4.4 Flashcards
What is an MNC
When a business operates in more than one country
Tend to be quite large but some are bigger than others
Positive impacts of MNCs
Provides jobs -> workers pay tax
Helps infrastructure
Train workforce
Negative impacts of MNCs
Pay low wages
Negative environmental impact
6 positive impacts of MNCs on a local economy
- creates employment
- increase skills base
- increase standard of living
- raises country’s profile
- improves balance of payments
- improves infrastructure
6 negative impacts of MNCs on a local economy
- profit leakage
- low paid jobs
- pull out quickly
- poor safety records
- increases urbanisation
- widens poverty gap
Explain further about why a positive impact of MNCs on the local economy is creating employment.
What does it depend on
Jobs available for local people -> reduces unemployment -> less drain on local resources e.g benefit system
Depends if there’s a benefit system in place.
Effect of this depends on how many jobs it creates and how big the MNC is. By having lower rates of unemployment -> higher levels of disposable income -> demand more goods + services -> benefits local businesses
Explain further about why a positive impact of MNCs on the local economy is increases skills base
What does it depend on
we may use training schemes to train local workforce -> improve knowledge + expertise -> attract other businesses to locate there and take advantage of it.
Depends on quality of training schemes and job role
Explain further about why a positive impact of MNCs on the local economy is increase of standard of living
What does it depend on
Increase in earnings -> increases tax paid within a country + gives more money to spend on services and infrastructure. Improve rate of ease of doing business
Depends on political environment, political party decides how much tax is spent on services
Explain further about why a positive impact of MNCs on the local economy is raising country’s profile
If MNCs plan their moves carefully. This is known worldwide and the movement into a particular country is a statement about its pro - business environment and political stability.
Publicity -> encourages other businesses to locate there as they see the benefits
Explain further about why a positive impact of MNCs on the local economy is improving balance of payments
Many goods made by MNCs are exported to other nearby countries -> increases amount of money earned by the country
Explain further about why a positive impact of MNCs on the local economy is improving infrastructure
Improve communication links within a country -> benefits country
Could be country or business or both who funds this improvement in infrastructure
Explain further about why a negative impact of MNCs on the local economy is profit leakage
Profits from factories or hotels run by the MNC go to the country in which the head office of the company is found.
Naturally businesses locate their head office where there is low corporation tax -> may be unethical as you pay the corporation tax rate of the country your head office is in even if you aren’t fully located there. However it can be seen as good business as you’re lowering costs
Explain further about why a negative impact of MNCs on the local economy is low paid jobs
Mainly low paid jobs are provided for local people. Higher laid managerial jobs go to workers brought in from the head office country.
Yes they’re providing jobs but only low paid ones.
In long term if they’re training local people to become managers, it’s good but not if they don’t
Explain further about why a negative impact of MNCs on the local economy is pull out quickly
In times of recession/ low sales, jobs of workers in the head office country are protected for longer than in other countries
They may just pull out of the country and if they’re developing, it would devastate the local economy
Explain further about why a negative impact of MNCs on the local economy is poor safety records
Poorer countries often have poorer safety standards + governments are willing to turn a blind eye to breaking the standards that exist.
Links to ethics
Explain further about why a negative impact of MNCs on the local economy is increasing urbanisation
MNCs usually found close or in urban areas. Hope of securing these jobs attract more people from rural areas to cities
Explain further about why a negative impact of MNCs on the local economy is widens poverty gap
Although wages are low in factories, they’re higher than elsewhere. Increases the cost of living for all and the prices of goods rise
4 positive impacts of MNCs on a national economy
- FDI flows
- balance of payments
- technology and skill transfer
- impact on consumers
2 negative impacts of MNCs on a national economy
- impact on business culture
* impact on tax revenues and transfer pricing
Explain further why a positive impact on MNCs on a national economy is FDI flows
What does it depend on
An MNC invests -> scale of investment significant.
Governments offer incentives for big companies to locate there -> subsidies + tax breaks attract investment -> reduces cost of production -> increases incentive to supply there.
May increase profit margins of business.
Depends on conditions of incentivisation -> weigh up pros and cons, is there legislation making it hard to invest
Explain further why a positive impact on MNCs on a national economy is balance of payments
Inward investment will help a country’s balance of payments.
The investment will be a direct flow of capital into the country and the investment is likely to result in import substitution and export promotion -> brings more revenue into country.
