4.4 global industries and companies (MNCs)

Question 1

what is a multinational company?

Answer 1

a business that has headquarters in one country but has manufacturing operations/outlets in different countries

Question 2

what is a factor that has contributed to the growth of MNCs?

Answer 2

globalisation

Question 3

how do MNCs choose locations?

Answer 3

based on factors such as cost advantages and access to markets

Question 4

which aspects of the local economy can MNCs impact?

Answer 4

local labour (wages, working conditions & job creation)
-local businesses
-the local community and environment

Question 5

how can MNCs positively impact job creation? (local labour)

Answer 5

-a new factory or plant can create hundreds of jobs for a local community MNCs
-opportunities for the development of skills
-possible growth in the population (people choose to relocate to work at the factory) → the growth in population may generate demand for local businesses too

Question 6

how can MNCs negatively impact job creation? (local labour)

Answer 6

MNCs may not create jobs for local workers as they may relocate workers from their own country to work abroad

Question 7

how can MNCs positively impact wages and working conditions? (local labour)

Answer 7

-MNCs may offer more competitive wages than local businesses
-MNCs may offer better working conditions than local businesses

-increased demand for labour in a local area → more competition for skilled workers if unemployment is low
-if supply of workers doesn’t increase sufficiently to meet this demand, wages will rise, as will the quality of working conditions and wages

Question 8

how can MNCs negatively impact wages and working conditions? (local labour)

Answer 8

-MNCs may exploit local workers if employment regulation is weak or not enforced
-MNCs tend to establish production facilities in regions where labour costs are lower and pay relatively low wages

Question 9

how can MNCs positively impact local businesses?

Answer 9

1) a large MNC will have a supply chain made up of smaller local businesses, in case of a large production facility, such as a car plant, this might involve hundreds of smaller suppliers of components and services → new opportunities for entrepreneurs in the area (high profit)

2) MNCs can help to boost the local economy creating opportunities for local businesses
↳ if the population is benefiting from higher wages, they may spend more on local business products

3) potential opportunities for joint ventures and partnerships with MNCs who seek to gain knowledge of the local market
↳ local firms may learn new skills and production methods that allow them to become more efficient

Question 10

how can MNCs negatively impact local businesses?

Answer 10

-MNCs reduce the supply of workers available to local businesses if they offer better pay and working conditions
-If MNCs are able to produce at a lower cost and compete with local businesses, they may lose local customers
↳ local businesses lose customers → unemployment for workers of local businesses

Question 11

which aspects of the local community & environment can MNCs impact?

Answer 11

-infrastructure
-councils
-charities
-environment

Question 12

how can MNCs positively impact local infrastructure?

Answer 12

-sufficient transport links and other aspects of infrastructure may not already be in place to support the MNC
-in such cases the MNC may build access roads and rail links, and invest in local utilities (access to water and electricity)
-the whole community, including other local businesses, will then benefit from this investment

Question 13

how can MNCs positively impact local councils?

Answer 13

-MNCs may have to pay taxes and business rates to local councils/ authorities
-these funds may be reinvested back into the local community

Question 14

how can MNCs positively impact local charities?

Answer 14

-large MNCs may set up charities and social enterprises to support the local community (to fulfil their social responsibility or to develop a positive image in the local area) -these charities and social enterprises will support local people

(e.g: food banks, health schemes, the regeneration of run-down areas in a town)

Question 15

how can MNCs negatively impact the local environment?

Answer 15

an MNC is likely to cause negative externalities in the local community and environment → congestion and pollution

(to counteract this, an MNC may invest money to enhance the local area → might build parks, community facilities, transport links)

Question 16

which metrics do MNCs impact on the national economy?

Answer 16

-FDI flows
-balance of payments
-technology and skills transfer
-consumers
-business culture
-tax revenues and transfer pricing

Question 17

how do MNCs affect FDI?

Answer 17

when an overseas business locates a factory, offices or a facility in a foreign country it invests a huge amount of capital into that country
(FDI)

Question 18

advantages of FDI from an MNC on the national economy:

Answer 18

-leads to spending in the economy, which creates jobs and lowers the level of unemployment (FDI creates wealth in a country)
↳ reduction in national debt
↳ increased employment
↳ increased incomes
↳ increased tax revenue

-enriches local firms or citizens who now have more money available to spend in the economy

Question 19

disadvantages of FDI from an MNC on the national economy:

Answer 19

assets from the home country are now owned (or partly owned) by foreign businesses → the local firms or individuals who have sold the asset, may not reinvest the money into the local economy but may move it abroad/offshore

Question 20

what is the balance of payments?

Answer 20

a statement showing all of the financial transactions between a country and the rest of the world

Question 22

how can MNCs help a balance of payments?

