What are the negative effects of multinational corporations?

Readers Question: I have to debate why multinational corporations are good for developing countries, and I know the arguments for them being bad are strong so are there any really good positive arguments I could use to smash the opposition? 

Multinational companies like Nike, Sony, Apple, Toyota, Coca-Cola all have investments and operations in developing economies. This can lead to both benefits and disadvantages for developing economies.

  • Multinationals provide an inflow of capital into the developing country. E.g. the investment to build the factory is counted as a capital flow on the financial account of the balance of payments. This capital investment helps the economy develop and increase its productive capacity.
  • The Harrod-Domar model of growth suggests that this level of investment is important for determining the level of economic growth. One of the best ways to increase the level of economic growth is to provide an inflow of capital from abroad.
  • The inflows of capital help to finance a current account deficit. (Basically, this means that foreign investment enables developing countries to buy imports.)
  • Multinational corporations provide employment. Although wages seem very low by Western standards, people in developing countries often see these new jobs as preferable to working as a subsistence farmer with even lower income.
  • Even liberal economists like Paul Krugman and Jeffrey Sachs have defended ‘sweatshop labour’ arguing that although employers are paying too low wages. Often sweatshop labour is better than the alternative of scavenging or no paid employment. Economies in south-east Asia have seen rising wages in recent decades – showing that low wage economies can develop.
  • Multinational firms may help improve infrastructure in the economy. They may improve the skills of their workforce. Foreign investment may stimulate spending in infrastructure such as roads and transport.
  • Multinational firms help to diversify the economy away from relying on primary products and agriculture – which are often subject to volatile prices and supply.

Disadvantages of Multinational Corporations in developing countries

  • Environmental costs. Multinational companies can outsource parts of the production process to developing economies with weaker environmental legislation. For example, there is a trade in rubbish, which gets sent to developing economies like India for disposal and recycling.
  • Profit repatriated. Although multinationals invest in developing economies, the profit is repatriated to the location of the multinational, so the net capital inflows are less than they seem.
  • Skilled labour. When undertaking new projects, the multinational may have to employ skilled labour from other economies and not the developing economy. This means best jobs are not received by local workers and the investment is diffused.
  • Raw materials. A large component of multinational investment in developing economies is seeking out raw materials – oil, diamonds, rubber and precious metals. The extraction of raw materials can cause environmental externalities – polluted rivers, loss of natural landscape. Also, there is only a short-term inflow of money to pay for the materials. In many cases, the payments have not effectively filtered through to the wider population – with money syphoned off by corrupt officials and politicians. Therefore, local communities in developing economies can face widespread disruption, but only limited compensation for the precious materials.
    • However, it is not all one way. Chinese companies have built new roads and railways in Africa to gain better access to raw materials in Central Africa. This infrastructure investment will leave a long-term legacy – even if firms leave Africa.
  • Sweat-shop labour. Not all economists are convinced sweat-shop labour is a good thing. Critics argue that weak labour conditions allow multinationals to use their monopsony power and pay lower wages to workers than they should get paid.

Related

  • Benefits and costs of Multinationals

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Readers Question: List and briefly describe the positive and negative attributes of multinational corporations (MNCs).

Multinational corporations are large companies with operations in several countries across the world. For example, Apple, Ford, Coca-Cola, Alphabet (Google) and Microsoft. Their size and turnover can be greater than the total GDP of many developing economies.

What are the negative effects of multinational corporations?

