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
- tend to have HQ in western markets
- tend to have production facilities in emerging economies
- multi site and multi product
- heavy investment into R&D
- global brand
Positive impacts of MNCs on the local economy
- job opportunities - improve local standards of living
- 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 - improves productivity of country
- local community have greater spending power - higher disposable income
- pays taxes. generates country revenue
- may partner with domestic businesses
- competition increases pressure on innovation and efficiency
- benefit local suppliers- new startups will form to supply MNCs
- environment may be invested in protecting, if MNC down want media attention for unethical practices
Negative impacts 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
- repatriating profits, so just using resources as cheap and available
- loss of supply of skilled workers for domestic firms
- –> become reliant on new technology so unwilling to work for domestic firms
- if profit driven, may have poor working conditions and wages (above average working conditions may still be classed as poor)
- cultural erosion
The 6 impacts 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 flows of FDI
the transfer of funds into and out of a country by MNCs
- used to set up new operations or acquire foreign assets
pros
of FDI flows from an MNC on a national economy
cons
pros:
- positive economic multiplier effect
- creates jobs
- increased disposable income and consumer buying power
- taxes, can be reinvested into improving public health services
- less need to import as goods are produced (improve balance of payments- which influences exchange rate changes)
- skills, education and technology transfer
- improve infrastructure
cons:
- profits may repatriate back to home country, economy loses out on finance in the long term
- MNC may be ‘footloose’ and move operations at sight of cheaper option (local start up firms that supply MNC will suffer)
- domestic business struggle to compete
- may erode culture (domestic business lose ‘edge’ as consumer tastes westernise)
- may damage natural resources or extract unsustainably
What is the balance of payments
a record of a country’s trade with the rest of the world
What is a surplus and a deficit, and effect of them
• surplus= exports are greater than imports
- shows that local businesses are successful in exporting
- appreciate currency
• deficit= imports are greater than exports
- cause currency to depreciate
Positive and negative impact of MNCs on a country’s balance of payments
••• what does a lower BoP (trade deficit) result in
POSITIVE
- FDI itself improves the BoP, counts as inflow
- 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
- repatriating profits leads to lower BoP
•••exchange rates depreciating
define technology and skills transfer
passing on key skills, and modern technologies or processes from an MNC to local workers in the host country
Impact of MNCs providing a technology and skills transfer, on the local economy
- new technologies and skills introduced to host economy and can be adopted by domestic companies
- improve productivity of whole host economy
- better educated workforce
- faster rate of self-sufficient innovation
——> therefore more globally competitive
Positive and Negative impact of MNCs on consumers
POSITIVE
- wider choice, even glocalised products
- 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
- if MNC heavily imports, may weaken balance of payments, depreciating the currency, meaning customers have less purchasing power
define taxation
a compulsory financial charge on business profits, set by the government, as part of their fiscal policy
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 artificially move profits
