Chapter 20, Problem 24AA

To determine

To evaluate: The possible advantages and disadvantages of multinationals and alliances.

Explanation of Solution

Possible advantages of multinationals and alliances:

1. Innovation: Multinational companies invest more in research and development. As a result, the host country also benefits from the R&D and experience innovation.
2. Employment creation: When a multination firm enters a country, it establishes its factory or office. It employs local laborers and generates employment.
3. Inflow of investment: Multinational companies are generally headquartered in developed nations. When they enter a developing nation, they also bring capital. They use the capital to invest in manufacturing centers, training of labor etc.

Possible disadvantages of multinationals and alliances:

1. Threat to small businesses: Multinationals enjoys a lower per-unit cost of production due to their large size. Small businesses produce lower quantities at a higher cost. They fail to compete with multinationals and exit the market.
2. Political influence: Since multinational firms are large, they can easily influence governments to make decisions that benefit their businesses. They may bribe politicians or fund their election campaigns to influence the political system. They may also threaten to leave the country and shift their operations to another country. No government can afford the leaving of multinationals as it will reduce employment which may lead to a political loss.
3. Negative impact on the environment: Multinationals often establish their business in developing nations. Developing nations do not have any stringent environment laws as developed nations. As a result, they exploit the environment by using resources in an improper manner.