Business

Advantages and Disadvantages of MNCs [Multinational Corporation]

In the world of globalization, you will notice that many brands are going global. They are not only selling their products in different countries, but they are also setting up manufacturing facilities in different countries. In terms of businesses, you will hear the term Multinational Corporations, also known as MNCs. So, what exactly is an MNC? Multinational Corporations are companies that have assets and resources in multiple countries. Some examples of Multinational Corporations include Tata Group Companies, Microsoft, Accenture, Honda and many other such companies. Today, we are going to talk about Multinational Corporations in detail, and we will also discuss their advantages as well as disadvantages.

What Is a Multinational Corporation?

MNC

As mentioned earlier, a Multinational Corporation is a company that offers services in two or more countries. You will also find many MNCs that offer products and services in developed countries; however, their resourcing is based out of developing nations. These companies may have production facilities in countries like China, India and Vietnam to keep their labour cost under check. You will also find companies like TCS, which have headquarters in India and offer their services to countries across the globe. There are three categorizations of Multinational Corporations. These are –

  • Regional MNCs – Regional MNCs are companies with headquarters in their country of origin. These companies have offices in other countries, and these offices are in control of the headquarters.
  • Centralized MNCs – Centralized Multinational Corporations are the units with headquarters in the home country, but the production units are in different countries to keep the production cost in check.
  • Multinationals – Here, the affiliates and subsidiaries are considered to be independently managed by offices under the purview of headquarters.

Advantages of Multinational Corporation

We have shared some basic details about Multinational Corporations. Let us now go ahead and check out the benefits of Multinational Corporations.

  • Better Quality Products – Multinational corporations can access better raw materials and skilled labour. In such a case, it is natural for the products to have better quality. So, you will notice that most multinationals have good products and services. Multinational Corporations also have better brand recognition.
  • Enhanced Customer base – The domestic market may reach a saturation point, and in such a case, the companies would want to find new customers. The best way to do that is by expanding operations to new countries. This can allow companies to explore a new customer base where they can offer their products.
  • Employment Opportunities – Multinational Corporations also create employment opportunities wherever they go. This is why most governments support globalization and have business-friendly policies. This also translates to a better and more diverse human resource which can work at different locations of the Multinational Corporations.
  • High Growth – If the growth is stagnated in the home country, then taking the corporation to new countries can help the company grow better. This can be because of the newer markets or lower service/production costs. The profits can improve after realizing all the capital expenditure in the initial years.
  • Lower Microeconomic Risk – A company with operations in one country will also have higher microeconomic and macroeconomic risks. These risks can be reduced with diversification. A Multinational Corporation has a lower microeconomic and macroeconomic risk. This also improves the chances of survival during a recession or stressed economic times.
  • Lower Production Cost – Another big advantage for Multinational Corporations is that they can lower the cost of their operations or manufacturing process. Many product-based companies set up their manufacturing facilities in China, India, Vietnam and Bangladesh to reduce the production cost. Similarly, many IT companies have offices in India to keep the cost of services low. They can take advantage of parity between two currencies.
  • Promotes Competition – If a country doesn’t have many brands, then it is possible that a singular brand may have a monopoly in a domain. This is never healthy for the customers. This is where Multinational Corporations come into the picture for promoting competition. Multiple companies offering the same product are always good for the consumer. They can leverage better quality and price when the market is competitive.
  • Technology Exchange – Multinational Corporation can also take advantage of better technology in the host countries. It is usually a win-win situation for both parties. For example, a company setting up a manufacturing facility in China will be able to take advantage of its advanced machines and manufacturing process.

Disadvantages of Multinational Corporations

There are also some disadvantages of Multinational Corporations. Check them out below.

  • High Investment – The capital expenditure involved in the inception of Multinational Corporations is quite high. This will only be realized over a period of time, but the initial investment remains to be high. So, when the corporation plans to expand to a new country, they need to have a cash reserve.
  • Local Regulations – The local regulations might be challenging to comply with. In such a case, Multinational Corporations need a local legal advisor to manage compliance and the law. Without this, the company may find itself breaching local laws.
  • Micro Multinational Companies – Today, in the internet age, you will see micro Multinational Corporations coming up. These are very small entities that take advantage of the workforce around the world. The advantages of such micro Multinational Corporations are limited for the nation.
  • Stressed Natural Resources – In some cases, it has been observed that Multinational Corporations may stress the country’s natural resources. This can be a problem if the water gets polluted or if there is massive air pollution because of the manufacturing units. It can impact the standard of living of the people who are already living in these countries.
  • Threat To Domestic Industries – Multinational Corporation also poses a challenge to small-scale domestic industries. The cost of production for Multinational Corporations can be much lower, and domestic industry might not be able to compete with them. This is also why Multinational Corporations may face local resistance in some countries.

Final Verdict

There are certainly advantages of the Multinational Corporation. The host country also gets to earn forex reserves. The MNCs can play a significant role in the country’s development, and they can also help massively improve the standard of living of the people. In the coming future, you will see more and more Multinational Corporations expanding their wings.

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Sumit Kumar Yadav has experience analyzing business and finance of big to small companies. Loan, Insurance, Investment data analysis are his key areas.