Answer 22

they can help to improve the balance of payment of a country as the FDI flows into the country will help improve their balance of payments
↳ any goods and services exported by the MNC will generate inflows to the country’s balance of payments, especially beneficial to a country when the MNC is exporting a rare and valuable raw material

Question 23

how can MNCs negatively affect a balance of payments?

Answer 23

-if the MNC imports raw materials or equipment, there is a flow of money out of the country
-if the MNC send profits back to their home country, it will also cause a flow of money out of the country

Question 24

MNCs and technology & skills transfer:

Answer 24

-an MNC may have succeeded through developing new technologies and processes in its home nation → it will also train and develop the knowledge and skills of its workforce
-the knowledge and technology will naturally transfer into the foreign country, this may help develop local industries and improve their competitiveness

Question 25

how do consumers benefit from MNCs?

Answer 25

-lower prices if MNCs pass on cost advantages in the form of price/if competitive pricing is used -more choice -improved quality -better living standards - a wider range of products and services to meet their needs and make life more enjoyable & higher incomes from job creation

Question 26

how are consumers negatively impacted by MNCs?

Answer 26

-in the short run, MNCs cause competition to increase -in the long run, MNCs can push domestic businesses out of the market leaving customers with less choice → may lead to MNCs exploiting customers with higher prices and low quality products as they have limited choice

Question 27

link between tax revenue and transfer pricing: (how MNCs affect the national economy)

Answer 27

-the host country can gain significant tax revenue from MNCs -governments can use this tax to invest in improving public services and infrastructure -however, MNCs seek to maximise profits and will try to reduce their tax liabilities

Question 28

what is transfer pricing?

Answer 28

-a method used by MNCs to shift profits from where they are generated to countries with lower tax rates this is a method of tax avoidance and means that the businesses will pay less tax in the host country

Question 29

beneficial ways that MNCs affect business culture: (national)

Answer 29

1) domestic businesses may be influenced by the business culture of MNCs (working practices, decision-making) ↳ e.g the policies of japanese businesses were adopted by UK businesses → more open workplaces, kaizen 2) MNCs may encourage a culture of entrepreneurship →this can help boost overall economic growth

Question 30

disadvantageous ways that MNCs affect business culture: (national)

Answer 30

-MNCs may demonstrate unethical behaviour and have a company culture of exploitation → this could encourage local firms to also ignore the working conditions

Question 31

Examiner Tips and Tricks:

Answer 31

In Paper 1 and 3, when assessing the impact of multinational companies on the local and national economy, consider the scale of the multinational in comparison to the country they are looking to establish in. For example, if the MNC makes more profit than the GDP of the country in a year, then it is likely to have a stronger influence on the country

Question 32

what are business ethics?

Answer 32

the principles and norms that govern business behaviour

Question 33

consequences of unethical actions:

Answer 33

unethical actions can damage the brand and result in a loss of profitability

Question 34

advantage of unethical actions:

Answer 34

unethical actions are usually pursued as they result in higher levels of profit for the business (or its owners)

Question 35

how do customers link to ethics?

Answer 35

customers around the world are putting more and more pressure on brands to behave ethically

Question 36

why is it easy for MNCs to act unethically?

Answer 36

as businesses operate across nations there are more discrepancies between laws, expectations, values and cultural norms

Question 37

what are the ethical considerations businesses need to consider?

Answer 37

stakeholder conflicts pay and working conditions environmental considerations supply chain considerations marketing considerations

Question 38

what is a stakeholder?

Answer 38

an individual or group that has an interest in or can be affected by a business

Question 39

stakeholder conflicts: explained

Answer 39

different stakeholder have different levels of power and different priorities, this creates the potential for conflict

Question 40

which stakeholders are at the highest potential for conflict for MNCs:

Answer 40

-governments & NGOs -communities -shareholders (owners) -customers -managers

Question 41

stakeholder conflicts: governments & NGOs

Answer 41

international governments will place pressure on MNCs to ensure they pay the correct tax levels, invest in the local community and look after their workers

Question 42

stakeholder conflicts: communities

Answer 42

-though MNCs will bring employment opportunities to a region, they may also bring negative externalities such as pollution -if not managed effectively this can cause bad publicity for a business

Question 43

stakeholder conflicts: shareholders

Answer 43

shareholders will seek the greatest return on their investment and profit maximisation can lead to other stakeholders' interests being sacrificed (ethics being ignored)

Question 44

stakeholder conflicts: customers

Answer 44

customers are becoming increasingly conscious of where their products have come from. It is not always clear whether products have come from sustainable and ethical sources, especially when produced abroad

Question 45

stakeholder interests: management v workers

Answer 45

-management may be more focused on output or reducing costs than on worker safety or creating a positive working environment -workers want to be safe and have a comfortable environment in which to work

