Negative Impacts of Multinational Corporations

by Victoria Bailey - Updated October 18, 2018
City Network

Today's global economy is a Gordian knot, a completely tangled group of strands that are endlessly intertwined. Multinational corporations are a natural result of this economic environment and have become a staple of the American business world. Multinational corporations that are majority U.S.-owned employed almost 6.5 million workers in 2014, and that figure tends to increase every year. While these companies can claim a significant portion of the United States' economic power, there are definite disadvantages to this situation. Creating jobs and wealth are good, but the social and environmental costs can be extreme.

Environmental Impacts

One natural advantage that multinational corporations have is the ability to produce goods using the least expensive methods possible worldwide. With few ties to any one political entity, their desire to work cheaply and efficiently often is at odds with sound environmental practices. With their economic importance to their host countries, they often find themselves in a power position when lobbying for beneficial environmental regulations that favor profits over nature. If host countries are at an economic disadvantage, their desire for increased revenue can override their need to regulate environmental impacts.

Transfer Pricing

One unique way multinational corporations can increase their profit margin is by transfer pricing. The goal of this practice is to reduce their tax liability in those countries that may have a higher tax rate for their products and increase their liability in countries with a lower tax rate. They do this by shipping partly finished goods and components between different factories in different countries. Transferring expensive goods from countries with a high tax rate make their bottom line look more healthy while transferring goods at a lower price to markets with a lower tax rate will decrease their final tax bill. The result is two or more different countries losing valuable tax revenue because of financial loopholes in the tax laws.

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Social and Cultural Impact

The increasing number of multinational corporations is creating a sort of homogenization effect, making much of the world look the same and causing different countries to lose their identities. This process, known as "McDonaldization," results in more and more parts of the world looking exactly like every other part. This standardization of the retail world is pushing out small businesses such as local artisans, regional cuisine and other small businesses, making streets in Tokyo and London look much the same as those in Chicago or Orlando.

Worker Exploitation

With profit being the primary goal and the world as their environment, multinational corporations can afford to pick and choose when it comes to finding governments that enact employment laws that benefit their business over the workers. Their head office may be in a country with stringent employment laws, but they're free to set up factories in economic deserts where people are eager to work for pennies a day. These workers tend to be low-skilled, resulting in a general loss of quality in the product line. Also, corporations tend to build in countries without strict health and safety laws, adding to the social decline of host countries.

Economic Uncertainty

Because they're not tied to any one country, multinationals may not have a reason to feel loyal to one country over another, which creates economic uncertainty, both for the workers and for the community in which they base their production. If laws change and a multinational finds that it can produce the same goods elsewhere for a fraction of the cost, they have no good reason to maintain their original factory. These corporations can ship jobs overseas to wherever they can build their products cheaper, which can leave some communities financially devastated.

About the Author

Victoria Bailey has owned and operated businesses for 25 years, including an award-winning gourmet restaurant and a rare bookstore. She spent time as a corporate training manager in the third-largest restaurant chain in its niche, but her first love will always be the small and independent businesses. Bailey has written for USAToday, Coldwell Banker, and various restaurant magazines, and is the ghost writer for a nationally-known food safety training guru.

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