Import substitution because they may start buying domestically -> boosts domestic businesses -> keeps cash in economy -> stimulates domestic economy further -> incentivises new firms to create products the MNC needs
Explain further why a positive impact on MNCs on a national economy is technology and skill transfer
What does it depend on
MNCs bring technology and production methods that are probably new to the host country and a lot can therefore be learnt from these techniques.
Workers will be trained to use the new technology + production techniques and domestic firms will see the benefits of the new technology.
This process is known as technology transfer
Depends on what skills + training they get + whether it’s well transferable
Explain further why a positive impact on MNCs on a national economy is impact on consumers
What does it depend on
If the MNC manufacturers for domestic markets as well as for export, local population will gain from a wider choice of goods at a price possibly lower than imported substitutes -> increases competition lowers prices + pushes them down
Depends if the good/ service was already in that country -> prices higher if they weren’t.
Market development or diversification as they’re going in a new country -> Ansoff’s theory
Explain further why a negative impact on MNCs on a national economy is impact of business culture
Cultural and social impact -> large numbers of foreign businesses can dilute local customs and traditional cultures.
George Ritzer coined the term McDonaldizatjon to describe the process by which more and more sectors of American society as well as of the world take on American culture
Who coined the term McDonaldization
George Ritzer
What’s McDonaldization
The process by which more and more sectors of American society as well as of the rest of the world take on American culture
Explain further why a negative impact on MNCs on a national economy is the impact on tax revenues and transfer pricing
Transfer pricing -> shorthand for MNCs shifting profits to tax havens to avoid tax in developed countries
MNCs report vast profit in tax havens like Switzerland, Ireland and Luxembourg where there is little or no production going on
Christian Aid estimate developing counties lose $160 billion of tax revenue annually to transfer pricing
What are ethics
Having moral principles that govern how a company does business. A moral principle is one that knows right from wrong
What 3 things does ethical responsibility depend on
- Size of business -> do they have the power to change the supply chain?
- Situation of the business -> external environment
- Power of different stakeholders -> who makes the decisions?
Explain stake holder conflicts for owners
Owners have an objective of high profits so there are good dividends for shareholders + get a good return on investment.
Conflict with customers as owners want profit but customers want to push profits down
Conflict with managers as they want promotion prospects and bonuses on high profits
Conflict with suppliers as they want to charge high prices
Explain stakeholder conflicts for customers
Customers want low prices, high quality, ethical products, availability, good service and choice
This means costs for the business to increase and profits fall.
Conflicts with owners as owners want profit but customers wants to push profits down
Conflicts with managers because they want promotion and bonuses from high profits but customers want to push profits down
Explain stake holder conflicts for managers
They want promotion prospects and bonuses on high profits
Conflicts with owner as they want high profits and customers as they want to push profits down
Explain stake holder conflicts for employees
They want job security -> relies on financially stable business so want it to make a profit
Want good working conditions -> pushes up costs
Conflict with suppliers because they want to charge high prices which affects profits and cash flow and employees want things that rely on the business making profit
Conflict with owners as they want high profits but employees are pushing costs up
Conflict with customers as they want low prices but employees push costs up so business has to charge more
Conflict with managers as they want bonuses from high profits but employees push costs up
Explain stake holder conflicts for government
Want tax payments + lawful ethical businesses -> uses less public resources like policing
Conflict with owners as it makes it more expensive for them
Explain stakeholder conflicts for suppliers
Want to charge high prices + to keep costs of production low.
Want to be paid on time which impacts cash flow and profits for business
Conflicts with owners as they want high profits
Conflicts with employees as they want a financially stable business
Explain about pay
Pay varies around the world as does the cost of living
Some MNCs don’t pay fair wages that the locals can live on -> this is exploitation
A minimum wage that is too high will deter businesses setting up there
Is there a fair distribution of wages? Does the MNC have enough to pay all of its workers? At least it’s giving its employees something? What’s the CEO and managers being paid + are they exploiting workers further down the hierarchy?
Explain about working conditions
Working conditions in a developing nation will be well below those of industrialised nations.
Owners want high profits and so may cost cut health and safety measures e.g. no fire escapes
Safety violations in garment factories.
If a country increases legislation, it will deter businesses setting up there
Name the environmental considerations
Emissions
Waste disposal
Explain about MNCs and emissions
Manufacturers will emit more than retailers
Climate crisis of 21st century has largely been caused by 90 companies which have produced nearly 2/3 of the greenhouse gases emitted
Tends to be legislation in developed countries to control how many emissions are created
May affect FDI if there’s legislation -> may deter businesses locating there
Are they selling business to business or to customer?
