Business Studies – 6.2.2 Multinational companies (MNCs) | e-Consult

Operating in countries with lower production costs is a significant advantage for MNCs. This primarily stems from differences in labor costs, raw material prices, and energy costs between countries. MNCs can significantly reduce their overall production expenses by relocating or outsourcing production to these lower-cost locations.

Labor costs are often the most significant driver. For example, a technology company might establish manufacturing facilities in countries like Vietnam or India where wages are considerably lower than in developed nations like the UK or the USA. This allows them to produce electronics or software at a lower cost and sell them at a competitive price.

Raw material costs can also be lower in certain countries. A mining company might operate in a country with abundant mineral resources, reducing transportation costs and securing a stable supply of raw materials. Similarly, agricultural companies might source crops from countries with favorable climates and lower land prices.

Energy costs are another factor. MNCs might choose to locate production facilities in countries with cheaper energy sources, such as renewable energy or hydroelectric power. This can further reduce their production costs and improve their competitiveness. For instance, a manufacturing plant might be located near a hydroelectric dam to benefit from lower electricity prices.

The benefits of lower production costs translate directly into higher profit margins and increased competitiveness in the global market. However, MNCs must also consider factors like quality control, intellectual property protection, and ethical labor practices when operating in countries with lower production costs.