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.
Potential Benefits of MNCs on Host Countries
Provision of significant employment and training to the labour force in the host country, Transfer of skills and expertise, helping to develop the quality of the host labour force.
MNCs add to the host country GDP through their spending, for example with local suppliers and through capital investment.
Competition from MNCs acts as an incentive to domestic firms in the host country to improve their competitiveness, perhaps by raising quality and/or efficiency.
MNCs extend consumer and business choice in the host country
Profitable MNCs are a source of significant tax revenues for the host economy (for example on profits earned as well as payroll and sales-related taxes)
Potential Drawbacks of MNCs on Host Countries
Domestic businesses may not be able to compete.
MNCs may not act ethically or in a socially-responsible way
MNCs may be accused of imposing their culture on the host country, perhaps at the expense of the richness of local culture- might reduce cultural diversity around the world.
Profits earned by MNCs may be remitted back to the MNC’s base country rather than reinvested in the host economy.
MNCs may make use of transfer pricing and other tax avoidance measures to significant reduce the profits on which they pay tax to the government in the host country
Why are MNCs good for poorer countries
Job opportunities so lower unemployment, competition to drive prices down, contribute to GDP but entry barriers, exploit cheap labour, not very eco-friendly
Why MNCs are good
Lower unemployment, higher exports which expand economy with injection increase GDP, reduce primary resource dependency, increased tax to increase HDI, skilled labour force
Why MNCs are bad
Exploitation of labour, exploitation of finite resources, country could become reliant on FDI, employment tends to be lower skill level so lower pay, environmental impact, extra competition for domestic firms
Support of MNCs beacon of global capitalism
Wealth generation bring employment, income and new tech to poorer countries driving up incomes and aiding development.
Why do people set up MNCs motives
Domestic market may be saturated, extension strategy for product life cycle, economies of scale, lower unit cost, enhance competitive advantage, available and cheap adaptable labour
FDI
Investment of foreign money into domestic structures, equipment, and investment based in the host country. Creates direct stable and long-lasting links between economies. Encourages a transfer of tech and know-how. Allows host economy to promote its products more widely in international markets. Additional source of funding for investment and can be important for the development of economy.
Positive effects of MNCs
Improved infrastructure. creates employment. Skill base because they operate training schemes which could attract other firms to the country, increase standard of living as increase tax for them to spend on services like healthcare. Raises countries profile -MNCs partner move carefully known worldwide movements into a particular country is a statement about its pro-business environment and political stability. Improves balance of payments because many goods made by MNCs are exported to other nearby countries
Negative impact of MNCS on overseas countries
1. Widens poverty gap. 2. Profit leakage. 3. Low paid jobs. 4. Pull out quickly. 5. Poor safety record. 6. Increases urbanisation
- Widens poverty tap
MNCs often interested in profit at the expense of the consumer. Usually have monopoly power enabling them to make access profit. Market dominance makes it difficult for local small firms. Economies of scale to push local firms out of business. Pollution and nonrenewable resources. Slave labour
- Profit leakage
Profits from the MNC go to the country in which the head office of the company is found so there’s less tax for the government
- Low paid jobs
Sometimes higher paid managerial jobs go to the workers brought in from the head office country
- Pull out quickly
In times of recession or low sales, jobs of workers in the head office country are protected for longer than other factories
- Poor safety record
Poorer countries often have poor safety standards and governments are willing to turn a blind eye on breaking the standards that exist
- Increases urbanisation
Many jobs created by MNCs are usually found in or close to urban areas. Hope of securing these jobs attracts more people from rural areas to cities. Wages are higher than everywhere else which increases the cost of living for all as prices of goods rise
More negative impacts
Labour exploitation, degradation of local environment, implementation of working practices which would be unacceptable in home country
Transfer pricing
A way multinationals can minimise their worldwide tax liabilities by transferring their profits from high tax to low tax countries
Tax avoidance
Legal ways of artificially minimising the taxes companies owe to society
Tax havens
Countries or district by taxes and company profits are at or close to 0.
MNCs and many other businesses artificially register the company headquarters in these
What does the disadvantage of poor ethical practices depend on for an MNC
In some ways MNCs may have to work harder I’ve been good than other companies because they have more to lose from bad publicity
Example of tax havens Richard Branson virgin group
Richard Branson‘s virgin group gets much of its income from UK government sources like real income but it keeps its tax base in offshore havens such as the Virgin Islands
