Paper 1- Theme 4.4- Global industries and MNCs Flashcards
define MNC
a multinational company is a business that has operations in more than one country
characteristic of MNC
- multi site and multi product
- heavy investment into R&D
- global brands
Positive impact of MNCs on the local economy
- job opportunities
- high wages and better working conditions as they have brand image to protect
- investment into local community and infrastructure
- transfer of developed skills (upskilling) to other business through training workers
- local community have greater spending power
Negative impact of MNCs on the local economy
- inflate wages for local business
- small local businesses can’t compete and will lose sales
- depletion of local resources & pollution
- loss of supply of skilled workers
Impact of MNCs on the national economy
- Flows of FDI
- Balance of payments
- Technology and skills transfer
- Impact on Consumers
- Impact on Business culture
- Tax revenue and transfer pricing
Define FDI
-money invested by an MNC into a host economy in order to set up operations
Drawbacks of FDI
-profits and investment may be sent back to domestic economy (repatriate)
What is the balance of payments
What is a surplus and a deficit
a record of a country’s trade with the rest of the world
surplus= exports are greater than imports
deficit= imports are greater than exports
Positive and negative impact of MNCs on a country’s balance of payments
POSITIVE
- FDI improves the BoP
- sales that the MNC make represents an inward flow of cash and increases exports
NEGATIVE
-materials and services imported by MNC represents an outward flow of cash and adds to imports
Impact of MNCs on national economy: technology and skills transfer
- new technologies and skills introduced to host economy and to domestic companies
- improve productivity of whole host economy
Positive and Negative impact of MNCs on consumers
POSITIVE
- wider choice
- access to global brands
- better quality products
- lower prices (EoS)
NEGATIVE
- local domestic business may be lost- loss of cultured products and services
- exploit customers by high prices due to desirability of premium global brands
positive and negative impact of MNCs on business culture
POSITIVES
- encourage efficiency
NEGATIVES
- traditional culture diluted
- lack of ethical practice may rub off onto other firms
- lead to more aggressive, profit driven firms adopting the MNC approach and disregarding tradition, sustainability, ethics
describe transfer pricing
DEFINITION
-a way MNCs can minimise their tax liabilities by transferring their profits from high-tax to low-tax countries
- MNCs sell their own goods at a low price to one of their own set ups in a low tax country, in order to move profits
negative impact of transfer pricing on national economy
- reduced amount of tax reinvested back into the country
—> minimises the positive effect that this investment could have in developing countries (e.g. Shell has 10x the GDP of kenya, so transfer pricing means Kenya may miss out on a large % of revenue from their tax)
define ethics
ethics are moral principles that underpin business decision making
define stakeholder conflict
-needs of different shareholders may conflict and so an action may benefit one group but impact another group negatively
Examples of stakeholders
customers employees suppliers banks shareholders community
describe the stakeholder concept
Friedman suggested that the only concern should be to use resources available as efficiently as possible to maximise profit, as this will benefit the whole society
Positives and negatives of ethical behaviour
POSITIVES
- USP
- higher employee motivation
- better reputation so easier to attract investment and to recruit
- modern social trend of higher demand for ethical products (consumerism)
NEGATIVES
- expectation built up (pressure to maintain)
- clash with shareholders (due to increased costs)
State the common ethical issues with MNCS
• pay and working conditions - less established legislations can be exploited (pay and conditions legislation is weaker in less developed countries)
• environmental impact
> high emmisions
> unsustainable waste disposal
• supply chain - any unethical practice in the supply chain makes the MNC unethical
- sweatshops
- child labour
- ignoring health and safety, and basic workers rights
• marketing
> misleading marketing - criminal act to make false statements about a product (includes labelling, price, quantity, ingredients, health claims)
> inappropriate promotional activities
- promoting directly to children
- aimed promotion at cultures or religions
why must the activities of MNS be controlled?
- lack of/ fickle commitment to host country (a footloose company)
- so large so may have more power over government (may persuade them to make decisions in the MNC’s best interests)
- reduce environmental damage (e.g. unsustainable resource depletion)
- help domestic businesses compete (protectionsm)
- limit cultural erosion
- protect against exploitation rand abuse of power over workers and other smaller businesses
4 ways that MNS can be controlled
- political influences
- government legislation
- pressure groups
- social media
define political influences
actions taken by the government to try and influence the behaviour of business and their customers
describe how political influence can control MNCs
e.g.
- MNCs can lobby with governments (attempt to influence them to create new legislation in favour of the MNC)
- governments can apply pressure to MNCs, forcing change :
- protectionism (include subsidiaries and trade initiatives)
- trade blocs
- requirement to form a joint venture (like in China)
- trade delegations (government officials visit companies in other countries and attempt to sell to them)
advantages of politically controlling MNCS
- large powerful organisation controlling them
- can create business relationships or manage/ end current ones
- can lead to elected officials challenge MNCs on problems the general public have- everyones idea is considered
disadvantages of politically controlling MNCS
- can be difficult if MNC has more power than government
- may allow for corruption to occur easier
- controlling MNC may limit innovation and industry development in country
describe how legislation can control MNCs
e.g.
- governments introducing new laws that affect the operations of MNCs
- laws apply to all MNCs
- labour laws (conditions, min wages)
- environmental laws (emissions, sustainability, waste disposal)
- competition laws (may reduce takeover opportunity and prevent anti competitive pricing from market leaders
- promotional laws (unethical marketing and inaccurate product descriptions
advantage of legislation controlling MNCs
- it is the law for all business to follow these rules, so not abiding will lead to punishment
- may lead to improved drive for efficiency in market
- protects consumers, environment and predatory attempts on other businesses
disadvantages of legislation controlling MNCs
- business may relocate to different country with more suitable legislation (fickle commitment)
- legislation is harder to enforce in smaller countries
define pressure groups
an organisation who organisations that fight to influence the actions of others, for the good of a particular cause
describe how pressure groups can control MNCs
- use direct and indirect action to influence governments and MNCs to change behaviour
- aim to change legislation or company operations or change public opinion
define direct and indirect action and examples of how these can be used to control MNCS
DIRECT: where a group focuses directly on changing policies and bringing about action
- protest
- boycott
- lobbying (attempt to influence legislation)
INDIRECT: where a group persuades others to act against a cause
- adverts
- publicity
- petitions
1 strength 1 weakness of pressure groups controlling MNCs
+ gathers all passionate, committed people together to fight same cause
X - direct action may lead to violence and different outsider perception of the true aim
define social media as a way to control MNCs
the use of virtual communities on social network sites to communicate about and highlight the behaviour of MNCs
describe how social media can be seen as way to control MNCs
- can make ethical issues viral (using a sharing culture) causing major PR disaster if unresolved quickly
- aim to reach wider audience of different demographic to allow it to spread quicker
2 Strengths of using social media to control MNCs
+ viral spread, can generate momentum behind the cause quickly
+ can be seen by all interested parties (government, MNC representatives, others who believe in same cause)
2 Weaknesses of using social media to control MNCs
X - can’t control message that is being spread
X - MNCs may see off unwanted attention through strong brand image, loyal customer base, finance available and even through their own influence on politics
Impact of social media on MNCs generally
+ allow for immediate customer service
+ improve brand image and emotional branding (brand has a persona online)
+ cost efficient way to gain awareness
X can build momentum behind consumer action
X can be at risk of false information spreading
X business operation are fully transparent- may lead to controlling measures from pressure groups or government
