A host country is a nation that allows a multinational company to set up operations in its country. Multinational companies have varying impacts on host countries, some of which are beneficial whilst others are detrimental.
Positive impact of multinational companies on host countries
There are many advantages for the host country to benefits from the presence of multinational companies.
1. Job creation. Multinational companies create employment opportunities. They also tend to pay more than local firms in host countries. Training programmes will also improve the quality and efficiency of local workforce. Therefore, more of the local workforce will be employed to work in the multinational companies.
Example 1: Volkswagen produces cars in Kaluga, Russia. The investment created more than 3,500 jobs.
Example 2: Toyota’s investment in France created 2,000 direct jobs and conceivably another 2,000 jobs in supporting industries.
Example 3: Audi produces cars in Győr, Hungary. As of 2018, this investment created over 13,000 jobs.
2. Boost to the local economy. Multinational companies help to increase the value of a country’s annual output by producing and selling high volume of products. They will also boost export earnings for the host country by selling products abroad. This will create consumption expenditure since more people are in paid employment, and boost the host country’s Gross Domestic Product (GDP). Therefore, the overall standard of living will be improved.
Example 4: Walmart, an American multinational retail corporation, operates a chain of hypermarkets, discount department stores and grocery stores in the U.S. and other countries around the world. Walmart has recorded the sales revenue of USD$559 billion in 2020. This amount easily exceeds the Gross Domestic Product (GDP) of many countries in the world. Walmart is also the world’s largest employer hiring around 2,300,000 workers in its stores.
3. More TAX revenue for local governments. The income generated by the multinational companies will be TAXable in the host country. The government in a host country will receive more Corporate TAX revenues from any Net Profits Before Interest and TAX made by multinational companies. Most of the multinational companies tend to be highly profitable businesses year after year. This will lead to more income for the government to spend on important public services such as health care and education.
Example 5: The Net Profit Margin of multinational firms such as The Coca Cola Company or McDonald's has been consistency exceeding 20% for many years. These companies also record huge Annual Net Profits amounting to a few billion USD$, hence pay very large Corporate TAXes.
4. Bringing new managerial skills and technology. Multinational companies introduce new skills and technology in production processes to host countries. With new ideas in management, and technology transfers, the efficiency of production in the host country will be raised. Management expertise in the community will slowly improve. Then, the foreign managers might be replaced by local staff once they are suitably qualified.
Example 6: Japanese multinational firms have introduced quality management tools to the rest of the world. These techniques of quality improvement such as Kaizen, Kanban, Andon, Quality Circles or Total Quality Management (TQM) have been widely adopted by many companies around the world.
5. Intensify competition – improved quality. With multinational companies on the market, local businesses will be forced to improve their quality and productivity up to international standards to compete with the multinationals. It is because without the threat from multinational companies, domestic firms do not necessarily have the incentive to be innovative or to respond to market forces. Higher competition will lead to greater efficiency to the benefit of domestic customers.
6. Increase in choices of products. Domestic customers will have access to a greater variety of goods and services as there is more competition. Therefore, customers will be able to benefit from more choices. Also, due to competition and better production methods, the quality of goods may be higher too.
7. Improvement of the country’s reputation. Multinational companies will invest in foreign country that has a positive regulatory and economic environment. Usually, governments of host countries provide incentives to multinational companies to set up in areas with high unemployment and a plentiful supply of labour. This may encourage other multinational companies to set up there as well.
8. Improvements in infrastructure. Very often, multinational companies have to invest in transportation and communication networks as they produce and sell large volumes of products. This may benefit everyone in the host country. New technology and techniques that are being used by the multinational companies, as well as advanced knowledge, will be shared with local employees. In that way, local companies that will hire those workers in the future could learn from them and improve.
9. Improvement of the balance of payments. Multinational companies with global presence will export their good to other countries. Hence, exports of the host country will increase. At the same time, imports may reduce as the multinational companies may be able to provide the products to the domestic customers that were previously imported. After all, the balance of payment of the host country will be improved. Keeping balance of payment at the appropriate healthy level is one of the six government objectives. It is because countries, the same as individual people, are not able to spend more than they earn in the long run to sustain themselves without borrowing. And borrowing, especially from other countries, is expensive.
