4.4 - Global industries and companies (multinational corporations)

Question 1

Define multinational company

Answer 1

A multinational company is one that has branches or manufacturing plants in several countries

Question 2

Ways multinational companies can impact the local economy (4)

Answer 2

• Local labour
• Wages
• Working conditions
• Job creation

Question 3

Positive impact of multinational companies on local labour (2)

Answer 3

• Western training methods may make the local workforce more productive/employable
• Training schemes for local people to use machinery which also attract other firms to the country

Question 4

Negative impacts of multinational companies on local labour

Answer 4

Western employers may attract over qualified people - possibly stripping local businesses and public services of skilled staff

Question 5

Positive impact of MNCs on wages

Answer 5

MNCs usually pay higher wage rates than local firms, improving standards of living - as an increase in wages increases taxes therefore greater government spending on services

Question 6

Negative impact of MNC’s on wages

Answer 6

Some Locals May feel bitter that they are paid less than westerners for doing the same job

Question 7

Positive impact of MNCs on working conditions

Answer 7

MNCs have international reputations to maintain, so they will tend to provide above-average conditions

Question 8

Negative impact of MNCs on working conditions (2)

Answer 8

• Conditions May be above average, yet still quite shocking for westerners
• Some MNCs May have impressive policies in place yet the workplace reality may be worse than the paper theory

Question 9

Positive impact of MNCs on job creation (2)

Answer 9

• Yum foods employs 1.5 million people worldwide; in Africa it provides more than 20,000 jobs
• Increased employment decreases the numbers of unemployment and the resultant drain on local resources

Question 10

Negative impact of MNCs on job creation

Answer 10

The success of MNCs may sometimes be at the expense of local independent firms; the key measure is net job creation

Question 11

Other ways MNCs have a positive impact on the local economy (3)

Answer 11

• Raise a country’s profile - MNCs plan their moves carefully This is known worldwide and the movement into a particular country is a statement about its pro business environmental and political stability
• Improve balance of payments - Many goods made by MNCs are exported to other nearby countries. This increases the amount of money earned by the country
• Improves infrastructure - MNCs often improve communication links within a country e.g road, rail and port facilities are updated and expanded benefiting the country

Question 12

Other ways MNCs have a negative impact on the local economy (3)

Answer 12

• Profit leakage - profits from factories or hotels ran by the MNC go to the country in which the head office of the company is found
• Low paid jobs - mainly low paid jobs are provided for local people. Higher paid managerial jobs go to workers brought in from the head office country
• Widens poverty gap - due to cost of living increasing as price of goods rise

Question 13

Impact of MNCs on Local businesses (3)

Answer 13

• When a MNCs sets up in a new area the impact on local businesses is likely to be positive
• This is because an MNC will look to local businesses for supplies - lead to greater local spending power to be spent in local shops and restaurants adding income to the area for local entrepreneurs to exploit
• However, if the operation started by a MNC provides direct competitions to an existing business it may have too much power for local powers

Question 14

Impact of MNCs on local communities (2)

Answer 14

• MNCs can raise healthcare standards, education and infrastructure
• However MNCs can disrupt social structures and indirectly bringing problems of crime that can associated with suddenly newly found wealth

Question 15

Impact of MNC on local environment

Answer 15

MNC can have a damaging effect on the physical environment whereas local business may be just as if not more guilty of causing environmental damage as MNC have to stick to global environmental standards as opposed to local businesses who stick to local standards which may be minimal

Question 16

Ways MNCs have an impact on the national economy (6)

Answer 16

• FDI flows
• Balance of payments
• Technology and skills transfer
• Consumers
• Business culture
• Tax revenues and transfer pricing

Question 17

Define foreign direct investment (FDI)

Answer 17

Occurs when a business purchases non-current assets in another country

Question 18

FDI flows - Ways MNCs have an impact on the national economy (3)

Answer 18

• When MNCs invest directly into other countries they are injecting cash into the national economy
• This cash creates jobs further injecting money into the local economy
• However, this is not always the case as once a MNC is generating profit the likelihood is that the profit will be sent out of the country back to the MNCs home country (known as profit leakage)

Question 19

Balance of payments - Ways MNCs have an impact on the national economy (4)

Answer 19

• If a country that exports less than it imports run a current account deficit which is likely to lead to a fall in the value of the currency risking inflation
• If a country attracts FDI the inflow of cash from MNCs cancels out the current account deficit
• Problems with this occur when a MNC decides to withdraw its FDI resulting in a further outflow further damaging the balance of payments current account
• One company’s decision to withdraw FDI would have a minimal impact on a major economy, but the effect of a large multinational withdrawing from a smaller less developed country can be significant

Question 20

Technology and skills transfer - Ways MNCs have an impact on the national economy (3)

