foreign exchange, in addition to import substitution; your products or services, previously imported, may now be bought domestically.

Tax Revenue for Home Country

Your multinational corporation's profits are subject to federal and state taxes, boosting revenues for the home government. In addition, new job opportunities are available for U.S. nationals in the foreign subsidiary to offer training, management administrative functions and facilitate technology transfer. Per the Internal Revenue Service Code, these employees have to pay income tax on their compensation.

Preferential Treatment Over Local Industry

By virtue of your economic importance, the foreign government may accord your corporation disproportionate leeway in your operations. You may be allowed to use natural resources without restriction, while environmental and labor laws are relaxed in your favor. Although good for business, there is the potential danger of operating without a reasonable concept of public interest or social policy, threatening the long-term welfare of the locals.

Loss of Jobs at Home

Although expanding into the global markets can create some jobs for U.S. nationals, this can be insignificant if the bulk of your corporation's operations are shifted overseas to leverage cheaper labor. Workers recruited in the foreign country are often willing to accept lower compensation, significantly reducing your labor cost of production. If your priority areas include labor-intensive manufacturing or services that require foreign management expertise, it may make economic sense to hire in the foreign country, but it is at the cost of domestic jobs.

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