Reading: / Matching Information / Part 3

Multinationals: Curse or Blessing?

A   Multinational corporations have their share of critics. Seen as exploitive and heartless, caring only about profits and nothing about local economy and welfare, they have been held responsible for many of the negative effects of globalisation. They also have their advocates who see them as the saviours of modern-day capitalism, spreading such benefits as employment opportunities and advanced technology to poorer countries as well as boosting their economic wealth. The truth is that the multinationals are neither all-good nor all-bad but somewhere in between the two extremes.

B   As a major power behind the worldwide flow of capital, goods and services, the impact multinational companies have on the global economy is sizeable. A United Nations Report revealed that sales generated through the foreign affiliates of multi-nationals alone exceeded the amount generated by all the world's exports – $7 trillion in total. A further $3 trillion was invested by multinationals in countries outside of their home base in property, equipment and industrial plants. In fact, according to a Foreign Investment Review Board article, foreign direct investment exceeds domestic investment by 3 to 1 with many of the beneficiaries being developing countries. The article also stated that international businesses play a key role in disseminating technology – evidenced by the fact that payments between multinationals and their foreign affiliates made up 75% of all international royalties on technology in 2009.

C   It may seem that most activity is concentrated in foreign countries but actually the opposite is true. Figures published in 2008 by the Journal of Management and Applied Economics showed that in addition to hiring two-thirds of its employees domestically, over half of the output produced by multi-nationals is generated domestically. This seems to counter the argument that multinationals are only interested in countries that offer the cheapest labourers. John Villiers, chief economist of the UK Trade Commission maintains, 'While cheap labour rates may be the motive for the location of some textile and electronics industries, the majority of multinationals place more importance on other considerations like transport costs, trade barriers, worker-safety and tax laws.'

D   Many view the phenomena of globalisation and multinationals as being mutual requirements, that both are needed in order to survive. The reality is that globalisation may actually make it more challenging for multinationals to flourish. In his book, Free Trade, economist Paul Weaver explains, 'The global goal of the free transfer of capital, goods and services across national and international borders may make the construction of factories and research centres in foreign countries uneconomical. Trade barriers have fallen and transport costs are much lower than they were formerly so it is easier, and even cheaper, for a company to send goods overseas rather than investing in outside infrastructure.'

E   Presently there are many multinational corporations operating very successfully. Richard Thompson (2003) asserts three reasons for this. The first is that increased production can lead to a lowering of the average cost per unit. This happens because the fixed costs involved in the manufacturing process are shared over an increased number of goods. Such economies of scale need not refer only to the manufacturing process and physical goods but also marketing strategies and support systems. The second reason is ‘vertical integration’ – a process whereby firms purchase their suppliers, customers or both in order to have easier access to resources. If those happen to be based abroad, then the firm becomes a multinational. The final reason put forward by Thompson is that companies who are proficient at crossing borders tend to flourish in the more integrated world economy of the 21st century.

F   Not everyone celebrates a successful multinational. Because of their size and scale, some multinationals can have more power than is healthy and, according to the author of The Absolute Power of Multinationalism, Steve Gabaldon, many do not hesitate to abuse it. He asserts, 'Governments are keen to attract the huge investment potential characterised by the multinationals so they are not always scrupulous about issues like protecting the environment or promoting worker safety. By threatening to withdraw their business, multinationals can often manipulate conditions to suit themselves...and no-one else.'

G   However, bigger is not always better – in the competitive market, multinationals are just as vulnerable to being taken over or failing altogether as any locally-based enterprise. Size is of little consequence if innovation is not part of the management strategy. If speed of production and delivery cannot keep up with demand and customers are able to purchase goods and services from someone closer by, the multinational is destined to fail. In this way, rather than taking over the world, the multinational is just another part of it.

Questions 1-5

Look at the following statements (Questions 1-5) and the list of sources below.

Match each statement with the correct source.

Write the correct letter A-G in boxes 1-5 of your answer sheet.

1.       the cost to produce an item is reduced if many are made

2.       low wages for workers are only one of the priorities for multinationals

3.       multinationals negatively influence local authorities

4.       multinationals produce most of their products in their home country

5.       multinationals should export locally made products



Paul Weaver


Foreign Investment Review Board


Steve Gabaldon


John Villiers


United Nations


Richard Thompson


Journal of Management and Applied Economics