Answer 20

• Local economy can copy or ‘borrow’ techniques and methods that are used by multinational companies to help improve the efficiency of local businesses
• Access to new technology can be the key to unlocking economic development
• Skills can be developed among the local workforce, which sustains ongoing development

Question 21

Consumers - Ways MNCs have an impact on the national economy (2)

Answer 21

• Consumers gain more choice when a multinational enters their country
• However, this increased competition can drive domestic firms out of business - leading to concerns over the fairness of the competition often attached to the entry of multinationals to foreign markets

Question 22

Business culture - Ways MNCs have an impact on the national economy (3)

Answer 22

• Multinational Business are fun in a professional and generally consistent way which may not be commonly found in host countries
• This can help domestic businesses in the same way technology and skills transfer helps to experience how MNCs operate
• As domestic suppliers deal with the multinational they are likely to adapt a more consistent and professional business culture

Question 23

Define transfer pricing

Answer 23

Is a technique used by multinationals to adjust the internal prices paid by one branch of their operations to another as a way of minimising the total tax bull paid by the company

Question 24

Tax revenues and transfer pricing - Ways MNCs have an impact on the national economy (3)

Answer 24

• As multinationals operate across several countries, it is logical for a multinational to try to maximise their profits in countries where tax rates are lowest
• Transfer pricing allows high prices (therefore low profits) to be changed by branches in high tax countries, with most profits engineered into the operations based in low tax countries
• The implication for host countries is that multinationals are able to minimise the tax they pay locally using transfer pricing - potentially places undue pressure in host countries’ governments to keep tax rates low

Question 25

Stakeholder conflicts - ethics (4)

Answer 25

• Large businesses operating on a global scale are most likely to be pursuing an objective of maximising profit, under pressure from their shareholders who are a dominant stakeholder group
• Retailers and suppliers may conflict over prices
• Directors and staff may conflict over pay
• Management and shareholders over pay dividends

Question 26

Ethical issues relating to pay and working conditions (3)

Answer 26

• Should wealth consumers feel comfortable wearing clothes made by factory workers paid pence rather pounds per hour?
• Should firms’s in less economically developed countries be allowed to produce goods for developed countries in working conditions that would be unacceptable in the markets being sold to, but which are legal in the host country
• Should a multinational company that outsources some of its production be responsible for the pay and working conditions in their suppliers’ factories?

Question 27

Examples of working conditions that could be seen to be ethically acceptable

Answer 27

• Cramped and hot, where profit margins are too low to allow more space and air conditioning
• Long working hours, perhaps up to 12 hours a day
• Agricultural workers planting rice - bending over for perhaps 12 hours a day

Question 28

Examples of working conditions that are unconditionally unacceptable

Answer 28

• Dangerous conditions with machinery and fire risk - and perhaps chemical air pollution
• Forcing people to work long hours. Perhaps by threats of dismissal
• Long back-breaking hours in agriculture with little pay - while farmers and dealers get rich

Question 29

Two environmental considerations for business ethics

Answer 29

• Emissions

* Waste disposal

Question 30

Emissions - environmental considerations for business ethics (2)

Answer 30

• for products that produce harmful emissions such as cars these emissions are regulated by products with lower emissions
• When measuring emission there may be ethical issues that arise such as: a company that do testing may adjust results in the hope of securing a long-term customer or if a company discovers emissions problems failure to communicate this information externally in the hope of quickly fixing it without tarnishing the company’s brand is unethical

Question 31

Waste disposal - environmental considerations for business ethics (3)

Answer 31

• Many products that are produced pose problems of disposal when their life is complete as electronic products with poisonous elements present ethical problems
• in developed countries this is highly regulated and thus expensive however some businesses see less economically developed countries with their weaker or non-existent regulations as a cheap solution.
• Dumping hazardous products or by-products on less developed countries is unethical

Question 32

Two supply chain considerations for business ethics

Answer 32

• Exploitation of workers

* Child labour

Question 33

Exploitation of workers - supply chain considerations for business ethics (3)

Answer 33

• Is viewed as ethically wrong however some interesting issues can be raised
• For example if the job that exploits its workers is the only available how will workers provide for themselves and/or their family
• Also should businesses be responsible for the practises carried out by their suppliers or their suppliers’ suppliers - if one of the suppliers’ supplier is using child labour does the original business deserve the backlash

Question 34

Child labour - supply chain considerations for business ethics

Answer 34

Is viewed as ethically wrong however if a child is working for their parents perhaps on a farm or factory would the removal of that extra pair of hands cause the business insurmountable (too great to overcome) problems?

