The multinational is in trouble

AMONG the many things that Donald Trump dislikes are big global firms. Faceless and rootless, they stand accused of unleashing “carnage” on ordinary Americans by shipping jobs and factories abroad. His answer is to domesticate these marauding multinationals. Lower taxes will draw their cash home, border charges will hobble their cross-border supply chains and the trade deals that help them do business will be rewritten. To avoid punitive treatment, “all you have to do is stay,” he told American bosses this week. 

Mr Trump is unusual in his aggressively protectionist tone. But in many ways he is behind the times. Multinational companies, the agents behind global integration, were already in retreat well before the populist revolts of 2016. Their financial performance has slipped so that they are no longer outstripping local firms. Many seem to have exhausted their ability to cut costs and taxes and to out-think their local competitors. Mr Trump’s broadsides are aimed at companies that are surprisingly vulnerable and, in many cases, are already heading home. The impact on global commerce will be profound.

The end of the arbitrage

Multinational firms (those that do a large chunk of their business outside their home region) employ only one in 50 of the world’s workers. But they matter. A few thousand firms influence what billions of people watch, wear and eat. The likes of IBM, McDonald’s, Ford, H&M, Infosys, Lenovo and Honda have been the benchmark for managers. They co-ordinate the supply chains that account for over 50% of all trade. They account for a third of the value of the world’s stockmarkets and they own the lion’s share of its intellectual property—from lingerie designs to virtual-reality software and diabetes drugs.

They boomed in the early 1990s, as China and the former Soviet bloc opened and Europe integrated. Investors liked global firms’ economies of scale and efficiency. Rather than running themselves as national fiefs, firms unbundled their functions. A Chinese factory might use tools from Germany, have owners in the United States, pay taxes in Luxembourg and sell to Japan. Governments in the rich world dreamed of their national champions becoming world-beaters. Governments in the emerging world welcomed the jobs, exports and technology that global firms brought. It was a golden age.

Central to the rise of the global firm was its claim to be a superior moneymaking machine. That claim lies in tatters (see Briefing). In the past five years the profits of multinationals have dropped by 25%. Returns on capital have slipped to their lowest in two decades. A strong dollar and a low oil price explain part of the decline. Technology superstars and consumer firms with strong brands are still thriving. But the pain is too widespread and prolonged to be dismissed as a blip. About 40% of all multinationals make a return on equity of less than 10%, a yardstick for underperformance. In a majority of industries they are growing more slowly and are less profitable than local firms that stayed in their backyard. The share of global profits accounted for by multinationals has fallen from 35% a decade ago to 30% now. 

For many industrial, manufacturing, financial, natural-resources, media and telecoms companies, global reach has become a burden, not an advantage.

That is because a 30-year window of arbitrage is closing. Firms’ tax bills have been massaged down as low as they can go; in China factory workers’ wages are rising. Local firms have become more sophisticated. They can steal, copy or displace global firms’ innovations without building costly offices and factories abroad. From America’s shale industry to Brazilian banking, from Chinese e-commerce to Indian telecoms, the companies at the cutting edge are local, not global.

The changing political landscape is making things even harder for the giants. Mr Trump is the latest and most strident manifestation of a worldwide shift to grab more of the value that multinationals capture. China wants global firms to place not just their supply chains there, but also their brainiest activities such as research and development. Last year Europe and America battled over who gets the $13bn of tax that Apple and Pfizer pay annually. From Germany to Indonesia rules on takeovers, antitrust and data are tightening.

Mr Trump’s arrival will only accelerate a gory process of restructuring. Many firms are simply too big: they will have to shrink their empires. Others are putting down deeper roots in the markets where they operate. General Electric and Siemens are “localising” supply chains, production, jobs and tax into regional or national units. Another strategy is to become “intangible”. Silicon Valley’s stars, from Uber to Google, are still expanding abroad. Fast-food firms and hotel chains are shifting from flipping burgers and making beds to selling branding rights. But such virtual multinationals are also vulnerable to populism because they create few direct jobs, pay little tax and are not protected by trade rules designed for physical goods.

