4.4.1 The Impact of MNCs Flashcards
What is a mulitnational company (MNC)?
A business that is registered in one country but has manufacturing operations/outlets in different countries
e.g. Starbucks headquatres are in Washington USA, but they have 32000 stores in 80 other countries
What will often help MNC’s choose locations?
- Will choose locations based on factors such as costs
What are the advantages & disadvantages of MNCs on Employment, Wages & Working conditions?
Advantages:
- MNCs lead to job creation for the local community
- MNCs may offer more competitive wage than local businesses
- MNCs may offer better working conditions than local businesses
Disadvantages:
- MNCs may exploit local workers if employment regulation is weak or not enforced
- MNCS tend to establish production facilities in regions where labour costs are lower & pay relatively low wages
- MNCS may not create jobs for local workers & may relocate workers from their own country to work abroad
What are the advantages & disadvantages of MNCs for local businesses?
Advantages:
- MNCs can help to boost the local economy creating opportunities for local businesses
- If the population is benefiting from higher wages they may spend more on local business products
- Local firms may learn new skills & production methods that allow them to become more efficient
Disadvantages:
- MNCs reduce the supply of workers avaliable to local businesses if they offer better pay & working conditions
- If MNCs are able to produce at a lower cost & compete with local businesses, they may lose local customers
- If local businesses lose customers, this may also cause unemployment for workers of local businesses
What are the advantages & disadvantages of MNCs to Local Communities & Environment?
Advantages:
- Local residents may benefit from job opportunities & growth in local economy
- MNCs often invest to improve infrastructure -better roads, transportation & access to water & electricity wld help local community in addition to helping MNC operate more efficiently
- MNCs may have to pay taxes & business rates to local councils/ authorities
These funds may be reinvested back into local community
Disadvantages:
- MNCs may cause damage to local habitats/environment during production process E.g. Shells track record of oil pollution in communities in Nigeria
- MNC’s may leave unsightly production facilities behind once they have extracted all of the resources and left the country
What are the impacts of MNCs on the national economy?
- FDI Flows
- Balance of Payments
- Technology & skills transfer
- Tax revenue & transfer pricing
- Business culture
- Consumers
Define foregin direct investment (FDI).
The net transfer of funds of funds to purchase physical capital e.g. machinery & factories
What is the relationship between FDI’s & MNCs?
- There will be an inflow of money into a country if a MNC decides to invest into a country through foreign direct investment
What are the advantages & disadvantages of FDI flows from MNCs?
Advantages:
- There is an initial lump sum of money that enters country to pay for the investment
This money enriches local firms/ citizens who now have more money available to spend in the economy
- If money is reinvested back into the local economy, it may help to generate new jobs & boost economic growth
Disadvantages:
- Assets from the home country are now owned (or partly owned) by foreign businesses e.g. factories
- The local firms or individuals who have sold the asset, may not reinvest the money into the local economy but may move it abroad/offshore
Define ‘balance payments’
- A statement showing all of the financial transactions between a country & the rest of the world
How do MNCs have a positive & negative impact on the balance of payments?
Positive Impacts:
- MNCs can help improve balance of payment of a country as FDI flows into the country will help improve their balance of payments
- Any goods/ services exported for sale by MNC will generate further inflows to the country’s balance of payments
- This is especially beneficial to a country when the MNC is exporting a rare & valuable raw material e.g. cobalt
Negative Impacts:
- If the MNC buys raw materials or equipment abroad (imports), there is a flow of money out of the country
- If the MNC send profits back to their home country, it will also represent a flow of money out of the country
The Bop is important because If more money is coming in than going out, the country has a BoP surplus (which can be good but might cause inflation).
If more money is going out than coming in, there’s a BoP deficit (which can lead to borrowing or currency depreciation).
How can the impact of MNCs technology & skills transfer affect national economy?
- MNCs can bring new technologies & skills to local businesses
- This will help improve efficiency & productivity, helping domestic businesses to become more competitive in national & international market
How can the impact of MNCs consumers affect national economy?
Customers in countries which host MNCs benefit from:
- A wider choice of goods & services
- Lower prices if MNCs pass their cost advantages on in the form of lower prices
- Better quality of goods & services
- Improved living standards as people may have higher incomes due to the job creation & the resulting reduction in unemployment
- HWVR in long run, MNCs can push domestic businesses out of market leaving customers wless choice
- This may lead to MNCs exploiting customers with higher prices & low quality products as they have limited choice
What are the advantages & disadvantages of MNCs on Business Culture?
Advantages:
- Domestic businesses may be influenced by the business culture of MNCs suc as copying ideas like Kaizen
- MNCs may also encourage a culture of entrepreneurship
This can help boost overall economic growth
Disadvantages
- MNCs may demonstrate unethical behaviour & have a company culture of exploitation
E.g. Bangladesh is used by many clothing brands to produce cheap clothes & many turn blind eye to poor working conditions
This encourages local firms to also ignore the working conditions
How can the impact of MNCs tax revenue & transfer pricing affect national economy?
- There is the potential for the host country to gain significant tax revenue - Governments can use tax revenue paid by MNCs to invest in improving public services & infrastructure
- However, MNCs seek to maximise profits & will try to reduce their tax liabilities - Transfer pricing is a method used by MNCs to shift profits from where they are generated to countries with lower tax rates
