MNCs and FDI

Question 1

What are multinational companies? Why are they significant?

Answer 1

Multinational companies (MNCs) are large and powerful firms that operate in multiple countries and have a global presence.

They have huge assets and revenue, highly qualified and experienced managers, powerful advertising and marketing capability, highly advanced technology, and the ability to exploit huge economies of scale to reduce costs significantly.

Question 2

What is foreign direct investment (FDI)? When is it approached?

Answer 2

Foreign direct investment (FDI) occurs when a company makes an investment in a foreign country which may involve the construction of a factory or the development of a plantation.

FDI is commonly approached when a foreign company wants to work with a company in the host nation to develop a business venture

Question 3

What are some reasons for the emergence of MNCs or FDI?

Answer 3

• when there is the need to exploit economies of scale to reduce costs
• when there is the need to buy huge quantities of resources
• when there are developments in transport and communication
• when there is the ability to sell more products in global markets than in domestic markets.

Question 4

What are some advantages of MNCs or FDI?

Answer 4

• Increase in potential customers
  (Larger reach = bigger target markets = increase in sales)
• Access to cheaper supplies
  (lower unit costs = increased profit margins / increased competitiveness)
• Access to cheaper labour
  (lower costs)
• Access to a wider range of skills
  (increased efficiency = increased innovation)

Question 5

What are some disadvantages of MNCs or FDI?

Answer 5

• repatriation (sending money back to where the MNC is based hence, the host country loses out)
• tax avoidance
• exploitation of workers
• environmental degradation & increased usage of non-renewable resources = unsustainable growth
• poor working conditions & poor wages being paid