4.4 Global Industries and Companies (Multinational Corporations) Flashcards
How is reverse engineering defined?
A method of analysing a product’s design by taking it apart.
How is transfer pricing defined?
A system operated by MNCs. It is an attempt to avoid relatively high tax rates through the prices which one subsidiary charges another for components and finished goods.
What areas of the local economy do MNC’s have an impact on?
- Labour force and job creation
- Wages and working conditions
- Local businesses
The local community and environment such as:
- Improvements in infrasturcutre
- Contributions to local government taxes
- Help in local communities
How do MNC’s impact the local labour force?
- Many communities welcome the opportunity to work for a large MNC and value job creation,
- Full-time jobs with possibility of training, a regular income, financial security and the opportunity to build a career is very appealing
How do MNC’s impact Wages and working conditions in local economy?
-When a large new business is opened, wages in the locality may rise as there is more demand for workers which is likely to drive up rates
- unemployment is relatively low, if employment opportunities already exist in the area wages are much more likely to go up
- Often MNCs will abide by working conditions fit for international standards, with up to date facilities and the latest technology
so they should raise employee welfare.
How do MNC’s positively impact Local Businesses?
- initially, local businesses can be involved in the construction of new plants/factories etc. can create jobs eg plumbers, carpenters.
- Once built local businesses may need to supply the factory with raw materials, components etc.
- as a result businesses in the area may benefit from an increase in trade, higher revenues and more profits, there also might a need to recruit more workers of their own to meet demand.
- people who have taken up a job at an MNC will have income to spend so this spending will provide more demand for local business/
How do MNC’s negatively impact Local Businesses?
- However, the MNC’s may take the better workers from local businesses offering better conditions or higher wages or they may also sell competing products.
0 The argument is that competition is good for all and forces businesses to innovate and make improvements.
-this might provide some longer-term benefits, such as more efficient and more innovative local enterprises
How do MNC’s impact the local infrastructure?
- MNCs might invest some of their own money to help develop roads, electricity, water, school, hospitals and other public amenities
- They might do this to help build trust with the community, but also because a better infrastructure is likely to improve the quality of human capital in the areas.
- better roads and improved transport links would also benefit MNC’s
How do MNC’s contributions to local government taxes?
- In the UK businesses have to pay rates to local authorities.
- Similar payments are likely the paid by MNCs when they operate in other countries
- This money can be used any local governments to help fund spending in the area
How do MNC’s help in the local communities?
- It could be building links with local community
- giving money to charities, sponsoring sporting events, give access to the company’s facilities
- Some MNCs may have a negative impact when operating overseas, As a result of environmental damage, communities may be left struggling to survive in areas where farming and other subsistence activities are almost impossible
- In mining industries - oil spills can lead to environmental harm from oil pollution
- This can have a significant impact on the health and activities of local people, specially farming and fishing
What areas of the national economy do MNC’s have an impact on?
Most governments around the world want MNC’s setting up in their countries as they generate income, employment, wealth and prosperity.
- FDI flows
- Balance of payments
- Technology and skills transfer
- Consumers
- Business culture
- Tax revenues and transfer pricing
How do MNC’s affect national FDI flows?
- Increase in income –> More FDI, should result in higher GDP. The extra employment resulting from new FDI will increase economic growth and raise better standard of living.
- Increase in tax revenue –> the government can be spent to better healthcare, education, housing and transport networks.
- increase in employment –> the company will create jobs and it has a knock on impact, with more employment from suppliers and other benefiting companies if the MNC invests in a project. This also means fewer people claiming benefits from the government.
- Reduce national debt –> the money received can reduce the debt, reducing the interest, improving the global perception of the countries financial stability and therefore making it more attractive and making it easier to borrow
How do MNCs impact national balance of payments?
- Investments by MNC’s will have a positive impact on the host nation’s balance of payments
- Initially, the flow of FDI when a project is being established will improve the balance of payments because money will flow into the host nation’s account
- Once a facility is ‘up and running’ there may be a further boost to the balance of payments. this is because if any output from a new factory is sold abroad there will be further flow of money into the balance of payments account of the host nations.
- e.g. the UK sell cars to the rest of EU from Japanese-owned produces such as Nissan.
- for LEDC this has a even greater impact as it is often difficult to get established in global markets and FDI allows them to boost sales of goods overseas
- However if MNC’s buy resources form overseas such as tools or machinery this will have a negative impact on balance of payments, as money will flow out of the country,
- there will also be a negative impact if profits are repatriated to the MNC’s base
- Repatriated profits represents a flow of money away from the host country
How do MNCs impact national Technology and Skills transfer?
Often MNC’s can bring with them new technologies and knowledge which again can benefit the host country.
- Horizontal transfers is when knowledge is shared across the same industry. Eg working practices and technology used by Nissan were copied by other car producers in the UK
- Vertical transfers may move forward or backward, so MNC’s may help local suppliers by providing technical assistance and training
- Forward vertical is when the host nation business’s buy goods and services from the MNC and learns from their working practices and managerial methods.
- the transfer of technology and skills from an MNC help improve efficiency and productivity making the domestic producers more competitive and generate sales both at home and abroad
- however this can lead to domestic producers being a threat to MNC’s in their market. through reverse engineering where some businesses analyse a rival’s product that they think are worth copying. This can increase the number of competitors the MNC faces in that market
How do MNCs impact the consumers in a nation?