Question 35

Two marketing considerations for business ethics

Answer 35

• Misleading product labelling

* Inappropriate promotional activities

Question 36

Misleading product labelling - marketing consideration for business ethics (2main 5 altogether)

Answer 36

• Tight product labelling legislation is in place to ensure that labels don’t lie, ethical issues still surround labelling many for food products
• Issues include:
- Implications of messages about the vague benefits of a product
- Inferences about a product’s ingredients or methods of production, perhaps implying it is ‘all natural’ but without being clean about the level of highly processed ingredients used in it
- Unhelpful imagery on packaging or in adverts, which is designed to infer, suggest or imply something untrue, without explicitly claiming an untruth

Question 37

Inappropriate promotional activities - marketing considerations for business ethics (main issue)

Answer 37

The main issue is where to draw the line between a business objective of maximising sales and consumers’ inability to resist the bombardment of promotional messages they receive every day

Question 39

Inappropriate promotional activities - marketing considerations for business ethics (examples) (4)

Answer 39

• Promotions that encourage consumers to buy more than they need can lead to food waste
• Food retailers have also received criticism for running Buy One Get One Free promotions on sugary drinks and foods, encouraging over-consumption of foods best consumed in small quantities
• Advertising has also been blamed for social issues such as body image issues, especially among teens, by using touched up images of models to set unattainable beauty goals
• Companies offering credit to try to encourage people to buy products they really cannot afford can also be accused of unethical promotion

Question 40

Why is there a need to control MNCs? (4)

Answer 40

• Safety concerns
• Short-term mineral extraction
• Weakening local cultures
• Lack of commitment to the host country

Question 41

Safety concerns - the need to control MNCs (2)

Answer 41

• MNCs producing in less developed countries with lax regulations on factory safety may be able to squeeze extra life out of unsafe machinery that would be retired from plants elsewhere
• If local regulations cannot ensure safe equipment for workers, some other form of control may be needed

Question 42

Short-term mineral extraction - the need to control MNCs (2)

Answer 42

• By their nature minerals can only be extracted once so when an MNC enters a host country to extract minerals it’s crucial that the country receives appropriate rewards for its irreplaceable natural resources
• However, often local politicians focus on benefiting personally for allowing the MNC in, rather than ensuring that rewards are shared equitable within the host country

Question 43

Weakening local cultures - the need to control MNCs (2)

Answer 43

• MNCs can be highly skilled at selling foreign products to locals
• This could lead to concerns that a MNCs marketing success can lead to consumers changing their habits and lifestyles as a result leading to a loss of traditional local cultures to be replaced by some kind of global corporate consumerist culture

Question 44

Lack of commitment to the host country - the need to control MNCs (2)

Answer 44

• A MNC lacks the strong bonds trying it to a country that a characteristics domestic focused companies
• Therefore causing an MNC to leave potentially creating significant unemployment or social problems in the event of problems that a domestic producer may have the commitment to work through such as a recession

Question 45

Factors to consider when controlling MNCs 4)

Answer 45

• Political influence
• Legal control
• Pressure groups
• Social media

Question 46

Define lobbying

Answer 46

Describes the process of directly trying to influence key political decision-makers to act in the best interests of a business

Question 47

Political influence - Factors to consider when controlling MNCs (7)

Answer 47

• Lobbying is something MNCs can do really well which can lead to them extorting a worrying level of influence over politicians with money and power
• This influence can used to achieve a things that aid MNC operations including:
- Granting licenses to run phone, rail or electricity networks
- Granting licenses to extract raw materials
- Encourages changes in laws and regulations affecting the multinationals’ operations
- Offering tax breaks
- Overlooking instances where a multinational has failed to adhere to regulations

Question 48

Legal control - Factors to consider when controlling MNCs (5)

Answer 48

• Multinationals have to abide by the laws of each country in which they operate. However the two legal areas where multinationals cause confusion is takeover and tax law
• Takeover deals involving domestic companies will be dealt with by competitions authorities which an stop MNC is one country taking over a MNC in another country
• EU can exert control through trade blocs
• cross-border takeover can in some way be ungoverned as well as transfer pricing
• The issue of legal control is more a problem in developing countries

Question 49

Pressure groups - Factors to consider when controlling MNCs (3)

Answer 49

• Pressure groups can exert pressure on multinationals and influence governments to try to curb business actions they do not support
• Pressure group power is limited to influencing as opposed to controlling the actions of MNCs
• However, in many cases, MNCs have stopped or adjusted activities that powerful pressure groups objected to

Question 50

Why social media may impact company behaviour - Factors to consider when controlling MNCs (2)

Answer 50

• MNC bosses are aware of the potential number of customers who may discover mistakes or malpractice that cast their business in a poor light
• This publicity can cause customers to buy from rivals - so bosses will pay close attention to avoid a potential catastrophic social media storm

Question 51

Why may social media have a little impact on company behaviour - Factors to consider when controlling MNCs (2)

Answer 51

• The speed with which issues appear on social media is tremendous but they also disappear from social media quickly too
• If a company can ‘weather the storm’ for a week or so, Twitter users are likely to have moved on to the next issue