Multinationals are large scale, well-established business with their headquarters in one country and operating through a network of production plants and or branches in different parts of the world. Multinationals must not be confused with local or national businesses that operate on a limited scale catering to the needs of customers in a particular town or country respectively.
Multinationals are in a position to enjoy a variety of economies of scale including purchasing, financial, risk bearing and technical economies of scale, due to their rapid growth. They are fully aware of their importance to the economy of the country they are investing and can sometimes pressurize the government to show flexibility in its policies regarding key areas such as taxation, environmental laws etc.
Multinationals often exploit the resources of developing countries and have an access to cheap factors of production. The multinationals can take multiple benefits from the country. They are in a position to influence the country and raise its living standards if operating in a developing country. Their new inventions or latest products can attract the customers of the developing country which will eventually give them higher profits. Moreover, the government wants the multinationals to operate in their countries. The multinationals can get some soft policies from the government such as low taxes. The government will ensure the survival of multinationals and offer flexible policies as well.
There’s nothing in the world that comes with benefits only, if there’s a positive side, there’s a negative side too. Multinationals are beneficial, however, management problems may arise for multinationals since they usually function on an exceptionally large scale. Some companies have a workforce of almost millions of employees dealing with hundreds of different products in more than a hundred countries. Sometimes the lack of sufficient amount of local knowledge can also create problems for such companies. It has also been observed that unfavourable political, national or global events may have a negative impact on the performance of certain multinationals. All in all, the benefits of multinationals are stronger than the drawbacks. Hence, companies that can operate on a large scale should consider these factors.