Taking back control

The retreat of global firms will give politicians a feeling of greater control as companies promise to do their bidding. But not every country can get a bigger share of the same firms’ production, jobs and tax. And a rapid unwinding of the dominant form of business of the past 20 years could be chaotic. Many countries with trade deficits (including “global Britain”) rely on the flow of capital that multinationals bring. If firms’ profits drop further, the value of stockmarkets will probably fall.

What of consumers and voters? They touch screens, wear clothes and are kept healthy by the products of firms that they dislike as immoral, exploitative and aloof. The golden age of global firms has also been a golden age for consumer choice and efficiency. Its demise may make the world seem fairer. But the retreat of the multinational cannot bring back all the jobs that the likes of Mr Trump promise. And it will mean rising prices, diminishing competition and slowing innovation. In time, millions of small firms trading across borders could replace big firms as transmitters of ideas and capital. But their weight is tiny. People may yet look back on the era when global firms ruled the business world, and regret its passing.

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Advantages and disadvantages of Multinationals

Multinational Corporations no doubt, carryout business with the ultimate object of profit making like any other domestic company. According to ILO report "for some, the multinational companies are an invaluable dynamic force and instrument for wider distribution of capital, technology and employment; for others they are monsters which our present institutions, national or international, cannot adequately control, a law to themselves with no reasonable concept, the public interest or social policy can accept. MNC's directly and indirectly help both the home country and the host country.

Advantages of MNC's for the host country
 
MNC's help the host country in the following ways

1. The investment level, employment level, and income level of the host country increases due to the operation of MNC's.
2. The industries of host country get latest technology from foreign countries through MNC's.
3. The host country's business also gets management expertise from MNC's.
4. The domestic traders and market intermediaries of the host country gets increased business from the operation of MNC's.
5. MNC's break protectionalism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness.
6. Domestic industries can make use of R and D outcomes of MNC's.
7. The host country can reduce imports and increase exports due to goods produced by MNC's in the host country. This helps to improve balance of payment.
8. Level of industrial and economic development increases due to the growth of MNC's in the host country.

Advantages of MNC's for the home country
 
MNC's home country has the following advantages.

1. MNC's create opportunities for marketing the products produced in the home country throughout the world.
2. They create employment opportunities to the people of home country both at home and abroad.
3. It gives a boost to the industrial activities of home country.
4. MNC's help to maintain favourable balance of payment of the home country in the long run.
5. Home country can also get the benefit of foreign culture brought by MNC's.

Disadvantages of MNC's for the host country
 
1. MNC's may transfer technology which has become outdated in the home country.
2. As MNC's do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries.
3. MNC's may kill the domestic industry by monpolising the host country's market.
4. In order to make profit, MNC's may use natural resources of the home country indiscriminately and cause depletion of the resources.
5. A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty.

Disadvantages of MNC's for the home country
 
1. MNC's transfer the capital from the home country to various host countries causing unfavourable balance of payment.
2. MNC's may not create employment opportunities to the people of home country if it adopts geocentric approach.
3. As investments in foreign countries is more profitable, MNC's may neglect the home countries industrial and economic development.

Applicability to particular business
 
MNC's is suitable in the following cases.

1. Where the Government wants to avail of foreign technology and foreign capital e.g. Maruti Udyog Limited, Hind lever, Philips, HP, Honeywell etc.
2. Where it is desirable in the national interest to increase employment opportunities in the country e.g., Hindustan Lever.
3. Where foreign management expertise is needed e.g. Honeywell, Samsung, LG Electronics etc.
4. Where it is desirable to diversify activities into untapped and priority areas like core and infrastructure industries, e.g. ITC is more acceptable to Indians L&T etc.
5. Pharmaceutical industries e.g. Glaxo, Bayer etc.

Multinationals and Transnationals

Multinational companies are not a recent phenomenon, but it is a fact that today because of modern and fast and efficient means of communications and transportation, companies and businesses find it easy to operate in many other countries apart from their parent country. It is customary to call such companies as multinational corporations. 

