4.4.1 The impact of MNCs

Question 1

What is the main impact of MNCs on economics?

Answer 1

• Local labour and job creation e.g Creation of jobs
• Wages and working conditions

Question 2

What impact do MNCs have on local businesses?

Answer 2

• local businesses may be involved in the construction of the new plant. There may be jobs for builders , carpenters, plumbers, electricians and welders
• may supply materials to MNCs resulting in higher revenue and more profit

However , the negatives are :
- may lure workers away from other businesses by offering better conditions or higher wages, or supply products that compete directly with those produced by local businesses.

Question 3

What impact does MNCs have on local communities and environment?

Answer 3

• Improvement in infrastructure
• Contribution to local government tax
• help in local communities e.g give money to local charities, give locals access to company’s facilities and participate in local cultural events.

Question 4

What is the impact of MNCs on the national economy?

Answer 4

Generate income, employment, wealth and prosperity

Question 5

How do FDI flows impact the economy?

Answer 5

• When an overseas business locates a new facility in a foreign country the amount of money spent to establish the facility is called foreign direct investment

Benefits of this are :
- increase in income
- increase in tax revenue
- increase in employment
- reduce national debt

Question 6

Why is an increase in income a Benefit of FDI?

Answer 6

Should result in higher levels of GDP for the host nation. Which will increase economic growth and help to raise the living standards for people in the host country

Question 7

Why is an reduction in national debt a Benefit of FDI?

Answer 7

If a county can reduce its debts and send out a message to the rest of the world that it is more financially stable. Interest payments might be reduced and the country should find it easier to borrow money.

Question 8

What are horizontal transfers?

Answer 8

Are when knowledge is transferred across the same industry. For example, new technologies and working practices used by Japanese car manufacturers were copied by other car producers.

Question 9

What are vertical transfers?

Answer 9

• Maybe forward or backwards transfer
  For example , MNCs often provide technical assistance, training and other information to their suppliers located in the host country
• whilst also assisting local suppliers in purchasing resources and in modernising production facilities.

Question 10

What are forward vertical transfers?

Answer 10

Are likely to occur when businesses in the host nation purchase goods and services from the MNCs

Question 11

How are consumers going to be impacted by MNCs

Answer 11

• More choice
• Lower prices due to competition forcing domestic producers to lower their prices.
• improved quality
• better living standards because MNCs bring job opportunities and higher incomes.

Question 12

How do MNCs impact business culture

Answer 12

• individuals may have some money from employment , which can be used for start-up capital
• workers may have developed skills that they think could be put to better use working for themselves
• multinationals may encourage workers to set up businesses and become suppliers.

Question 13

What is reverse engineering

Answer 13

A method of analysing a products design by taking it apart

Question 14

What is transfer pricing

Answer 14

A system operated by MNCs. It is an attempt to avoid relatively high tax rates through the prices which one subsidiary charges another for comments and finished goods.

Question 15

Benefits of MNCs to countries in which they operate

Answer 15

• MNCs provide significant employment and training to the labour force
• 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 e.g local suppliers
• significant tax revenue
• incentive to domestic firms because it improves their competitive

Question 16

Drawbacks of MNCs to countries in which they operate?

Answer 16

• Profit leakage; Profits from factories or hotels run 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.
• Pull out quickly; In times of recession/low sales, jobs of workers in the head office country are protected for longer than in other factories.

• Poor safety record; Poorer countries often have poorer safety standards, and governments are willing to turn a blind eye to breaking the standards that exist.
• Increases urbanisation; Most 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.
• Widens poverty gap; Although wages are low in factories, they are higher than elsewhere. This increases the cost of living for all, as prices of goods rise.

Question 17

Advantages of vertical integration

Answer 17

1.Cost savings: Vertical integration can help a company achieve cost savings by eliminating intermediaries and controlling the entire supply chain, from raw materials to finished products. This can lead to more efficient operations and lower production costs.

2.Quality control: By controlling the entire supply chain, a company can ensure consistent quality of its products and minimize the risk of defects or other quality issues.

3.Competitive advantage: Vertical integration can provide a company with a competitive advantage by giving it greater control over the production process, which can lead to faster innovation and greater responsiveness to customer needs.

Question 18

Disadvantages of vertical integration

Answer 18

1. High capital requirements: Vertical integration often requires significant capital investment to acquire or build new facilities, which can be a barrier to entry for smaller companies.

2.Limited flexibility: Vertical integration can limit a company’s flexibility to respond to changes in the market, as it may be committed to certain suppliers or distribution channels.

3.Risk concentration: By controlling the entire supply chain, a company may be exposed to greater risk if there are disruptions in any part of the chain, such as a natural disaster or a supplier bankruptcy.

Question 19

Advantages of horizontal integration

Answer 19

1.Economies of scale: Horizontal integration can help a company achieve economies of scale by increasing its market share and reducing costs through greater efficiencies and bargaining power.

2.Diversification: Horizontal integration can help a company diversify its product offerings and reduce its dependence on a single product or market.

3.Increased market power: Horizontal integration can give a company greater market power by eliminating competition and increasing its ability to set prices.

Question 20

Disadvantages of horizontal integration

Answer 20

1.Regulatory hurdles: Horizontal integration may be subject to antitrust regulations that limit the size or market share of a company, which can limit the potential benefits of the strategy.

2.Cultural differences: Merging with or acquiring another company can lead to cultural differences and integration challenges, which can negatively impact employee morale and productivity.

3.Integration costs: Integrating two companies can be complex and costly, requiring significant resources and management attention, which can divert attention from other business priorities.