Expanding into multiple countries can help a company grow their profits and fuel the economy of their home country from afar. Unfortunately, these benefits are sometimes reaped at the expense of a host country, where labor laws and environmental restrictions are far more lax. Where is the line?
Multinational corporation are all around you, and all around the world, although you might not realize it at first glance. Any enterprise that has operations in one or more countries beyond where they're headquartered is classified as a multinational. These companies opt to expand into the global arena for a number of reasons, including increased market share and the resulting economies of scale. It can save money, increase productivity and help consolidate management. Despite the many benefits, multinational corporations also have a couple of distinct disadvantages. They're often criticized for exploiting their host countries for their resources and using foreign cities to skirt stricter labor and wage laws at home.
Advantage: Enhanced Investment in Host Country
Multinational corporations can be an invaluable dynamic force for employment as well as the wider distribution of capital and technology. By establishing a subsidiary, your investment helps the host country with critical financial infrastructure for both economic and social development. Your operations lead to improved balance of payments and job creation and raising levels of employment for the locals. You contribute to the host's exports and corresponding foreign exchange, in addition to import substitution; your products or services, previously imported, may now be bought domestically. What this means is that a multinational brings a lot of business and cash to the places it sets up shop. Plus, it saves money for your customers because the company doesn't have to import the goods.
Advantage: Tax Revenue for Home Country
A multinational corporation's profits are subject to federal and state taxes regardless of where the income is coming from. This boosts revenues for the home government.
In addition, new job opportunities are available for U.S. nationals in the foreign subsidiary to offer training, management administrative functions and facilitate technology transfer. Per the Internal Revenue Service Code, these employees have to pay income tax on their compensation. Taxes owed to your home country may be lessened through the use of intercompany transactions. These transactions shift funds from subsidiaries in countries with a higher tax rate to those with lower taxes. Payments for intellectual property use or raw materials help move dollars from one country to another. In recent years, this practice has come under fire in many countries.
Disadvantage: Preferential Treatment Over Local Industry
By virtue of your economic importance, the foreign government may accord your corporation disproportionate leeway in your operations. You may be allowed to use natural resources without restriction, while environmental and labor laws are relaxed in your favor – but this isn't always the best thing. Although it's undeniably good for business, there is the potential danger of operating without a reasonable concept of public interest or social policy. It threatening the long-term welfare of the locals, and if you're dealing with emissions, the world.
Disadvantage: Loss of Jobs at Home
Although expanding into the global markets can create some jobs for U.S. nationals, this can be insignificant if the bulk of your corporation's operations are shifted overseas to leverage cheaper labor. Workers recruited in the foreign country are often willing to accept lower compensation, significantly reducing your labor cost of production. If your priority areas include labor-intensive manufacturing or services that require foreign management expertise, it may make economic sense to hire in the foreign country, but it is at the cost of domestic jobs.