A multinational company is a global operation with the production and distribution of its goods located in numerous countries. Typically multinationals have different stages of the supply chain located in different countries. This enables the firm to specialise production in countries where it has a comparative advantage. The firm gains many benefits of being global – economies of scale in production, a global brand recognition and the ability to hire skilled labour from across the world.
The main benefits of being a multinational company
Specialisation in production. The scale of many industries means firms split production into different countries. For example, Apple design electronics in the US, where they have access to skilled labour. However, the design is then manufactured in China, where labour costs make production much more efficient than producing in relatively high cost US. For industries like the motorcar, the production process is split up into more stages, with plants dedicated to engines, tyres and bodywork. The multinational can produce different components in regions which are best suited to manufacturing that process before assembling in plants close to their market for sale. For example, BMW produce engines in Germany, import tyres from Asia and then have plants assembling cars in many different countries, such as the UK.
Outsourcing. Related to specialisation is the concept of outsourcing. A manufacturing firm in a high-labour cost economy can outsource the labour intensive production to cheaper labour cost countries and enable a reduction in costs.
Economies of scale. Many industries have high fixed costs. This means firms who can grow in size will benefit from lower long-run average costs and greater efficiency.
Multinationals can benefit from a range of different economies of scale, including
- Technical economies – economies of scale in producing goods, using expensive machines and investment. For example, if a drug company invests in developing new drugs, it can then sell them around the world
- Marketing. A global brand can advertise on a global scale and gain global exposure. For example, at the Olympics, you see global brands such as Coca Cola, Visa, Samsung, McDonald’s and General Electric.
- Risk-bearing – A large multinational is more able to survive a local downturn due to its diverse consumer base. If the US economy slows, a multinational can counter this by increased sales in Asia. A firm which only operates in one country is more vulnerable to domestic problems.
A multinational company can filter profits through countries which have lower corporation tax rates. For example, Google has set up in Ireland to take advantage of lower tax rates there. Amazon has a significant subsidiary in Luxembourg. Though most of its sales occur in European countries with higher tax rates, the use of a subsidiary in Luxembourg has enabled it to avoid taxes. About 33% of U.S. Fortune 500 companies have subsidiaries in Luxembourg, according to a 2014 report from Citizens for Tax Justice and U.S. PIRG Education Fund. (Amazon ended the practise in 2015 after investigation by EU)
Employment of skilled labour
A multinational has a bigger pool of labour to employ. The firm can employ specialists from across the globe. Having a bigger talent pool enables it to employ better managers or innovators, which can drive a companies growth.
Wider consumer base
Most firms reach a product of market saturation – in a product life-cycle, a large firm has very limited scope for growing sales in an economy. Selling abroad enables a much greater consumer base and opens up new possibilities to increase sales. For example, in the West, cigarette sales have gone into decline, however, by switching their focus to developing world, tobacco companies have new areas of growth and sales, reversing the decline from their ‘traditional markets’
These are the benefits to the firm of being a multinational. However, a benefit for a firm need not be a benefit for society. Tax avoidance increases profits for the company but leads to less tax revenue for governments and less government spending.