However, there is another word used for similar companies operating in more than a single country and that is transnational. This article tries to highlight the differences between multinational and transnational, in order to remove any doubt in the reader’s mind about these two concepts.

There is no doubt that when a company grows at a rate faster than its products or services can be utilized by people in the home country, it tries to internationalize its business in anticipation of greater profits. Thus, when a company invests in another country besides its own and does business with another country, it is termed as a multinational. A single company can have operations in any number of countries. Today we have multinationals referred to as MNC’s.

A different word has been coined to refer to corporations having a presence in more than a single country. Transnational is also a business entity having business operations in more than a single country, and many of the MNC’s classify to be called as transnational.

The basic difference between a multinational and a transnational lies in the fact that transnational company is borderless, as it does not consider any particular country as its base, home or headquarters. Multinational companies, though having a parent country and a centralized decision making process, adopts a selling strategy that is unique to every other country where it has investments. This strategy is made keeping in mind the requirements of the local markets and the rules and regulations of the government. Often MNC’s have to abide by sensitivities and culture of the local people.

Disadvantages of Multinationals

List of Cons of Multinational Corporations

1. They might unfavorably dominate the market. 
 
Remember that the market dominance of multinational corporations would make it hard for smaller local companies to thrive and succeed. For example, arguments state that the larger supermarkets can squeeze out local corner stores’ notable margin, leading to lesser diversity.

2. They might exploit the workforce. 
 
These corporations are not well-known for treating people fairly and are instead known for ignoring rules and regulations, as well as turning a blind eye to injustice in the workplace. They are put into the spotlight for outsourcing to the lowest bidders and for skimping on quality. They are not known for having what smaller businesses have—the “human” touch. Many of them are even found exploiting workers and natural resources without considering the economic well- being of any country. In fact, some of them are criticized for using slave labor, where workers are paid with very small wages.

3. They take advantage of consumer expense. 
 
Usually, companies are interested at consumers’ expense, but multinational companies, with more power, is taking this to another level.

4. They can push local firms out of business. 
 
Giant multinationals use the scale of developing economies to push the local firms out of their business.

5. They are willing to gain ridiculous profits at any cost. 
 
These companies are able to realize tremendous profits and do not share their wealth. For example, these organizations that have manufacturing plants in China, where wages are very low, do not increase worker salaries when actually they have very huge amounts of extra revenues.

6. They strive for a monopolized business. 
 
Naturally, many of the largest corporations are monopolizing their industries. They are very powerful, which makes it very difficult, if not impossible, for start-ups and smaller businesses to compete. By monopolizing, they cut out the competition, which eventually stunts economic growth. Plus, authorities might put power in the hands of these global corporations, so they will be able to set the rules.

7. They a great environmental threat.
 
In the name of profit, multinational corporations commonly contribute to pollution and make use of non-renewable resources, which can pose a threat to the environment. They often abuse the environment and are typically not very careful when using their resources. Moreover, they are well known for leaving an environmental mess in their wake and even have a strong reputation for dumping waste and utilizing natural resources until they are depleted. In general, they are not being very good as keepers of the earth.

Conclusion

While it is a fact that multinational corporations bring a lot of benefits, we cannot also deny that they can cause of some major issues in the economy. On your end, do you think they are beneficial or a big threat in countries, based on the pros and cons listed above?

Advantages of multinationals

List of Pros of Multinational Corporations

1. Their size benefits consumers. 
 
The operational size and scale of these corporations can give them the chance of taking advantage of the economies of scale, which paves the way for lower average costs and prices for consumers. This is particularly important to industries that carry extremely high fixed costs, such as car manufacturers and airlines.

2. They can help a country in many ways. 
 
Multinational corporations have the ability to bring advanced technology to poorer countries, while bringing low-cost products to the wealthier ones.

3. They are cost-effective. 
 
By utilizing labor in parts of the world where the low cost of living does not require high wages for production, these companies can keep consumer costs down. As a result, many industries can also benefit.

