4.4.1 The Impact Of MNCs Flashcards
MNC definition
A multinational company
is one that has branches
or manufacturing plants in
several countries.
Positive and negative impact of MNCs- local labour training
Western training methods may make the local workforce more productive/ employable. Western employers may attract over- qualified people possibly stripping local businesses and public services of skilled staff
Positive and negative impact of MNCs- wages
MNCs usually pay higher wage rates than local firms, improving standards of living. Some locals may feel bitter that they are paid less than westerners for doing exactly the same job
Positive and negative impact of MNCs- working conditions
MNCs have international reputations to maintain, so they will tend to provide above-average conditions, Conditions may be above average, yet still quite shocking to westerners • Some MNCs may have impressive policies in place, yet the workplace reality may be worse than the paper theory
Positive and negative impact of MNCs- job creation
The success of MNCs may sometimes be at the expense of local independent firms; the key measure is net job creation
Local businesses
When a multinational sets up operations in a new area, the impact on
most local businesses is likely to be positive. A new factory that creates
hundreds of jobs will look to local businesses for some supplies, will
create more spending power locally -
- to be spent in local shops and
restaurants
- and will add income to the area that local entrepreneurs
can exploit. However, if the operation started by a multinational provides
direct competition to an existing business, it may have too much power
for local rivals.
Local communities and the environment
Examples of multinationals
investing in local communities, raising standards of healthcare, education
and infrastructure can be found. Alongside these are examples of
multinationals whose approach can cause damage to local communities,
disrupting social structures and indirectly bringing problems of crime that
can be associated with suddenly newly found wealth.
Likewise, although there are examples of multinationals that have had
a damaging effect on the physical environment, local businesses may be
just as, if not more, guilty of causing environmental damage. This may
be especially true where local environmental regulations are minimal or
non-existent: at least a multinational may need to stick to globally laid
down internal environmental standards.
The impact of MNCs on the national economy- FDI Flows
When multinationals choose to invest directly into other countries, they
are injecting cash into the national economy. That cash creates jobs and
injects extra money into the local economy. However, there are concerns
that the FDI flows may not entirely work in that direction. Once a
multinational is generating profit, the likelihood is that the profit will be
sent out of the country, back to the multinational’s home country.
The impact of MNCs on the national economy- balance of payments
Countries that import more than they export run a current account deficit.
This is likely to lead to a fall in the value of the currency, which creates a
risk of inflation. However, if the country attracts FDI, the inflow of cash
from multinationals cancels out the current account deficit.
The potential problem to this occurs when a multinational decides to
withdraw its FDI. This represents a further outflow from the country,
thus 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 economically developed country can be significant.
The impact of MNCs on the national economy- technology and skills transfer
When multinationals open facilities in a new host nation, they are likely to
introduce ideas and methods that may be new to the country. This allows
the local economy to copy or “borrow’ the techniques and methods being
used, improving 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 the ongoing development.
The impact of MNCs on the national economy- consumers
As multinationals enter new countries, consumers within those countries
gain more choice. This is broadly seen as a good thing. However,
problems may emerge if the competition from the multinational drives
domestic firms out of business. Though this is the reality of capitalism,
concerns over the fairness of the competition are often attached to the
entry of multinationals to foreign markets.
What can you introduce as a counter-argument/ evaluation
Ethical concerns
The impact of MNCs on the national economy- business culture
Multinational businesses are run in a professional and generally consistent
way. This consistency of operation may not be commonly found in host
countries. In just the same way that technology and skills transfer helps
domestic businesses, so will the experience of seeing how a multinational
operates. As domestic suppliers deal with the multinational they are likely
to adapt a more consistent and professional business culture.
The impact of MNCs on the national economy- tax revenues and transfer pricing
The implication for host countries is that multinationals are able to
minimise the tax they pay locally using transfer pricing. This potentially
places undue pressure on host countries’ governments to keep tax rates low.
Transfer pricing
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 bill
paid by the company. multinational will move products between its different
locations, charging an ‘internal price’ for components or partially finished
goods as they are transferred between the multinational’s locations. Different countries charge different rates of tax on business profits.
illegal, but ethically dubious.
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, declaring minimal or no profits in high tax countries.
