Impact of MNCs Flashcards
What is a multinational company?
A business that has operations in more than one country
Characteristics of MNCs
- dominant players in the market
- complex structures, multi site and multi product
- growth through organic and inorganic growth
- heavy investment in R&D
- globally recognised brand
Benefits of MNCs on country the operate in
- provide significant employment and training to labour force in host country
- transfer of skills and expertise, helping to develop the quality of the host labour force
- add to host country GDP through their spending e.g local suppliers and through capital investment
- competition from MNCs acts as an incentive to domestic firms, improving their competitiveness
- extend consumer and business choice
Drawbacks of MNCS on country they operate in
- domestic businesses may not be able to compete with MNCs and some will fail
- may not feel they need to meet the host country expectations for acting ethically
- may be accused of imposing their culture on the host country
- profits earned by MNCs may be repatriated back to MNCs country rather than reinvested in host economy
- may make use of transfer pricing and other tax avoidance measures to reduce profits on which they pay tax to the government
Impacts of MNCs on local firms
+ higher demand on products
+ provide support services (building, cleaning, raw materials)
+ investment in infrastructure
+ greater spending power in local community
- increased costs (workers and ancillary services)
- loss of supply of talented workers
- loss of sales (demand for substitute products)
Impact of MNCs on local community/ environment
+ environment- may improve as it generates income to government through tax- regeneration
+ increased employment, lower provers
+ improved infrastructure
+ improved education
+ investment in projects to improve local environment
- congestion/ pollution
- housing prices rising making it harder for community
- loss of tradition/ culture
Impact of MNCs on national economies: FDI
FDI: money spent by an MNC to set up operations in a host country
- an injection into host economy
- economic growth (GDP
- generation of revenue for the national government
- job creation and wealth
However, following the initial investment a lot of the profits are likely to flow back to the domestic economy
Impact of MNCs on national economies: balance of payments
A record of a country’s trade/ transactions with the rest of the world
- a surplus is when the sum of exports of goods, services, investment income and transfers is greater than imports
- a deficit is when the sum of exports of goods, services, investment income and transfers is less than imports
Impact of MNCs on national economies: technology and skills transfer
- new technologies and skills will be introduced to the host economies
- collaborative work between countries to further development
- spread of technology and skills across sectors and to domestic companies
- this can therefore impact productivity in the whole economy
Impact of MNCs on consumers
- wider choice of goods and services
- access to global brands
- better quality products
- potentially lower prices for consumers (EOS)
However: - may lose local, more traditional businesses
- may exploit consumers using the desirability of premium global branding
Impact of MNCs on business culture
- may introduce more aggressive cultures based on a profit motive
- traditional businesses may be more likely to be family based
- could dilute traditional business culture
- could cause conflicts with other local firms who conduct business very differently
However: - encourage enterprise due to recognising capitalism
Impact of MNCs on national economies:
Tax revenues
- tax havens: low or zero tax (e.g Bermuda and Switzerland)
- taxation: a levy charged by the government as part of their fiscal policy
• taxes paid in host country will boost governments revenue increasing investment in public services
Impact of MNCs on national economies: transfer pricing
- transfer pricing: tax profits in the lowest countries (legally manipulate where their profits are made to avoid tax)
- the price charged by one company to another within the same MNC
• can be used by MNCs to manipulate profits between subsidies and tax liabilities