Question 46

stakeholder interests: company profits vs. resource depletion

Answer 46

-the owners (shareholders) aim to maximise output to profit maximise -higher output requires more rapid usage of natural resources and causes more environmental damage

Question 47

MNCS & ethics: pay & working conditions

Answer 47

-standards for health and safety and employment legislation differ considerably across countries -this can sometimes lead to production facilities operated in LEDCs (Less Economically Developed Countries) being below an acceptable standard -MNCs need to decide if they will comply with the regulations of their base location or the country abroad

Question 48

examples of MNCs being unethical in terms of working conditions & pay:

Answer 48

1) MNCs may demonstrate unethical behaviour by exploiting workers in LEDCs by paying them lower wages ↳ MNCs argue that the wages they pay provide a decent standard of living within that country (though they can afford to pay higher wages) 2) some MNCs behave unethically by providing poor working conditions to cut costs → factories and warehouses with poor working conditions are sweatshops

Question 49

what are ethical business practices that MNCs can adopt in terms of pay and working conditions?

Answer 49

**acceptable pay levels of workers** - a "living wage' is paid **provision of suitable working conditions*** - ventilation, number of breaks **human rights** - no inhumane treatment or excessive working hours

Question 50

which 2 main environmental considerations should MNCs focus on?

Answer 50

-emissions -waste disposal

Question 51

how do governments link to environmental considerations?

Answer 51

-climate change and global warming have become a priority for governments across the world -governments are encouraging businesses to improve the environmental impact of their business activity

Question 52

how do MNCs, waste disposal & legislation in LEDCs link?

Answer 52

-many developed countries have regulations about how businesses should dispose of their waste -LEDCs usually have less regulation and enforcement on waste management (there is usually poor waste management infrastructure)

Question 53

why might MNCs ignore waste disposal?

Answer 53

-MNCs can dispose of waste in LEDCs at a cheaper cost, which allows them to maintain their high profits -managing these negative externalities ethically, incurs costs and could conflict with the profit motive for some MNCs

Question 54

what are LEDCs?

Answer 54

Less Economically Developed Countries

Question 55

how do MNCs, emissions & legislation in LEDCs link?

Answer 55

-emissions are often released from factories or from products made by MNCs -some forms of legislation, do not exist in LEDCS and there are no pressures from government for businesses to report on greenhouse gas emissions

Question 56

findings about emissions & companies:

Answer 56

The Carbon Majors Database report found that 100 companies are responsible for 71% of the global emissions that cause global warming

Question 57

how do emissions negatively affect local communities?

Answer 57

the emissions MNCs produce have a negative impact on local communities, causing health issues such as asthma, cancer and skin irritations

Question 58

which 2 main supply chain considerations should MNCs focus on?

Answer 58

-exploitation of labour -child labour

Question 59

why is global sourcing becoming increasingly difficult?

Answer 59

raw materials may come from a wide variety of countries. this can make it very difficult for governments and consumers to track where, with what and how products from MNCs have been produced

Question 60

how does the difficulty of global sourcing link to unethical behaviour of MNCs?

Answer 60

it means it is far more difficult to be certain that workers or a community have not been exploited somewhere down the supply chain → this makes it easier for MNCs to hide unethical behaviour

Question 61

child labour:

Answer 61

-some MNCs have manufacturing facilities in countries where child labour is common (usually in areas where children are are working to generate income for the family)

Question 62

how does child labour negatively affect MNCs?

Answer 62

MNCs using child labour in their supply chain face backlash, which can damage their brand and affect sales (protesting)

Question 63

exploitation of labour:

Answer 63

-exploitation of labour can take the form of low wages and poor working conditions (e.g. working long hours and with poor ventilation)

Question 64

how are MNCs affected by exploitation of labour?

Answer 64

MNCs are under increasing pressure from governments, customers and institutions to take action to ensure their products and services do not involve exploited labour

Question 65

which 2 main points relate to MNCs and marketing considerations?

Answer 65

-misleading product labelling -inappropriate promotional activities

Question 66

overview of marketing considerations:

Answer 66

unethical practices in marketing may involve the way a business promotes its products to consumers, but also the way it negotiates and deals with potential customers and suppliers

Question 67

misleading labelling: (+ examples)

Answer 67

labelling on packaging must comply with the regulation of the country ↳ no false information aimed at generating higher sales (false information in advertising) misleading information includes false information about… -size -content of the product -features -functionality

Question 68

real life examples of misleading labelling:

Answer 68

Volkswagen were found to falsely promote ‘clean diesel’ vehicles and had to pay approximately $34bn in fines → this severely damaged their brand

Question 69

illegal promotional activities: (+ examples)

Answer 69

promotional activities should not be offensive or illegal examples: -use of company finances to entertain potential customers and suppliers -giving of gifts to customers and suppliers

Question 70

real life example of inappropriate promotional activities:

Answer 70

Nivea had to pull their ‘White is purity’ campaign for their deodorant in the Middle East as the public believed it was promoting white supremacy

Question 71

why is it important to control the actions of MNCs?

