The impact of MNCs 4.4.1

Question 1

What is a multinational corporation?

Answer 1

A business that is based or registered in one country but has outlets/affiliates or does business in other countries. Such companies have offices and/or factories in different countries (typically emerging economies or undeveloped countries due to cost savings) and usually have a centralised head office (typically in western markets e.g. UK and US) where they coordinate global management.

Question 2

What are the characteristics of an MNC?

Answer 2

• Dominant players in the market
• Complex structures, multi-site and multi-product
• Grown through organic and inorganic growth
• Heavy investment in R&D
• Globally recognised brands

Question 3

How do MNCs impact the local economy?

Answer 3

1. Local labour, wages, working conditions and job creation
2. Local businesses
3. Local community and environment

Question 4

Advantages of MNCs on local labour, wages, working conditions and job creation:

Answer 4

• Create jobs with better opportunities e.g. training, shared expertise, full-time work, and promotions. This has a significant effect on the local economy which ultimately benefits the economy through more taxes being paid and more public services being funded.
• Pushes wages up improving the overall standard of living in that country.
• Helps skills develop in the country which improves MNC’s productivity but in the long term helps the country’s skills too. This will help employability for the local workforce as well.
• Better working conditions as businesses look to maintain their own reputation and do not wish to be known as exploitative.

Question 5

However, potential disadvantages of MNCs on local labour, wages, working conditions and job creation:

Answer 5

• This creates wage inflation for local businesses, potentially causing local businesses to not be able to afford their staff anymore in an attempt to keep up which could affect the economy if local businesses start to fail.
• May look to exploit cheap workers.
• Brings in own managers only offering low-skilled jobs to workers, causing skills transfer to not be as effective.
• Working conditions may be poor. Above average may still be seen as very poor and have a negative impact on the MNC brand and ultimately sales.
• Lack of union representation or trade unions can become more powerful demanding higher pay or better working conditions. This may be good for the workers and the economy but may cause the MNC to not see the country as an attractive place for production anymore, which would significantly affect the country’s economy if the MNC leaves to go elsewhere.

Question 6

Advantages of MNCs on local businesses:

Answer 6

• Provide support services e.g. building of factories, cleaning, raw material/components. MNCs add to the host country’s GDP through their spending, for example with local suppliers and through capital investment.
• Improved infrastructure
• Higher spending power from the local community due to increased wages and therefore disposable income, increasing demand for other businesses e.g. shops
• May create joint ventures with local businesses and MNCs allowing the business access to new skills and more efficient methods of production.
• Skills transfer may occur where MNC workers pass on the knowledge and methods of production they have learnt to local businesses allowing them to become more competitive.
• Increased competition may cause local businesses to become more innovative and efficient and may uncover local and international markets that a domestic business can use for growth.

Question 7

However, potential disadvantages of MNCs on local businesses include:

Answer 7

• Increase costs especially in wages in order to keep up with the MNC’s higher wages.
• Loss of talented workers due to the attraction of the MNC towards skilled workers and therefore not able to ensure survival.
• Loss of sales from substitute products.
• Those who do not have a job at the MNC may become resentful which could cause unrest in the community.

Question 8

Advantages of MNCs on the local community and environment:

Answer 8

• Higher employment, less poverty, lower crime.
• Improved infrastructure e.g. hospitals and roads.
• Improved education.
• Increased funds for local governments from the payment of taxes.
• Projects to improve environmental standards.

Question 9

However, potential disadvantages of MNCs on the local community and environment include:

Answer 9

• Environmental disasters.
• Loss of traditions and cultures. MNCs may be accused of imposing their culture on the host country, perhaps at the expense of the richness of local culture. MNCs might reduce cultural diversity around the world as they continue to expand, particularly into less developed or developing countries.
• Damage to traditional industries e.g. land for farmers.
• Some industries will naturally carry a level of risk to the environment and community such as oil and gas.
• Profits earned by MNCs may be remitted back to the MNC’s base country rather than reinvested in the host economy, therefore not benefitting the local economy or improving the environment.

Question 10

What are balance payments?

Answer 10

A record of a country’s trade/transactions with the rest of the world. A surplus is when the sum of exports of goods/services/investment income/transfers is greater than imports. A deficit is when the sum of exports of goods/services/investment income/transfers is less than imports.

