The impact of MNCs

Question 1

what is a MNC

Answer 1

• it is a business that is registered in one country but has manufacturing operations / outlets in different countries.

Question 2

Impact of MNCs on the local economy

Answer 2

• Local economy: a small section of the national economy.
  –> MNCs offer both advantages and disadvantages with regard to:
• employment, wages & working conditions.
• the impact of local businesses
• the impact of the local community and environment.

Question 3

employment, wages & working conditions.

Answer 3

• MNCs require workers when moving into a new country and a demand for local labour creates jobs, this can help to increase and improve employment in the country as MNCs often offer strong wages and good working conditions.
• advantages of MNCS:
• may lead to job creation for the local community.
• may offer more competitive wages than local businesses.
• may offer better working conditions that local businesses.
• Disadvantages:
• may exploit local workers if employment regulation is weak or not enforced.
• tend to establish production facilities in regions where labour costs are lower and pay relatively low wages.
• may not create jobs for local workers as they may relocate workers from their own country to work abroad

Question 4

local businesses.

Answer 4

• MNCs can raise a country’s profile, which may help local businesses thrive. However, if they compete with them directly, it may detract from local businesses revenues due to their market dominance. They may use their EOS to push local firms put of business, squeezing their margins, leading to less diversity.
• Advantages of MNCs:
• can help to boost the local economy creating opportunities for local businesses.
  –> if the population is benefiting from higher wages, they may spend more on local business products.
  –> MNCs may utilise the services of local businesses.
• there may be opportunities for joint ventures and partnerships with MNCs who seek to gain knowledge of the local market = local businesses can learn new skills and production methods that allow them to become more efficient.
• Disadvantages:
• MNCs reduce the supply of workers available to local businesses if they offer better pay and working conditions.
• local businesses may lose customers and demand is MNCs are able to produce at a lower cost = this may cause unemployment for workers and local businesses.

Question 5

local communities and environment

Answer 5

• MNCs are likely to cause large negative externalities in the local community and environment, like pollution. To counteract this, an MNC may invest money to improve the infrastructure and enhance the local area.
• Advantages of MNCs:
• local residents may benefit from job opportunities and growth in the local economy.
• MNCs often invest to improve infrastructure (better roads, transportation and access to water and electricity would help the local community in addition to helping the MNC operate more efficiently).
• MNCs may have to pay taxes and business rates to local councils / authorities = these funds may be reinvested back into the local community.
• MNCs can establish charitable incentives that have a positive effect on the local community.
• Disadvantages:
• may cause damage to local habitats / environments during production process.
• may leave unsightly production facilities behind once they have extracted all the resources and left the country.

Question 6

Impact of MNCs on the National economy

Answer 6

• national economy: the country’s economy as a whole.
• many governments are in favour of MNCs establishing in their country as there are benefits to the wider economy.

Question 7

Foreign direct investment (FDI) flows

Answer 7

• there will be an inflow of money into a country if a MNC decides to invest into a country through FDI.
• This is because when an overseas businesses locates into a foreign country, it invests a huge amount of capital into that country.
• Advantages:
• the initial lump sum of money that enters the country can enrich local businesses or citizens who now have more money available to spend in the economy = this leads to spending in the economy, which creates jobs and lowers the level of unemployment.
• if this money is reinvested back into the local economy, it may help to generate new jobs and boost economic growth.
• FDI creates wealth in a country, as it leads to: reduced national debt, increased employment, increased incomes and increased tax revenue.
• Disadvantages:
• assets from the home country are now owned or partly owned by foreign businesses.
• the local firms or individuals who have sold the asset may not reinvest the money into the local economy but may move in abroad / offshore.

Question 8

balance of payments

Answer 8

• it is a statement showing all the financial transactions between a country and the rest of the world.
• Advantages:
• MNCs can help improve the balance of payments of a country, as the FDI flows into the country will help improve their balance of payments.
• any goods/services exported for sale by the MNC will generate further inflows into the country’s balance of payments and improve the country’s GDP.
• Disadvantages:
• If MNCs import raw materials or equipments from abroad, there is a flow of money put of the country.
• If MNCs send profits back to their home country, it will also represent a flow of money out of the country = called Profit Leakage (profits generated by MNC is remitted back to home country).

Question 9

technology and skills transfer

Answer 9

• MNCs can bring in new technologies and skills to local businesses.
• this is because MNCs may have created its success through developing new technology and processes and will also train and develop the knowledge and skills of its workforce. This will naturally transfer into the foreign country.
• this will help to improve efficiency and productivity, helping domestic businesses to become more competitive in the national and international market.

Question 10

consumers

Answer 10

–> the introduction of an MNC will increase the level of competition within a national industry. Although this has negative consequence for domestic businesses, this can create benefits for consumers, like:

• wider choice of goods and services
• lower prices (MNCs usually drive down prices because of their bargaining power and their cost advantages).
• better quality products/ services.
• improved living standards = people may have higher incomes due to job creation and the reduction in unemployment + a wider range of products and services to meet their needs and make life more enjoyable.
• Disadvantages:
• However, in the long run, MNCs can push domestic businesses out of the market leaving customers with less choice.
• this may lead to MNCs exploiting customers with higher prices and low quality products as they have limited choice.

Question 11

business culture

Answer 11

• it is the way things are done and completed in a business. it is made up of shared values, beliefs and assumptions about how people behave both personally and professionally.
• the business culture of MNCs may naturally transfer to local businesses through the growth of MNCs or domestic businesses may be influenced by them., include: working practices, decision-making techniques and entrepreneurialism.
• advantages:
• domestic businesses may become more open and employers may start to copy ideas such as kaizen and continuous improvement = can increase efficiency.
• MNCs may also encourage a culture of entrepreneurship = can help boost overall economic growth.
• Disadvantages:
• MNCs may demonstrate unethical behaviour and have a company culture of exploitation.
• this may encourage local businesses to also ignore working conditions for the sake of cheap production.

Question 12

Tax revenue and transfer pricing

Answer 12

• there is the potential for the host country to gain significant tax revenue.
• govs can use tax revenue paid by MNCs to invest in improving public services and infrastructure.
• however, MNCs seek to maximise profits and will try to reduce their tax liabilities.
• Transfer pricing: method used by MNCs to shift profits from where they are generated to countries with lower tax rates.
  = MNC will ensure it is selling its products through a country with the lowest tax levels.
• this is a method of tax avoidance and means that the MNC will pay less tax in the host country.
• MNCs often operate across countries to avoid paying high levels of taxation.
• but, this can have a huge negative impact on government tax revenues.