C10 The importance and growth of multinational companies

Question 1

How have MNCs developed?

Answer 1

1. Economies of scale - increases level of output developed to enjoy lower costs
2. Marketing - gains more public recognition and therefore expands
3. Technical and financial superiority - have developed advanced technologies and can afford to invest in research and development, and employing most talented people

Question 2

Define commodoties

Answer 2

Products that are bought and sold

Question 3

Define patents

Answer 3

Legal documents giving a person or a company the right to make a specific product or invention, and no other person or company has the right to do the same

Question 4

Define venture

Answer 4

New business activity that involves taking risk

Question 5

What are the benefits of becoming an MNC?

Answer 5

1. Larger customer base - have access to much larger market than companies that focus entirely on domestic markets
2. Lower costs - can exploit economies of scale, can buy resources and borrow money at cheaper rates
3. Higher profile
4. Avoiding trade barriers - by establishing operations in countries that have trade barriers in place
5. Lower taxes - basing head offices in countries where taxes are lower (eg Ireland 12.5% tax ‘tax havens’)

Question 6

What are the benefits of MNCs to a country/economy?

Answer 6

1. Increase in income and employment - create new jobs in developing countries, get local suppliers into work, raises economic growth and living standards
2. Increase in tax revenue - profits made by MNCs are taxed by host nation, can be used to improve government services
3. Increase in exports - recorded as output of country then recorded as export, helps country increase their foreign currency reserves
4. Transfer of technology - often provide foreign suppliers with technical help, training and other info
5. Improvement in the quality of human capital - MNCs provide training and work experience for their workers
6. Enterprise development - MNCs encourage more people to set up businesses in less developed countries

Question 7

Define currency reserves

Answer 7

Money in foreign currency held by a country and used to support its own currency and to pay for imports and foreign exports.

A reserve currency reduces exchange rate risk since there’s no need for a country to exchange its currency for the reserve currency to do trade.

Question 8

Define human capital

Answer 8

People and their skills

Question 9

Define enterprise

Answer 9

The starting and running of businesses

Question 10

What are the possible drawbacks of multinationals to a country/economy?

Answer 10

1. Environmental damage - MNCs heavily involved in the extraction industries
2. Exploitation of less developed countries
3. Repatriation of profits - the profits are returned to the country where the multinational is based and has its headquarters, so host country loses out
4. Lack of accountability (responsibility) - so large and powerful, evade the law especially countries where the government is weak or corrupt

Question 11

Define repatriation (of profits)

Answer 11

When a multinational returns profits from an overseas venture to the country where it is based