Question 11

What is FDI?

Answer 11

Is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased.

Question 12

What is transfer pricing?

Answer 12

Two companies that are part of the same MNC use internal pricing to artificially transfer profits from high to low-tax countries.

Question 13

How do MNCs impact the national economy?

Answer 13

• FDI flows
• Balance of payments
• Technology and skills transfer
• Consumers
• Business culture
• Tax revenues and transfer pricing

Question 14

Advantages of MNCs on FDI flows:

Answer 14

• The costs associated with setting up operations abroad are likely to be substantial.
• FDI will usually result in employee benefits such as job creation for the host country as most employees will be locally recruited. These benefits may be relatively greater given that government will usually try to attract firms to areas where there is relatively high unemployment or a good labour supply.
• An injection into the host economy through economic growth (GDP). MNCs add to the host country’s GDP through their spending, for example with local suppliers and through capital investment.
• Generation of revenue for the local government.

Question 15

However, potential disadvantages of MNCs on FDI Flows include:

Answer 15

• Following the initial investment, a lot of the profits are likely to flow back to the domestic economy of the MNC.
• Profits made by the MNC may try to avoid the tax system. Tax avoidance can result in fewer benefits from FDI than had been expected.

Question 16

Advantages of MNCs on Balance of payments:

Answer 16

• FDI, such as an MNC, represents a flow of investment into the host country and will therefore improve the BoP
• Exports sold from the MNC will also represent an inward flow of cash, contributing to the BoP.
• Inward investment will usually help a country’s balance of payments situation. The investment itself will be a direct flow of capital into the country and the investment is also likely to result in import substitution and export promotion. The export promotion comes due to the multinational using their production facility as a basis for exporting, while import substitution means that products previously imported may now be bought domestically.

Question 17

However, potential disadvantages of MNCs on Balance of Payments include:

Answer 17

If materials and services are imported to support the MNC in the host country, this represents an outward flow and will give a negative impact on the BoP.

Question 18

Advantages of MNCs on technology and skills transfer:

Answer 18

• New technologies and skills will be introduced to the host economies, which can lead to a better educated and innovative workforce that allows the country to become more competitive in the global market.
• Collaborative work between countries to further development
• Spread of technology and skills across sectors and to domestic companies

Question 19

However, potential disadvantages of MNCs on technology and skills transfer include:

Answer 19

This may lead to a “brain drain”, where newly highly skilled and qualified workers that benefitted from the MNC may choose to emigrate out of the country in search of better work. This leaves the nation with reduced levels of highly skilled workers.

Question 20

Advantages of MNCs on consumers:

Answer 20

• Wider choice of goods and services
• Access to global brands
• Better quality products
• Lower costs products with higher quality than local brands. This is particularly true if the MNC has glocalised the product.

Question 21

However, potential disadvantages of MNCs on consumers include:

Answer 21

Losing local and more traditional businesses. This could lead to bad publicity for the MNC as it gains the reception of ruining domestic businesses/jobs and so may not be welcomed as well by consumers which may cause sales revenue to not increase as they had expected.

Question 22

Advantages of MNCs on Business culture:

Answer 22

• May introduce more aggressive cultures based on a profit motive. Typically MNC business culture is highly professional with its focus on growth, profit, efficiency and quality. This will benefit an emerging economy as the MNC brings with it a consistent and professional way of working which will ultimately be learnt by domestic businesses.
• Traditional businesses may be more likely to be family-based

Question 23

However, potential disadvantages of MNCs on business culture include:

Answer 23

Some MNC’s have shown to operate in unethical ways, with a culture that may bring more harm than good to overseas markets in which they are operating. For example, in December 2010 the British defence giant British Aerospace was fined £28m for bribing official in Tanzania when trying to get the local government to purchase a military radar system.

Question 24

Advantages of MNCs on Tax revenue:

Answer 24

Taxes paid within the host country will boost the government’s revenue allowing for greater spending on public services such as health care and infrastructure.

Question 25

However, potential disadvantages of MNCs on Tax revenue include:

Answer 25

However, MNCs may spread their tax liabilities amongst a number of countries many of which will have different rates of tax and so an MNC will wish to minimise its tax liability. For example through transfer pricing where MNC manipulates profits between subsidiaries in order to minimise tax liability.