- More choice –> for consumers (although not all MNC’s produce consumer goods, eg components or services for other businesses)
- Lower prices –> the arrival of MNCs increases competitions. MNCs are able to usually charge a lower price (often through more efficient production techniques ). this competitive pressure may also force domestic producers to lower their prices
- Improved quality –> MNCs use ‘state of the art’ technology, modern materials and more efficent work practices (TQM) so the qyality of the produce is improved eg better designed, more durable if they have been made using better materials, more efficient etc
- Better living standards –> through more employment opportunities, higher incomes, generally better products at a cheaper price.
- Due to some MNC’s being so powerful (some have annual revenue greater than some countries GDP) it can be a formidable presence, it could lead to domestic businesses leaving the market due to this intense competition, which would subsequently make the market less competitive as there is less choice for consumers in the long term.
- Also with little or no competition MNC may come to dominate the market and exploit consumers
How do MNCs impact business culture in a nation?
it can impact the culture of the country, eg encouraging those employed by the MNC to start their own business because:
- Individuals can save up the money needed to start up
- Workers have developed the skills needed that they think they could put to better use working for themselves
- MNC’s encourage workers to setup businesses and become suppliers. if quality is maintained, MNC might encourage this development because it provides the,m with more flexibility
- Sometimes the business culture from the MNC can impact the hosts culture and approach to running businesses. UK culture became more open and less confrontational, managers began to recognise the wider talents of their employees etc. after the influence of the Japanese MNCs.
How do MNC impact a nation’s tax revenue and transfer pricing?
- MNCs are known for trying to avoid taxes as they aim to make as much profit as possible.
- a common technique used to avoid tax on profits is transfer pricing - which involves selling their products to another company they operate at artificially low prices to then sell them from that company at lower tax prices.
- When setting taxes, countries need to weigh the need to have taxes to spend, but also setting low taxes to attract investment.
- They also need to be robust in their dealings with MNCs to ensure that they pay their fair share of taxes
How is Ethics defined?
Moral rules or principles of behaviour that should guide members of a profession or organisation and make them deal honestly and fairly with each other and with their stakeholders.
How is Institutional Framework defined?
The system of formal laws, regulations and procedures, and informal conventions customs and norms that shape activity and behaviour.
How is Code of Conduct defined?
A set of rules outlining the proper practices of an organisation that contributes to the welfare of key stakeholders and respects the rights of all affected by its operations.
How is Stakeholders defined?
Groups or individuals who can affect or be affected by the actions of a business.
What are the various groups that could be involved in stakeholder conflicts?
- Consumers
- Employees
- Shareholders
- Countries or communities
What conflicts can consumers have?
- Conflicts of interest, such as where an energy firm manipulates the markets, resulting in consumers paying more than they otherwise would have.
- This is done by using a different measure to report on their profit margins to the public , which can mean that an increase in household bills could be made to see justified
- Product safety, such as involving tainted meat that reaches consumers in the supply chain
- Misleading advertising
What conflicts can Employees have?
- Employee safety, ensuring healthy and safety conditions, avoiding failings that might lead to injury or death
- Employee redundancies. A company may need to reduce staff numbers to regain profitability or they may choose to outsource some work for cheaper returns
- Pay and conditions
What conflicts can Shareholders have?
- Conflicts of interest between the management and the shareholders
- Short-term versus long-term investment through dividends. One of the main reasons a shareholder invest is to seek returns on their investment through dividends.
- A business may take a long-term view that it needs to invest in new equipment or expand its branches, reinvesting profits can finance future growth however this could mean that there are less dividends that could be paid to a shareholder
What conflicts can countries or communities have?
- safety, where people’s well-being is compromised, such as the reported pesticide chemical leak at the Union Carbide plant in Bhopal. India poising over 300,000 people and caused 5,200 deaths
- Environmental concerns, where the activities of the business pollute or damage the environment. For example. the mining of tar sand impacts on the local wildlife and air and water quality.
- resource depletion, where a company’s extraction objective conflict with the best possible future for that country.
- for instance if resource are depleted before they are able to be replenished or are exploited to the detriment of the country’s environment.
What could be some issues to do with Working conditions?
Your working conditions are affected by factors including health and safety, security and working hours. Poor working conditions can damage your health and put your safety at risk.
Your employer is legally responsible for ensuring good working conditions, but you also have a responsibility to work safely .
What is Healthy and Safety?
- The Workplace Health, Safety and Welfare Regulations – which became law in 1993 – lay down minimum standards for workplaces and work in or near buildings.
- These regulations apply to most types of workplace except transport, construction sites and domestic premises. Workplaces must be suitable for all who work in them, including workers with any kind of disability.
- You have the right to a safe and healthy workplace which is suitable for all who work in or visit them. This means that your employer must look at issues such as space, cleanliness, lighting and ventilation and adequate toilet, washing and changing facilities.
- Workplace dangers are not always obvious but paying attention to these issues and those related to areas such as emergency lighting, suitable floors, safe traffic routes, windows and doors will help to achieve this.
- Working practices and conditions that seem harmless can eventually lead to serious illness.
