What are the advantages of multinational companies

Multinational companies

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general definition

A multinational company (MNU; English: Multi National Corporation, MNC) is generally any legally independent company that has at least one subsidiary abroad and therefore has more than one production site.

Alternative definition

For MNEs, which are also referred to as "multinationals" or "global players", there is no uniformly recognized definition. In the United States, a company is considered to be multinational if a foreign company already holds 10% of the shares in it. From a global perspective, MNEs are characterized by the fact that they become active in other countries beyond their national borders (headquarters of the parent company in Germany) and produce and / or invest there. [1]

facts and figures

MNEs are often criticized for the fact that their economic power and their political influence are increasing with increasing globalization. About a third of world trade is controlled by multinational corporations, and they have an indirect stake in another third. Only the remaining 33% of world trade takes place on the "polypolistic level" and is not influenced by MNEs.

By comparing the size of the world's most important countries with the most important companies, one comes to the conclusion that only half of the hundred largest economies in the world are national economies. The other half are powerful multinational corporations. [2]

Fig. 1 Turnover of multinational companies (2005)
Fig. 2 GDP of selected countries (current)

For example, Wal-Mart's sales in 2005 were greater than Denmark's current nominal GDP (compare Figures 1 and 2). Shell's turnover (measured in 2005) is greater than the GDP of Portugal and Bulgaria combined. Although this comparison is rather problematic, it shows the significant size and thus the position of power that individual companies have achieved compared to nation states.

History and Development

industrialization

Multinational companies have a long history that began with industrialization. For example, the invention of the steam locomotive and the railroad led to a later expansion of the rail network throughout Europe. The automotive industry was shaped by the companies Ford (founded in 1903) and General Motors (founded in 1908) in the early 20th century. These were the first American multinationals in this sector to become active in Europe. General Electric was producing and selling light bulbs worldwide as early as 1900.

Between the wars

As early as 1914, there were around 3,000 of these so-called "multis" or "global players" in the United States and Europe. Little importance can be attached to this number as most MNEs at that time did not have the economic strength that is the case today. Sectors in which the first MNEs formed were the banking sector, the railroad and the automotive industry. During the Second World War, the importance of multinational companies declined sharply.

After 1945 until today

With the liberalization of trade after World War II, the extent of world trade increased enormously. What followed was direct investment in large numbers in all major countries. MNEs experienced an enormous boom. New sectors included the telecommunications, transportation and energy markets.

It should be noted that the number of multinationals has quadrupled between 1980 and today. While the United Nations still counted around 17,000 MNEs in the 1980s (in 1994 it was a good 40,000!) This number has increased to 70,000 over the decades.

Germany, the USA and the Southeast Asian region

Multinational companies have developed differently in individual countries. The number of MNEs in Germany has almost doubled from 1980 (5000) to today (around 9000). Today there are around 2400 MNU in the USA and around 2200 in Japan. These two countries have lower growth rates than the FRG, as many companies in both countries have merged. The Southeast Asian region, however, has enormous potential for growth and therefore the development and expansion of further locations for MNEs seems very likely.

Types and theory of the MNE

horizontally integrated companies

  • produce goods and services of the same kind in every market where MNEs are active (e.g. McDonald's)
  • particularly suitable if, due to trade barriers (customs duties, etc.), local production is the more cost-effective option
  • Use of resources on site
  • shorter transport routes (no shipping etc.)

This motive is known as the location motive of multinational companies. It provides information on why MNEs produce the same good in several countries.

vertically integrated companies

  • produce goods and services in one country that are used as intermediate products in the production process of other companies in other countries
  • can be seen as a division of labor between, for example, the parent company and the subsidiary
  • runs almost within the company, but internationally
  • thus simple technology transfer is possible

The aim of vertical integration is primarily to use the comparative advantage of the different international production locations and to achieve efficiency advantages.

This motive is known as the internalization motive of multinational corporations. It answers the question why a good is manufactured by the same company at different locations.

Advantages and disadvantages

advantages

A great advantage of MNEs is the transfer of technology and knowledge to developing countries. The establishment of new production facilities creates jobs. An adjustment of prosperity to the great nations will take place (if only to a small extent). Overall, global competition is becoming more extensive. Smaller states such as Hong Kong are also able to participate in international trade and intervene to a limited extent.

The advantages for MNEs are the avoidance of possible customs duties. Furthermore, there are no transport costs. The labor force in developing countries mostly works for less wages. Significant cost advantages are also reflected in the procurement of raw materials. Another advantage are lower tax rates in the host countries. If MNEs are active in foreign countries, they can also escape political and state interference. Due to the enormous cost advantages mentioned above, the foreign, untapped market is becoming increasingly attractive for MNEs.

disadvantage

A major disadvantage of MNEs is that many host countries feel threatened by the presence of multinational companies. They are said to overexploit nature, exploit the workforce and disregard culture. Many locals (a very strong phenomenon in Japan) therefore refuse to work for such companies. Large multinationals are also gaining enormous influence due to a lack of political restrictions.

Disadvantages for MNEs include, for example, motivating their employees. There are also dangers of economic crises (inflation, fluctuations in the exchange rate, etc.) and political unrest in some countries. In order to work on markets that are still untapped and to become active in such regions, companies often have to accept high costs. In general, the choice of location can also turn out to be suboptimal in retrospect.

criticism

Lower costs on the one hand are synonymous with disadvantages for the local population on the other. The term exploitation is often associated with multinational corporations. They employ their workers at starvation wages and mercilessly exploit the host country's resources - both people and nature. Due to the disregard for cultural customs and traditions and the inadequate public control, MNEs are increasingly coming into public criticism and are strongly reminiscent of the image of the colonization of the European powers before the First World War. It is also frightening that many companies now have such power that they overshadow entire economies (compare Figures 1 and 2). Their influence is growing, and with it the danger that MNEs will continue to gain more and more political influence in the future.

Conclusion

Multinational companies have many advantages and disadvantages. However, despite their dubious reputation, they are essential to world trade. In some respects, however, this is considered excessive, because ultimately they also ensure the maintenance of the global economy.

The OECD Guidelines for Multinational Enterprises, for example, can remedy their criticism.

Individual evidence

  1. ↑ Hartmut Leser; DIERCKE Dictionary General Geography, 13th edition, 2005, pp.581 / 582
  2. ^ Bathelt, Harald and Glückler, Johannes; Wirtschaftsgeographie, 2. UTB edition, 2002, p.266

literature

  • Krugman, Paul R. and Obstfeld, Maurice; International Economics: Theory and Politics of Foreign Trade, 6th edition, Pearson Studium, 2003
  • Hartmut Leser; DIERCKE Dictionary General Geography, 13th edition, 2005
  • Bathelt, Harald and Glückler, Johannes; Economic Geography, 2. UTB edition, 2002

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