Chevron, BP and Exxon are the biggest polluters
What are emissions
The production and discharge of something, especially gas or radiation
Explain about MNCs and waste disposal
MNCs regularly flout or ignore weak environmental laws in India or other developing nations
Owners want to keep costs down, good waste management is expensive so there’s a stakeholder conflict with those that live near these toxic dumps
Name the supply chain considerations
Forced labour
Child labour
What’s is a supply chain
A system of businesses, people, activities, information and resources involved in moving a product or service from supplier to customer
What are the supply chain problems
- Having part of a supply chain in a developing nation can be a problem for the MNCs
- Many garment factories or labour intensive production processes outsource to slums, refugee camps and unlicensed back street businesses with poor working conditions
- This can mean that labour is intentionally or unessentially exploited by the MNCs
What’s forced labour
- threats or actual physical harm to the worker
- restriction of movement or confinement to the workplace
- debt bondages
- withholding of wages or excessive wage reductions
- retention of identity documents
- threat of denunciations to the authorities
What’s child labour
- Some children are trapped in forms of slavery in armed conflicts, forced labour and debt bondage (to pay off debts incurred by parents and grandparents), drug trafficking and organised begging and in many other forms of labour.
- For some work, children receive no payment, only food and a place to sleep
- Poverty is the most common reason why children work
- Poor households spend the bulk of their income on food and the income provided by working children is often critical to their survival
What’s the marketing consideration
Misleading marketing
Inappropriate promotional activities
Explain misleading marketing
- If your cereal says its has no added sugar - it may still be high in sugar, hidden as fructose or glucose
- Rowntrees fruitsome bar is 38% sugar
- None of these products is breaking the law, but they are giving a false impression to consumers
What are the 4 methods to control MNCs
Political influence
Legal control
Pressure groups
Social media
Explain about political influence
- Governments can apply pressure to attempt to change the behaviour of MNCs
- For example MNCs have been avoiding paying tax in the UK
- Starbucks
- Amazon
• Since 2012, when the UK Chancellor at the time, put tax avoidance on the G20 agenda, the UK has helped reform international tax rules and led the way with action to prevent corporations from paying little or no taxes
Explain about legal control
- If a country introduces laws to reduce pollution or protect children from child labour then this will all cost the MNC money to improve their practices
- Quite often the MNC may ignore or flout these regulations
- Prime example is the Deepwater Horizon where the US government legally made BP pay compensation to Mexicans affected by the disaster
What are the benefits of political influence
MNCs may want to stay on side of the government as they may get tax breaks, help trade ect
If the MNC gains political approval they may find trading smoother and less troublesome
What are the drawbacks of political influence
Politicians can be bribed (especially in developing countries)
Some MNCs bring so much wealth and employment to an economy that a weaker government might ignore unethical activities e.g Brazil, Nigeria, Mali
May affect trade deals e.g trump adding tariffs to stop Americans buying Chinese goods
What are the benefits of legal control
- Laws can be passed at any point
- Laws mean that consumers have some rights against the MNCs
- However even if laws are introduced they may still be broken by the MNCs
What are the drawbacks of legal control
- The MNC may simply move production to a country where there are less laws and restrictions
- The host nation does not want to lose the economic input of the MNC so this deters laws being passed
- MNCs can afford expensive legal defence of any challenge
Explain about pressure groups
- Pressure groups can have a strong influence on public opinion and behaviour of MNC, if they want to avoid a PR disaster
- Pressure groups such as
- Greenpeace
- WWF
- Friends of the Earth
- War on Want
What’s a pressure group
Organisation that tries to get businesses to change
Benefits of pressure groups
- Pressure groups can raise public awareness of MNCs activities in host countries
- Pressure groups can create PR problems for MNCs peacefully
Drawbacks of pressure groups
- The pressure group needs to be large and organised if it is to have any impact on changing the activities of the MNCs
- The size and wealth of the largest MNCs mean they can easily counter or quieten pressure group activity
Explain about social media
- can see the swift mobilisation of public opinion and hence pressure on MNCs to change their behaviour
- can turn a product scare into a national crisis within hours
- can be used to orchestrate a boycott
Benefits of social media
Very powerful as it has so many behind it.
Powerful way for customers to alter policy, activity and services of large businesses
Drawbacks of social media
- Social media can only effect short-term change the Internet is a dynamic medium, fickle customers become bored easily and move on to the next scandal
- A MNC can just dust itself down and carry on with very little impact on their activities
