1.5.2 - Multinationals and host economies

Multinationals and growth

A multinational has business operations in more than one country, rather than simply sending an occasional export order abroad.

A host country is a country in which a foreign multinational locates operations. An illustrative South Korean electronics business with factories and sales operations in Vietnam is a multinational; Vietnam hosts those operations. An illustrative local craft seller posting products to customers abroad is an exporter, but overseas customers alone do not show it has operations there.

Globalisation makes international expansion easier through transport, communication, access to markets and reduced trade barriers. Improved communication lets managers exchange information quickly with overseas operations, making it easier to coordinate production and selling across countries. A business may grow by opening its own overseas premises or acquiring an existing business there. Such expansion requires finance, management and knowledge of the market; access does not make growth automatic.

Multinationals matter because their investment, employment and buying decisions affect several economies. A large international manufacturer can influence the host country's suppliers and workers as well as its own customers. Size and influence vary, and a multinational's decisions are made for its business objectives rather than necessarily for the host country's priorities.

Benefits to the business

Becoming a multinational can give a business closer access to overseas markets and resources.

Local operations can put the business nearer customers, reducing delivery times and helping it understand preferences. An illustrative large food retailer opening stores abroad can adapt its range to local tastes and sell directly to those customers. This creates a revenue opportunity, but its stores must attract enough demand to cover their costs.

Locating production abroad can provide access to materials, skills or lower production costs. An illustrative clothing business may open a factory near fabric suppliers and suitable workers. Shorter input journeys could reduce costs and delays. Lower wages do not guarantee lower overall costs if productivity is poor or transport, training and quality-control costs are high.

Production within a market or trade bloc may reduce some barriers faced by imports, subject to the agreement's rules. A larger business can also spread spending on design or administration over more sales and reduce dependence on one national market. These possible benefits encourage expansion, but coordinating distant operations, following different laws and maintaining quality add costs. Benefits depend on effective management and suitable demand.

Benefits to host economies

A host economy can benefit when a multinational creates productive activity that supports local people and businesses.

An illustrative multinational appliance producer opens a factory in Indonesia. Hiring local workers creates jobs and incomes. Workers may spend some of that income at local shops and services, supporting further activity. The scale of the benefit depends on how many jobs are genuinely additional and on wages and working conditions.

Buying packaging, transport or maintenance locally creates orders for host-country suppliers. Training workers or sharing production methods can develop skills and technology, which may improve productivity. These benefits are weaker if the business imports most supplies or reserves skilled roles for staff brought from elsewhere.

Investment in a factory or other facilities increases productive capacity. Where the multinational pays applicable taxes, the government gains revenue it can use for public services or infrastructure. This is not the same as all the multinational's revenue becoming government income. Tax concessions, allowable deductions and the firm's taxable profit affect the amount received.

Exports produced in the host country can also generate foreign-currency receipts. Their contribution must be considered alongside imported inputs and payments sent abroad. A host country's benefit therefore depends on what the operation actually does and retains locally, not merely the presence of a famous company.

Drawbacks and host judgement

Hosting a multinational can create costs or dependencies alongside the gains from investment and employment.

A multinational with a strong brand or lower costs may take customers from local businesses. If local firms lose sales and close, some employment gains at the multinational may be offset by job losses elsewhere. This is possible rather than inevitable: local suppliers or firms serving different customer needs may grow.

Profit repatriation means sending profit back to the multinational's home country. This reduces the amount of those profits retained in the host economy, though local wages, supplier payments and taxes may still provide benefits. It is inaccurate to say that repatriation means the host receives nothing.

Poor labour practices or environmental damage can harm workers and communities, especially where regulation is weak or poorly enforced. A factory might create jobs yet impose waste-disposal costs on others. These are possible drawbacks, not features of every multinational. Host-country laws and enforcement affect the outcome.

Dependence on a major foreign employer can be risky if it relocates or closes. Workers may lose jobs and suppliers may lose a large customer. The business's ability to choose other locations may also give it influence when negotiating tax concessions; generous concessions can reduce the government's net gain.

For the illustrative appliance plant, useful judgement considers the jobs, skills and local sourcing against environmental controls, concessions and relocation risk. A strong benefit case would involve worthwhile additional jobs, local supplier links and enforced standards. A factory with few local links and large public costs may contribute much less.