10. Local suppliers can gain new customers. Local producers and suppliers are likely to benefit from the increased presence of multinational companies in the country. They will be supplying raw materials, components and finished goods, as well as services, and this will generate additional jobs and higher sales revenues for those suppliers.
Negative impact of multinational companies on host countries
However, it will not be all good news. The expansion of multinational corporations into a country could lead to many drawbacks to the host country.
1. Exploitation of the local workforce. Some multinational companies have been criticized for paying low wages to workers in poor countries. Especially, when the host country faces high unemployment and workers are low skilled. Also, due to the absence of strict labor, and health and safety rules in some underdeveloped and developing countries, multinationals can employ cheap labor for long hours with few of the benefits that the staff in their home country would demand.
Example 7: Many clothing manufacturers have been facing accusations of employing illegal child workers who produce their clothes in sweatshops and factories in South-East Asia. This may lead to poor publicity and tarnished brand reputation globally.
2. Higher pollution and environmental damage. Pollution levels from manufacturing plants in underdeveloped and developing countries might be at higher levels than allowed in other developed countries. It might be because of many reasons. Multinational companies aim to produce goods as quickly and as cheaply as possible, and in doing so may ignore their impact on the environment. Also, it might be because of slack rules of the host country’s government which does not insist on environmentally acceptable practices. Otherwise, it may drive multinational companies away.
3. Repatriation of profits to home countries. Many multinational companies send back the profits that they earn in host countries to their home country. Profits may be sent back to the country where the head office of the company is based, rather than kept for reinvestment in the host nation. Whilst multinational companies can create wealth in the host country, the profits are repatriated to the home country in the end. This will leave the host country with very little financial benefit.
4. Exploitation of natural resources. Sometimes multinational companies set up their operations in host countries, so that they can have easier and cheaper access to natural resources. Extensive depletion of the limited natural resources of some countries has been blamed on some large multinational corporations. The argument is that they have little incentive to conserve these resources, as they are able to relocate quickly to other countries once resources have run out. In the long-term this may lead to scarcity of that natural resource in the host country. Anti-globalization groups are concerned about the social responsibility of multinational companies in their attempt to grow and exploit the planet’s scarce resources.
5. Less sense of Corporate Social Responsibility (CSR) and negative social impact. Most of the multinational companies are Public Limited Companies. They are mainly driven by profit as investors demand dividends and capital gains. Hence, they may not pay much attention to health and safety of workers and customers, if the laws of the host country are not very strict. Host nations are often unable to control the actions of large multinational companies, due to their sheer market power. The marketing done by multinational companies can greatly affect the lifestyle, food habits and culture of the host communities. This may mean that traditional products and practices disappear leading to a reduction in cultural identity.
Example 8: From time to time, some of the multinational businesses from the West are being accused in the media of imposing Western culture on other societies.
Example 9: After 2010, a few American companies including Google and Yahoo have pulled out of China no longer providing services in The Middle Kingdom.
6. Small local companies may go out of business. Since multinational companies are large and are experts in their area of operation, they are also cost-efficient. Usually, they can provide better quality goods at lower prices. Local companies that provide the same goods may suffer in such a case, therefore be squeezed out of business due to inferior equipment and much smaller resources. Due to fierce competitive pressures, domestic firms might be forced into reducing prices to remain competitive.
7. Contributing to severe unemployment. Multinational companies are capable of causing severe unemployment in the host country. It is because they are so good at what they do that they can pose a threat to domestic businesses. In general, competition can be good when it causes local firms to improve their performance. But, competition can also be bad when domestic firms are unable to compete on equal terms ending up with laying off redundant workers, or even having to shut down the business in the worst-case scenario.
8. Intensified pressure on local governments. Many of the Foreign Direct Investments (FDIs) made by multinational companies are huge amounting to hundreds of millions of USD$. This will greatly affect the economic conditions of the host country by positively contributing to the economic growth. However, there is no free lunch. In exchange for this investment, multinational companies may try to lobby and influence government policies that affect them in a favorable way. Hence, there might be undue influence on local governments. This will not be good for the host country in the long-term as the government may feel like its being held hostage by a single company.
