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)
