How Do Multinational Companies Affect Local Businesses?

A multinational company is a commercial organization that conducts business in several countries but has headquarters in its home country. It operates overseas by setting up units such as subsidiaries or affiliates, or takes over or merges with local companies. Because of the size of their operations, multinational companies sometimes can have both a positive and a negative impact on the economies and business of local companies in their host countries, depending on the circumstances.

To encourage multinational companies to invest in their countries, governments sometimes offer incentives such as lower taxes and administrative support. They also might ease labor and environmental regulations. Local governments also develop infrastructure facilities such as transportation, roads, communication channels and utilities for the use of multinational companies, which results in the host country’s overall development. Local businesses often benefit from these easier regulations and advanced facilities.

To conduct operations more effectively, multinational companies partner with local companies for supplies. They also might use resident businesses to get their products to local consumers. They employ local companies on contracts and rent out franchises, which results in growth for the local companies. To accommodate their multinational partners and provide efficient support, local businesses must develop advanced methods of conducting business. This might include using lean methods, providing better workplace conditions, hiring skilled staff and adopting efficient marketing plans. Also, affiliation with international companies often put local companies in direct contact with better technology.

Multinational companies often bring better and more advanced products into local markets, and resident companies must match them to stay in business. This means that local businesses must adopt equivalent technologies and products. Because multinational companies have more resources at their disposal, they can explore new markets in the host country. These markets are usually untapped by local businesses, which often aim their operations at exporting their goods and services. Local businesses, therefore, can grow by entering the new markets that the multinational companies uncover.

Multinational companies often create more products and receive more revenues. Therefore, they can offer better wages and invest in highly skilled workers. This can be disadvantageous to local companies because they have to match the better wage scale to prevent employee turnover in their own operations. The flip side to this scenario is that multinational companies often train their employees and make better technical skills available to them. When these employees leave the multinational company, they might take their skills and experiences to local companies.

When governments create support systems for multinational companies, they don’t always extend the same privileges to local businesses. This gives the multinational companies an advantage. Also, multinational companies often edge local businesses out of the market because the multinationals frequently sell better products, and these products are often cheaper than those at local competitors. Because of the direct investment they bring into the country, multinational companies exert influence on governments to adapt policies that are suitable to multinational companies. These policies aren't always advantageous to local businesses.