Benefits of Multinational Corporations

  • Create wealth and jobs around the world. Inward investment by multinationals creates much needed foreign currency for developing economies. They also create jobs and help raise expectations of what is possible.
    What are the negative effects of multinational corporations?
  • Their size and scale of operation enable them to benefit from economies of scale enabling lower average costs and prices for consumers. This is particularly important in industries with very high fixed costs, such as car manufacture and airlines.
  • Large profits can be used for research & development. For example, oil exploration is costly and risky; this could only be undertaken by a large firm with significant profit and resources. It is similar for drug manufacturers who need to take risks in developing new drugs.
  • Ensure minimum standards. The success of multinationals is often because consumers like to buy goods and services where they can rely on minimum standards. i.e. if you visit any country you know that the Starbucks coffee shop will give something you are fairly familiar with. It may not be the best coffee in the district, but it won’t be the worst. People like the security of knowing what to expect.
  • Products which attain global dominance have a universal appeal. McDonald’s, Coca-Cola, Apple have attained their market share due to meeting consumer preferences.
  • Foreign investments. Multinationals engage in Foreign direct investment. This helps create capital flows to poorer/developing economies. It also creates jobs. Although wages may be low by the standards of the developed world – they are better jobs than alternatives and gradually help to raise wages in the developing world.
  • Outsourcing of production by multinationals – enables lower prices; this increases disposable incomes of households in the developed world and enables them to buy more goods and services – creating new sources of employment to offset the lost jobs from outsourcing manufacturing jobs.

Criticisms of Multinational Corporations

  • Companies are often interested in profit at the expense of the consumer. Multinational companies often have monopoly power which enables them to make an excess profit. For example, Shell made profits of £14bn last year.
  • Tax avoidance. Many multinationals set up companies in countries with the lowest tax rate. They funnel profit through the countries with the lowest corporation tax rates – e.g. Bermuda, Ireland, Luxemburg. For example: in 2011, Google had £2.5bn of UK sales, but only paid £3.4 million UK tax. A tax rate of 00.1% despite having a global-wide profit margin of 33%. (tax avoiding companies) This means the multinationals are ‘free-riding on smaller companies who cannot attain the same creative tax accounts.
  • Cash reserves – Apple has cash reserves of $216bn, 93% of which is overseas. This represents deadweight welfare loss. It is not being used for investment
  • Their market dominance makes it difficult for local small firms to thrive. For example, it is argued that big supermarkets are squeezing the margins of local corner shops leading to less diversity.
  • In developing economies, big multinationals can use their economies of scale to push local firms out of business.
  • In the pursuit of profit, multinational companies often contribute to pollution and use of non-renewable resources which is putting the environment under threat. For example, some MNCs have been criticised of outsourcing pollution and environmental degradation to developing economies where pollution standards are lower.
  • ‘Sweat-shop labour’ MNCs have been criticised for using ‘slave labour’ – workers who are paid a pittance by Western standards.
  • Outsourcing to cheaper labour-cost economies has caused loss of jobs in the developed world. This is an issue in the US where many multinationals have outsourced production around the world.

Evaluation

  • Some criticisms of MNCs may be due to other issues. For example, the fact MNCs pollute is perhaps a failure of government regulation. Also, small firms can pollute just as much.
  • MNCs may pay low wages by western standards but, this is arguably better than the alternatives of not having a job at all. Also, some multinationals have responded to concerns over standards of working conditions and have sought to improve them.

What do you think of Multinational companies? – leave comment below.

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What are the 3 disadvantages of multinational corporations?

List of the Disadvantages of Multinational Corporations.
Multinational corporations create higher environmental costs. ... .
Multinational corporations don't always leave profits local. ... .
Multinational corporations import skilled labor. ... .
Multinational corporations create one-way raw material resource consumption..

What are the effects of multinational corporations?

By producing the same quality of goods at lower costs, multinational companies can reduce prices and increase the purchasing power of consumers worldwide. Other benefits include a direct financial investment in foreign countries and job growth in their local economies.

What are the positives and the negatives of multinational corporations?

MNCs provide good quality products with innovation, also help in the employment in the host country also higher assets and great income source..
Exploitation of laborers..
Dominate the host country's supremacy..
Increase pollution..
Import skilled laborers..
Build legal monopolies..

What are the negative effects of multinationals on their host countries?

The host nation may lose control over its own economy. Negative impact on the host's balance of payments because of heavy imports of spares and components. Exploitation of the hosts' irreplenishable natural resources leading to the dwindling of these. Exploitation of labour of the host when the country needs it.