Answer 71

-MNCs can bring many benefits to a country, but their actions need to be controlled by governments and NGOs -this is to ensure their business practices are in the best interests of all stakeholders

Question 72

do countries find it easy to control MNCs?

Answer 72

NO: both governments of LEDCs and MEDCs find it difficult to manage MNCs ↳ MEDCs often benefit from the profits of MNCs and these firms carry significant political influence on government policy ↳ LEDCs often have key decision makers (autocratic rulers) who receive payment for access to the country’s resources

Question 73

factors to consider when controlling MNCs:

Answer 73

-political influence -legal control -pressure groups -social media NOT ON SPEC: taxation policies

Question 74

political influence on MNCs:

Answer 74

-businesses and industries can be directly controlled through state ownership to ensure business is conducted in the best interests of society -government policies (e.g: tariffs, quotas) are another way to influence trade -government subsidies are a further option to support home industries -when MNCs establish themselves in a new country, they must work within the institutional framework of that country

Question 75

danger of political influences as a way to influence MNCS: (developed countries)

Answer 75

it can open up opportunities for state corruption… MNCs in developed countries are often able to exert pressure on national governments to create favourable conditions for their business ↳ another common issue occurs when politicians may occupy roles on the board of directors for an MNC after retiring in return for reducing political control on the MNC whilst they are in power

Question 76

danger of political influences as a way to influence MNCS: (developing countries)

Answer 76

MNCs in developing countries can influence governments as they may establish deals which are beneficial to politicians ↳ bribes may be paid to secure lucrative contracts

Question 77

legal control of MNCs:

Answer 77

-MNCs can be controlled through regulation such as competition laws, employment legislation and consumer legislation -where MNCs breach these laws, governments can take direct action → may involve heavy fines or even criminal prosecution against individuals within a compan

Question 78

what are competition laws?

Answer 78

they promote healthy competition -bans anti-competitive agreements between firms such as agreements to fix prices or to carve up markets, and it makes it illegal for businesses to abuse a dominant market position

Question 79

how can a business abuse a dominant market position?

Answer 79

-directly or indirectly imposing unfair purchase or selling prices -refusal to supply -applying different conditions to equivalent transactions with other trading parties (discrimination)

Question 80

how do governments use legal control to attract MNCs?

Answer 80

governments want to attract MNCs to help boost their economy, so creating legal control in areas relating to taxes and employment ensures stability for the MNC

Question 81

what are pressure groups?

Answer 81

-organisations that operate to influence company and public policy in the interest of a particular cause -pressure groups can operate on a national or international scale

Question 82

which ways can pressure groups take action? xx

Answer 82

-naming and shaming -direct action → protests, strikes and boycotting products -lobbying by taking issues directly to the government

Question 83

what is lobbying?

Answer 83

the activity of trying to persuade someone in authority, usually an elected member of a government, to support laws or rules that give your organization or industry an advantage

Question 84

how do pressure groups control MNCs?

Answer 84

even where businesses have not broken any laws, unethical practices can be exposed through naming and shaming companies, lobbying (taking issues directly to government) or direct action

Question 85

how can MNCs use social media to their advantage?

Answer 85

MNCs can use social media to their advantage to spread awareness and promote their business on a global scale

Question 86

how can social media be used to control MNCSs?

Answer 86

-social media also enables all stakeholders to freely share information about the unethical behaviour of MNCs → creates a transparency -MNCs are forced to address the issues raised on social media as there is a high level of public exposure and information can spread rapidly

Question 87

how can social media be a limited method of control?

Answer 87

MNC influence on social media may be limited in some countries as they have regulations in place to manage social media power (E.g. some governments closely monitor social media to regulate information being spread)

Question 88

how can taxation policy control MNCs in a positive way?

Answer 88

taxation policy can influence business activity… ↳ low corporation tax levels might be applied in order to attract FDI ↳ taxation policy might also be used to ensure any negative externalities are 'internalised' e.g. forcing companies with high carbon emissions to pay a higher tax rate

Question 89

how can taxation policy be ineffective at controlling MNCs?

Answer 89

tax evasion is also a big issue for some nations where large MNCs exploit tax laws to evade paying tax

Question 90

Examiner Tips and Tricks

Answer 90

In Paper 1, when assessing the best way to control the actions of an MNC, you must consider the advantages and disadvantages of the different methods. When evaluating you should also consider the most effective method within the context of the business in the extract. How large is the business? How well established is it? What is the reputation of the MNC in other countries? etc.