Chapter 79- The Impact of MNC’s Flashcards
Impact of MNCs on the local economy
Arrival of MNCs usually welcomed due to a new factory creating employment, providing work for businesses in the supply chain, give a boost to the local economy and provide opportunity for people to learn new skills.
Local labour and job creation
Creation of jobs is one of the main impacts- full-time jobs with training, regular income, financial security and the opportunity to build a career.
Wages and working conditions
When new business opened = wages could rise. This is because the demand for workers in the local economy is likely to drive up rates.
If unemployment is relatively low, and if other employment opportunities already exists in the area, wages are more likely to go up.
Jobs created are also likely to have favourable working conditions because MNCs often have a modern approach to business development where- facilities are likely to be new and up to date, adopting the latest technologies, and their working practises are likely to be modern and efficient + most will adopt internationally recognised standards of health and safety, and employee welfare.
MNCs can have positive impacts on the local area:
- Jobs for builders, carpenters, plumbers, elections and welders in the construction process of the new plant.
- Plant ‘up and running’ may be a need for local businesses to supply materials, components, commercial services and utilities = area will benefit from increased trade, higher revenues + profit.
- May need to recruit more workers to meet their own demands.
- People who taken jobs will have income to spend = more demand in the local economy.
HOWEVER:
•When MNCs go overseas they can have a negative effect on the local business- where workers are lured to them and other local business have to compete alongside them.
•Although the larger businesses may put pressure on the small business in the long term to become innovative and efficient, in order to compete.
The local community and environment
Benefits:
•Improvements in infrastructure, MNCs might invest some of their own money to help develop roads, electricity, water and gas supplies, schools, hospitals and other public amenities – likely to improve quality of human capital in the area as well as roads benefiting the plant.
- Contributions to local government taxes, in UK businesses have to pay rates to local authorities. Similar, payments are likely to be paid by MNCs when they operate in other countries, meaning money can be spent in the local area.
- Help in local communities, some MNCs try to make links with the local area going to sporting or cultural events. Or even money to charities, organise fundraising events or give the public access to company’s facilities.
Some can have a negative effect when working overseas – by causing environmental damage, people may be left struggling in areas where farming and other subsistence activities are almost impossible.
Mining industries in particular can have an impact if there are oil spills that lead to environmental harm from oil pollution. This can have impact on the health and activities of local people, especially farming and fishing.
FDI flows
When an overseas business locates a new facility in foreign country, the amount of money spent on establishing that facility is classified as foreign investment (FDI).
Impact of MNCs on the national economy
- Increase in income, generally flows of FDI should result in higher levels of GDP for the host nation. Extra output + employment resulting from new FDI will increase economic growth and should help to raise the living standards for people in the host country.
- Increase in tax revenue, profits made by MNCs are taxed by host nation = increase tax revenue for gov = money can be spent on improving gov services, such as healthcare, education, housing and transport networks.
- Increase in employment, the flow of FDI creates new jobs in the host nation.
- Reduce national debt, some of the money received through FDI might be used to reduce national debt. Positive for host country = as sends out message to rest of world that it is more financially stable. As result interest payments might be reduced and the country should find it easier to borrow in the future.
- Technology and skills transfer, MNC investment in foreign countries = new technologies and modern working practises are introduced into the host nation = could transfer tech and knowledge into local businesses. This can be horizontal or vertical.
Horizontal
Is when knowledge is transferred across the same industry. E.g. new tech and working practises used by Japanese companies were copied by UK car producers.
Vertical
May be forward or backward e.g. providing technical assistance/training to supplier in host country or assist local suppliers in purchasing resources and in modernising production facilities.
Consumers
Will benefit from an MNC because they will be able to buy some goods as well as having:
- More choice, the MNC will add to the variety of products the consumer is able to buy, unless it is making components or provides a service for another business.
- Lower prices, arrival of MNCs = an increase in comp. Product by MNC may be cheaper as production is more modern and efficient = able to charge lower prices + competitive pressure = more costs lowered.
- Improved quality, use of ‘state of the art’ tech, modern materials and more efficient working practises = quality improved.
- Better living standards, benefiting from employment opportunities + higher incomes. More choice and enjoy cheaper + better quality products. Also if products are cheaper the more income to fund other expenditure.
Business Culture
MNCs set up can change the culture of the business in the area. E.g. in some cases people employed by MNC may leave their jobs and start their own business because:
• saved money
• developed skill which could be put to better use working
for themselves
• MNCs may encourage workers to set up businesses +
become suppliers.
Tax revenues and transfer pricing
MNCs pay taxes to national economies = gov can then spend on health care or education etc. However some MNCs seek places with low tax costs.
Transfer pricing is a system operated by MNCs, as an attempt to avoid relatively high tax rates through the prices which one subsidiary chargers another for components and finished goods.
