The main advantages and disadvantages of Transnational corporations (TNCs) operations for the host country and the investing country:
Advantages to Host Country:
Foreign Capital: Developing countries suffer from shortage of capital required for rapid industrialization. TNCs bring in capital for the development of these countries. Direct foreign investment speeds up the process of economic development.
Advanced Technology: Developing countries are technologically backward. They do not have sufficient resources to carry on research and development. TNCs bring advanced technology to developing countries. Through continuous research and development, TNCs serve as a source of inventions and innovations.
Employment Opportunities: Developing countries face unemployment problem. TNCs create large scale employment opportunities in host countries. TNCs increase the investment level and thereby the employment level.
Foreign Exchange: Most of the developing countries face adverse balance of payment position. TNCs help the host countries to increase their exports and reduce their dependence on imports. As a result, balance of payment position of host countries improves.
Development of Human Resources: TNCs employ modern management techniques and trained managers. TNCs help to professionalism management in host countries. As carriers of knowledge and experience, TNCs build up knowledge base and thereby assist the development of human resources in host countries.
Healthy Competition: TNCs increase competition and thereby break domestic monopolies. TNCs compel the domestic companies to improve their efficiency or withdraw from the market. For example, many Indian companies acquired ISO-9002 quality certification due to competition from multinational corporations after 1991.
Growth of Domestic Firms: TNCs stimulate the growth of local enterprises. In order to support its other operations, a TNC may assist domestic suppliers and ancillary units.
Standard of Living: TNCs provide superior products and services and help to improve living standards in host countries.
World Economy: TNCs help to integrate national economies into a world economy. TNCs encourage international brotherhood and cultural exchanges through international business. Different TNCs operate in different countries. As a TNC offers many benefits to each of the host countries, these countries are getting united. Cultural differences between them are reducing and they are gradually moving towards a single i.e. global economy.
Disadvantages to Host Country:
Disregard of National Goals: TNCs invest in the most profitable sectors e.g. consumer goods disregarding the goals and priorities of host country. TNCs do very little for underdeveloped strategic sectors and regions. Due to their capital-intensive technology and profit maximization approach, TNCs have failed to help in solving the problems of unemployment and poverty.
Threat to National Sovereignty: TNCs pose a danger to the independence of host countries. To promote their interests TNCs tend to interface in the political affairs of host countries. Some TNCs are accused of overthrowing governments in countries such as Chile.
Alien Culture: TNCs bring not only capital and technology, but their own culture also. TNCs tend to vitiate the cultural heritage of local people and propagate their own culture to sell their products. For example, TNCs have encouraged the consumption of soft drinks, packaged food etc. in India.
Obsolete Technology: TNCs often transfer outdated technology to their collaborators in host countries. In a number of cases technology transferred by TNCs was found unsuitable causing waste of scarce capital. Repetitive imports of similar technology led to excessive royalty payments without adding to technical knowledge in host countries. Sometimes machinery available locally was imported or it remained idle for want of repairs and maintenance facilities. TNCs have failed to develop local skills and talents.
Excessive Remittance: TNCs remit huge amount to the home country by way of royalty, technical fee, dividend, licensing fee etc. This puts severe pressures on the foreign exchange reserves and balance of payments of host countries.
Creation of Monopoly: TNCs give rise to monopoly and concentration of economic power in host countries by exploiting their strategic advantages like patents, superior technology etc. TNCs kill indigenous enterprises for example, Parle Soft Drinks and Kwality Ice Cream Co. had to sell themselves to foreign TNCs in India.
Restrictive Clauses: Due to strong bargaining power, TNCs introduce restrictive clauses in collaboration agreements. According to these restrictive clauses, technology cannot be passed to their parties or pricing of products will be by the TNC, or exports from host country will be restricted or managerial posts will be filled by parent company. TNCs do not transfer R&D, training and other facilities to host countries.
Depletion of Natural Resources: TNCs have caused rapid depletion of some of the non-renewable natural resources in host countries.