Impact Of MNC's

Question 1

What’s an MNC

Answer 1

A business that has branches or departments in more than one country

It’s head office will be based in one country

Question 2

How can MNC’s affect local economies

Positive effects

Answer 2

• Create jobs, increasing employment levels of local labour. More employment, less benefit payments, less local government spending
• Increased employment, increase local standard of living
• Higher employment rates means more money spent on local firms
• MNC’s might invest in improving infrastructure, benefiting local community. Reducing local government spending on infrastructure

Question 3

How can MNC’s affect local economies

Negative effects

Answer 3

• MNC’s brings its own labour. Put strain on local resources(food supplies). Increase demand could increase prices
• Increased competition for staff. Could force local wages up, which local firms can’t afford, therefore lose staff
• Local people start buying from MNC instead of local firms, force out of business
• MNC’s could exploit workers, which could increase health problems

Question 4

Give an advantage for governments from MNC’s moving into their country

Answer 4

-MNC moving into a country means increased government tax revenue for that country as the MNC will have to pay taxes on their profits, exports and land they buy

Question 5

Give a tax avoidance scheme MNC’s use to increase profits

Answer 5

Transfer pricing

• This is where one part of an MNC sell products to different parts of the same MNC. This means MNC’s can move money legally between countries.
• If one part of an MNC is in a country with a low tax rate, it might sell products to other parts of the MNC for very high prices. This moves it’s money from a country with a high tax rate, to one with a low tax rate.
• At end of tax year, more of MNC’s profit is in a country with low tax rate. This can lower tax paid to governments, reducing amount of money in national economy

Question 6

Why might host governments introduce an anti-tax avoidance legislation against MNC’s

Answer 6

Government fears MNC will relocate to another country, reducing their tax revenue

Question 7

MNC’s have other positive effects on national economy

What are they

Answer 7

• They create large FDI flows. This is flow of money into and out of a country’s economy from FDI. This balances the country’s balance of payments
• MNC might need to train it’s staff with new skills or introduce new technology to its host nation
• Pay for training or technical help for its suppliers located in the host country. Improving goods or services supplied to MNC
• MNC’s benefit from economies of scale, so might be able to offer cheaper products to nation, encouraging spending

Question 8

MNC’s have other negative effects on national economy

Answer 8

• Can cause money to leave national economy, which will have negative effect on nations balance payments. E.g. might send profits back to home country
• MNC’s can force domestic firms out of business by offering better service or undercutting prices. Lead to loss of tax payments for government, less choice for consumers
• MNC’s may dictate economic policy and negotiate lower tax rates due to power and value to country

Question 9

Impact of an MNC will depend on nature of its business

Answer 9

• Firms with highly skilled labour, will cause more skills to be transferred
• MNC that uses highly skilled workers, might import skilled workers, so will have small impact on host country’s unemployment rate. MNC that needs lower skilled workers, such as fruit pickers, wont need to import workers, more likely to create jobs