COST AND BENEFITS OF MULTINATIONAL
ENTERPRISES
Multinational Enterprise (MNE) - a business
entity which conducts business operations in
various countries with its subsidiaries and affiliates.
MNEs possess considerable and wide human
resources, finance, expertise and technology as well
as enjoy substantial competitive advantage.
 Benefits of Multinational Companies
 Standardization of Quality - Multinational
manufacturers can deliver consistent
quality to today’s highest standards,
independent of the region in which they
manufacture, while maximizing the
economic benefits of those regions.
 Cost Benefits All Around - Manufacturers
with a presence in multiple economic
regions can offer customers attractive
prices. Cost advantages with regards to
labor, raw materials, subsidies, logistics,
and energy will present themselves when
evaluating various cost models where
different manufacturing regions can be
explored. Multinational companies can
provide a single point of contact to
maintain local customer service that speaks
the same language in the same time zone,
in turn saving time and money.
 Boost to Economies - International
companies need international suppliers in
order to be globally competitive. Suppliers
that understand how to provide and deliver
value to these customers will in turn
strengthen both their customer’s
competitiveness as well as their own
businesses. These companies will enjoy
success beyond what their local economies
can generate reducing the risk of doing
business in only one region with only one
economy.
 Efficiencies vs. Monopoly Power
 Transaction Efficiencies – occurs
when the multinational enterprise has
access to low-cost factors of
production, an international
distribution network, and/or current
technology.
 Monopoly Power – this power
enables the multinational enterprise
to earn profits that may be taken out
of the country, or to force local
competitors out of the market or to
take advantage of its position to the
country’s disadvantage.
 Home vs. Host Government View
 Home country – refers to the country
from which particular multinational
enterprise originates. It generally
looks to the MNE to provide
products and services that would
otherwise not have been available at
the same cost in the country.
 Host Country – refers to the country
in which particular activities are
undertaken. It often views favorably
the MNEs’ extension of business
abroad, because this leads to greater
exports and remittances of earnings.
 MNE consider separately three types of FDI
1. Extractive FDI – for obtaining raw
materials.
2. Market-serving FDI – for serving the
local market.
 3. Sourcing FDI – for sourcing production
locally to take advantage of local
production conditions in order to serve
foreign markets.
 Economic Cost and Benefits of Foreign
Direct Investment (FDI)
 Income/employment effects – any
increase (decrease) in aggregate
income is accompanied by a
proportional increase (decrease) in
employment and vice versa. The
income effects of a foreign
investment project include the direct
effect of the construction and
operation of the new facilities.
 Price effects – generally, the effect
of FDI on the price of the product or
service generated is to lower it. FDI
expected to raise the prices paid to
the factors of production, as MNEs
compete with local firms of these
factors.
 Balance of payments effects
- Capital inflow that often
accompanies the establishment of
the project
- Funds outflow (profit remittance
and capital repatriation)
- Exports generated by the local
facility for sales elsewhere and
imports used to supply the local
facility.
- Imports used to supply the local
facility
- Other financial flows between
the parent and the subsidiary
(Intracompany loans, royalty
payments)
 Distribution Effects – MNEs
presumably improve the distribution
of income between richer and poorer
countries. The literature critical of
MNEs demonstrates that FDI often
helps the economic elites of host
countries to improve their well-
being, while benefiting lower-
income people very little if at all.
 Technological Transfer – possibly
the main benefit associated with the
global expansion of MNEs is the
transfer of information, specifically
product, process and managerial
technology that they carry out.
 Ownership and Control of the
Economy – host countries find that
FDI by powerful, efficient foreign
firms may lead to foreign ownership
of large parts of important industries,
such as computers, chemicals and
telecommunications.
 Implications of Managers
1. The MNE manager should be aware that
governments and pressure groups in the
countries where the firm does business
will be concerned about the costs and
benefits of the firm’s local activities.
2. The MNE manager may want to choose
bedging strategy to reduce the risk of
adverse government policies.
3. The MNE manager may find from
examination of a social benefit analysis
that the firm is close to the social “break-
even” point.
REPORTED BY:
Badua, Jhona Marie
Carpio, Jasmin Grace