3.4.1 Impact of Multinational Corporations Flashcards
MNCs and asymmetric power and relationships
- Size of multinational corporations compared to governments in host countries
- They have more power than the governments in the countries they are operating
- Royal dutch shell = 458,361 billion dollars
- Norway = 368,962 billion dollars
- Eg Elon musk buying twitter and being openly pro trump, and this being seen by majority of users
- Stakeholders: do they push domestic firms out of business? do they respect the environment on the host countries?
what is an MNC
Businesses that operate/have assets in more than one country
what is technology transfer
Foreign firms locate in emerging economy, bringing them new skills not previously accessible → those trained can work in domestic businesses and pass these onto new colleagues
what is transfer pricing
One part of a MNC in one country sells goods to another part in another country→ can move profits to the location with the lowest tax rates
features of MNCs
- Have offices or factories in different countries and usually have a centralised head office where they coordinate global management and other countries where they operate are host countries
- Large organisations with turnover exceeding the GDP of manuy countries, but some are small scale in comparison
- Largest are American, Japanese or European, but Chinese and Indian MNCs are rising
aim of MNCs (5)
- Access new markets → home market saturated, overseas markets can be an extension strategy
- Overseas markets with increasing incomes lead to future growth in sales and profits
- Reduce costs → low costs labour by gaining economies of scale, reducing input costs (low cost labour in developing countries), less regulation or being closer to market (eg setting up inside of a trading bloc to avoid tariffs and trade barriers)
- Lower costc per unit leads to increased CA
- Depends on type of product → if low value, low costs is needed, especially if sold in a price sensitive market
- Low cost labour good for LABOUR INTENSIVE firms
- Access skilled labour → Japan manufacturing in N england due to high skilled workers without jobs after deindustrialisation
- Cars gain competitve advantage through productivity and quality, so high output needed, higher wages for skilled workers is fine as it they have high revenue due to product’s nature
- Control resources → closer to raw materials, access a cheap and secure source
- Especially needed when trade has decreased, so accessing them through other firms is hard eg with COVID
- Gov incentives → grants/tax breaks can be offered tio attract MNCs and FDI → lowers costs and competitive advantage is gained
- True for EE where internal investment is low
MNCs and initial investment into host country + drawbacks
- Initial investment in a location in host country creates employment as building and equipment will be needed and creates work for locals
- Workforce needed when operation starts
- Local businesses may be involved in supplying or servicing the MNC and see an increase in business, taking on more workers
- Locals with new jobs spend some on domestic firms, increasing local demand and jobs
- Positive local multiplier effect
BUT
- Local businesses lose market share to MNCs
- Mass produce standardised products, threatening national product variety
- Cultural imperialists, replacing/destroying native culture with unwanted products and values
- Can cause high environmental damagae by processes and transport → short or long term
MNCs and wages impact + drawbacks
- Cheaper labour importance for MNCs, but pay higher than average wage in host
- Increased motivation, productivity, lower turnover and wide choice of workers
BUT
- Wages can be low and working conditions poor, sweatshops created
- Health and safety conditions are often poor and regulations ignored
- Child labour may be used and exploited
impact of MNCs on local firms, community and environment
- Component manufacturers increase
- New businesses may outsource, using local businesses for cleaning/canteen
- Well organised local government departments insist on deals that involve new business in infrastructure developments, environ protection and communal facilities
- Training leads to tech transfer
BUT
- Some local govs especially in economies in early stages of development, may have weaker govs
- Powerful MNCs can exploit, and reduce contribution to local facilities and be careless about environment
- Local businesses suffer if MNCs reduce market share and may have to close down
impact of MNCs on economic growth
- Growth of business activity will stimulate the economy, provided the MNC recruits local people
- Increase employment and wages should increase tax and gov revenue
- Increase gov spending can benefit population and economy
- MNC creates vibrant business culture, including local recruits, employees it trains may move on and help new employers become more efficient and successful in business
- Especially if employed by domestic businesses
impact of MNCs on FDI and balance of payments
- Exports increase, increasing balance of payments
- Developing economy allows for export possibilities like tourism
- Successful FDI from an initial MNC reduces risk for others to invest into a country and they will be kee to go there → FDI further increases alongside technology
- Increased growth and wealth increases spending and investment. Govs invest in infrastructure and generate MNC interest
- Emerging economies govs may generate FDI in other economies eg China in Africa securing raw materials
- Flows of FDI into the economy, if large will tend to oush the exhange rate up, making imports cheaper to increase standard of living
BUT
Exports dear, reducing revenue in foreign markets for a country
MNC impact on technology and skills transfer + drawbacks
- MNCs may require skilled workers and train up the local workforce
- May acquire useful skills that will benefit them if they move on
- Locals trained as managers may learn new business techniques
- MNCs bring new techniques and tech and methods which can be learnt and adopted in host
- New work practices and tech help host to become more competitiove and grow - this is tech transfer
BUT
- MNCs may not train locals at a high level
- Skills may be brought in by hiring expert workers, locals may get unskilled work
managers are not usually recruited locally
- R and D facilities may be kept in home country, reducing ways for locals to develop skills/tech transfer
- MNCs enter countries to access new market, so sales and marketing facilities are the only ones established
impact of MNCs on consumers + drawbacks
- Incomes rise, consuemrs spend more and create demand in the economy
- Many people have been lifted out of poverty as they moved from agriculture to cities and productivity increased
- Famines are rare where they were common
- Many people in emerging economies need to pay for education, health care and pensions
- May save for this rather than spend
- Many EE have limited welfare policies
- Income may not be evenly distributed across population (urban chinese vs rural)
MNCs and business culture
- China has researchers giving economy competitve advantage
- Specialisation in china: pioneered cheap solar panels
1980-90: developed countries emulated lean production in Japan - Became relevant in EE changing management strategies
MNC impact on tax and transfer pricing + drawbacks
- Increased employment and wages should enlarge the tax base and increase government revenue
- If benefits are paid to the unemployed, this bill may decrease
- Profits of MNCs can be taxed
- Increased gov spending can benefit wider pop and economy
BUT
- Profits can be sent to home country
- Tax can be avoided by transfer pricing
- MNCs likely to take incentives, stay and leave to newest low cost location → leave behind unemployed workers and weakened economy