4. They can create jobs and wealth. 
 
These global companies’ inward investments offer the much needed foreign currency for developing economies, which in turn help with creating jobs and increasing expectations of things that will likely happen. 

5. They help other companies. 
 
Through merger and acquisition, multinational companies can help other commercial organizations with achieving economies of scale in distribution and marketing, allowing well-managed businesses to take over those that are poorly managed.

6. They adhere to the best brand standards. 
 
This is one of the best qualities of these corporations. For example, McDonalds is still McDonalds wherever it is operating in the world. There is a standard that this restaurant chain is expected to adhere to. The same goes to the manufacturing sector, where standards are set and are expected to be adhered to. This builds trust and confidence among consumers, which is then converted to consumer loyalty.

7. They ensure minimum standards.
 
Somehow connected to the previous pro, the main reason for the success of multinationals is that consumers would usually purchase products and services on which they can go for minimum standards.

8. They help improve standard of living. 
 
Multinational corporations have the capability to improve the world’s standard of living, providing people with access of quality products regardless of the place.

9. Their large profits are consumed for development and research. 
 
Taking into consideration pharmaceutical companies, they can easily afford to pour millions of dollars into their research and development efforts. The same goes for automobile manufacturers and other large corporate entities. Without their global presence and large profit margins, they will not be able to do this. Another good example is oil exploration, which is both costly and risky. As such, only large firms can undertake it by using significant amount of money and other resources.

10. They allow for a wider market. 
 
With these big businesses, huge markets have been created both domestically and internationally.

Multinational Corporations

Can multinationals be controlled?

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.


SHOULD THEY BE CONTROLLED?


Are governments powerless to control multinationals?

Links to details about multinationals

List of Advantages of Multinational Corporations

1. Cheaper Labor
One of the advantages of multinational corporations is the opportunity to operate in countries where labor is not as expensive. This is one of the perks that smaller companies do not enjoy. Multinationals can set up their offices in several countries where demand for their services and products are high while cheaper labor is available.
2. Broader Market Base
By opening establishments or offices in several countries, multinationals increase their chances of reaching out to customers on a global scale, a benefit which other companies limited to regional offices and establishments do not have. The access to more customers gives them more opportunities to develop and cater their products and services that will fit the needs of potential customers.
3. Tax Cuts
Multinationals can enjoy lower taxes in other countries for exports and imports, an advantage that owners of international corporations can take at any given day. And although not all countries can have lower tariffs, there are those that give tax cuts to investors to attract more international companies to do business in these countries.
4. Job Creation
When international companies set up branches in other countries, employees and members of the team are locals. That said, more people are given employment opportunities especially in developing countries.

List of Disadvantages of Multinational Corporations

1. Potential Abuse of Workers
Multinational companies often invest in developing countries where they can take advantage of cheaper labor. Some multinational corporations prefer to put up branches in these parts of the world where there are no stringent policies in labor and where people need jobs because these multinationals can demand for cheaper labor and lesser healthcare benefits.
2. Threat to Local Businesses
Another disadvantage of multinationals in other countries is their ability to dominate the marker. These giant corporations can dominate the industries they are in because they have better products and they can afford to even offer them at lower prices since they have the financial resources to buy in bulk. This can eat up all the other small businesses offering the same goods and services. Chances are, local businesses will suffer and worse, close down.
3. Loss of Jobs
With more companies transferring offices and centering operations in other countries, jobs for the people living in developed countries are threatened. Take the case of multinationals that create offices in developing countries for their technical operations and manufacturing. The jobs given to the locals of the host country should be the jobs enjoyed by the people where the head office is located.
Multinational corporations have both advantages and disadvantages since it creates jobs but can also end up in the exploitation of workers, among other things. And since they are most likely to stay, it’s best to create policies to make globalization equitable.

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.

Following are the world’s Top 10 MNCs

• Microsoft 
• Nokia
• Toyota
• Intel
• Coca-Cola
• Sony
• IBM
• General Electric
• Nike
• Citigroup.

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