are Multinationals A Force For Good Or Should They Be Controlled?

Question 1

what are the strategies governments use to attract FDI?

Answer 1

• subsidies for training workers
• high tariffs for imports to encourage FDI
• A more flexible labour market e.g. the UK making it easier to hire and fire workers, temporary contractors, and zero hour contracts
• unskilled work force/cheap workforce
• attractive rates of corporation tax
• investment in infrastructure
• skilled workforce

Question 2

how does FDI/MNCs benefit the host nation?

Answer 2

• boost GDP: investment from abroad is an injection into the economy, creating jobs, spending and has an upward multiplier affect
• firms that are corporately responsible will try to improve efficiency
• Technology transfer
• tax revenue for the government
• higher incomes of the workforce may generate savings – allowing firms to borrow money to develop and grow
• New management and production techniques
• economic growth will occur
• existence of one successful MNC may encourage others to follow
• local firms may benefit from joint-ventures
• generates exports and improves the country’s balance of payments
• higher employment➡️ lower welfare spending for the government
• offers employment to women

Question 3

what are the negative impact of MNCs on the host nation?

Answer 3

• competition drives local firms out of business because they don’t have economies of scale
• the local population may not actually benefit from the products
• The MNC may promote demerit good is that are being regulated in their own country e.g. tobacco
• very few skills are developed (sometimes) because of the repetitive tasks➡️screwdriver factories
• not all parts of the country would benefit from the MNC:
• there will be an upward multiplier effect in the area they are situated, however, rural areas will not benefit➡️no trickle down effect… Increases inequality in the country
• transfer pricing techniques: price their products in different countries, so that they make as little profit as possible in countries were corporation tax is higher
• westernisation➡️loss of culture/tradition
• exploitation of labour: sweat shops, countries can be engaged in a race to the bottom
• exploiting less strict environmental laws➡️ damaging the environment➡️negative production externalities
• MNCs put pressures on governments to behave in a way which benefits the MNC
• farmers may be exploited by the monopoly power of large MNCs

Question 4

describe self regulation for an MNC

Answer 4

• regarding their image, reputation and CSR
• The MNC take steps to regulate their own behaviour
• they may want to take a stakeholder approach, where the interests of all the stakeholders are taken into account, rather than just the shareholders
• they need to enhance their image and reputation to show that they are corporately responsible
• Keen to be ranked highly in the ethical ranking table
• many businesses join an ‘umbrella’ organisation e.g. in the UK the ETI (ethical trading initiative) or the fair trade foundation
• ETI: an alliance of companies who adopt a code of labour practice based on the standards of the ILO (International labour organisation)
• these enhance the company’s image and should potentially boost sales

Question 5

what are three issues with self regulation for an MNC?

Answer 5

1. targets maybe set too low to have any real impact
2. what they say on their website may not be what they actually do
3. The CSR may simply be a marketing exercise

Question 6

describe government regulation for an MNC and describe one problem associated with it

Answer 6

• law: is an act or legislation
• regulation: standards/ guidelines about behaviour e.g. minimum wage and living wage… Pressure from the government and MNCs to ensure MNCs behave in a corporately responsible manner
• companies find loopholes in the system and bribes to the government

Question 7

describe pressure groups regulations for MNCs, and list one problem with them

Answer 7

• A group of individuals with a common interest in pursuit. They attempt to influence public opinion government legislation
• The power of the media/the Internet is a massive source of power to them
• but not all pressure groups are powerful: depends on the resources, finance, and the ability to get the public on the side

Question 8

why do MNCs want to produce and sell globally?

Answer 8

• to boost sales as they sell to a larger market so they gain higher market share and profits
• saturation of domestic market and existing foreign markets
• an extension strategy in terms of the product life-cycle (backward innovation)
• to take advantage of lower costs e.g. wages… maybe to avoid having a competitive disadvantage
• access to raw materials
• less strict environmental laws
• to gain the benefits of economies of scale (risk bearing, production, marketing)
• to recover development costs due to shorter product life-cycles
• to be near the market and have a better understanding of it➡️more responsive to changes and reduced transport costs
• to avoid protectionist policies e.g. import tariffs
• to take advantage of government assistance