Theme 3, 3.4 Impact of Globalisation on Local and National Economies

Question 1

Define Multiplier effect?

Answer 1

Bigger change in economy stimulated by initial injection.

Question 2

Define technology transfer

Answer 2

Means the adoption of efficient technology from abroad. FDI will often involve the use of new technology which can spread from MNCs into local businesses.

Question 3

Define Transfer Pricing

Answer 3

Is the settling of prices for transactions between legally separated businesses which have the same ownership or control. It can be used to manipulate profit sharing and tax liability, ( a different form of tax avoidance).

Question 4

Define Repatriate

Answer 4

MNCs are businesses and seek to make profit for their owners. These owners are generally shareholders in the home country so MNCs will repatriate profits to provide dividends.

Question 5

Define Shareholder model

Answer 5

Some shareholders believe that MNCs must put their interest above all else.

Question 6

Define Stakeholder conflict

Answer 6

Different stakeholders have different objectives. The interests of different stakeholder groups can conflict.

Question 7

Define CSR

Answer 7

Refers to the extent to which a business accepts obligations to society over and above the legal requirements.

Question 8

Define Subcontracting

Answer 8

A business practice where main contractor hires additional individuals or companies called subcontractors to help complete a project.

Question 9

Define Cost minimisation

Answer 9

Cost savings that can sometimes lead to exploitation and ignoring obligations.

Question 10

Define External costs

Answer 10

Costs which impact on third parties

Question 11

Define Supply chains

Answer 11

The sequence of processes that starts with the basic inputs to delivering the product to the consumer.

Question 12

Define Exploitation.

Answer 12

Taking advantage of local workers, communities and environment.

Question 13

Define Pressure group

Answer 13

Groups that gather people with shared interest or concern to influence the public, gov or firms.

Question 14

Define Subsidiary

Answer 14

A company that is partly or completely owned by another company that holds a controlling interest in it. They have their own separate legal identity.

Question 15

Define Subsidy

Answer 15

Financial or other incentive to encourage investment.

Question 16

What are MNCs?

Answer 16

Multinational Corporations are corporations with assets in multiple foreign countries.

Question 17

How would investing in foreign countries help the people of that country?

Answer 17

It would create jobs for these people, which could potentially improve their quality of life.

Question 18

Why would MNCs choose to shift their production processes abroad?

Answer 18

To take advantage of the low cost of labour.

Question 19

How would local firms benefit from MNCs in that area.

Answer 19

Local firms may supply the MNC with raw materials or other goods, thus increasing their revenue.

Question 20

Briefly describe Corporate Social Responsibility (CSP)

Answer 20

This is when firms ensure that their actions are beneficial to society.

Question 21

How could the presence of an MNC hinder the growth of local firms.

Answer 21

If local firms can’t benefit from economies of scale and provide goods at the same price level as the MNC, they may lose out on revenue which will affect their scope for profit.

Question 22

How would the local economy Benefit from MNCs ?

Answer 22

MNCs would increase employment in the area, and through the multiplier effect this would increase spending and lead to stronger economic growth.

Question 23

Would an increase in exports improve or damage the balance of payments?

Answer 23

This would improve the balance of payments.

Question 24

Who are stakeholders?

Answer 24

These are anyone with an interest in how a particular business is run.

Question 25

What do cheap products imply about the workers making those products?

Answer 25

That those workers are paid very poorly.

Question 26

Why do some countries fear trying to control MNCs?

Answer 26

If they impose too much regulation and red tape, the MNC may cease activities in that country, which could lead to unemployment and less economic growth.

Question 27

Why would a firm monitor its own behaviour?

Answer 27

It may have high ethical standards.

Question 28

What are the OECD guidelines for MNCs?

Answer 28

They encourage firms to adhere to the principles of human rights.

Question 29

How might self-regulation harm a firm’s profit?

Answer 29

They may lose out in a competitive market, thus reducing the profit potential of a firm.

Question 30

The impact of MNCs on the local economy: labour (MNC power)

Answer 30

Multinational corporations (MNCs) vary from relatively small businesses with an offshoot in a second country (which might just be a marketing operation) to global giants with turnovers higher than most countries’ GDPs.

Question 31

The impact of MNCs on the local economy: Labour (structural)

Answer 31

This venture, like most successful economic activity, has brought benefits in both directions. Nissan have an efficient and productive plant inside the EU; workers in the north-east have found well paid and fulfilling employment. The region still has relatively high unemployment but this would have been far worse without Nissan and other multinationals which have brought jobs to the area. There has also been an improvement in industrial relations, with positive collaboration between workers and employers replacing the more
adversarial approach sometimes found in traditional industries.

Question 32

The impact of MNCs on the local economy: labour (FDI)

Answer 32

Developed economies still attract the majority of MNC investment. They have skilled labour, good infrastructure and close proximity to developed markets. Labour-intensive unskilled production is more likely to go to countries where labour is cheaper, perhaps with a small minority of highly skilled staff brought
in from the home country.

Governments encourage inward investment from MNCs because it brings job creation, first in constructing
new productive plant and then in its operation. The benefits are greater where skills are developed. This
should increase earnings for workers as many learn new skills. If output is exported (or takes the place of
earlier imports) the country’s trade position should improve.

However, cost minimisation may encourage a ‘race to the bottom’ in terms of conditions of employment for simple tasks. When there is a need for quality and skills, there will be different priorities, resulting in better treatment of more valuable workers. That said, even a low paid and unskilled job with poor working conditions may be acceptable if there is no alternative other than to return to underemployment on the
family farm and a very low income.

Question 33

The impact of MNCs on local firm
(competition)

Answer 33

Local businesses in construction and infrastructure receive the first benefits from MNC inward investment. Once a plant is operational, suppliers and other firms are likely to benefit. MNCs may help to reorganise supplier operations to improve the quality and reliability of their output. This will generate growth.

The impact on local firms that will be competing in the same market as the MNC will be different. They may be overwhelmed when MNCs arrive, with global brands and cost advantages from economies of scale. An MNC may even take key skilled staff from local rivals by offering better wages and conditions. As an example, imagine the possible impact on local soft drink producers of the arrival of a Coca-Cola bottling plant. However, local firms do have the advantage of experience, in terms of understanding both the local
market and local production conditions.

Question 34

The impact of MNCs on local firms (growth)

Answer 34

The optimistic view is that competition can prompt firms to operate more efficiently, with local firms quickly
learning from newcomers. This can have a positive impact on growth and living standards. Pessimists currently envisage global consumer clones, dressed in Nike gear and carrying iPhones, using their American Express cards to buy meals from McDonalds and so reducing the demand for local products. In future,
emerging market brands may come to dominate in some markets.

Question 35

The impact of MNCs on local communities and environments (inadequate regulation)

Answer 35

Where a new factory is built, an MNC will want infrastructure such as reliable power supplies, fast access to the internet and good road and other transport links. It will help an MNC if good health services minimise
absence through sickness and if sound education systems produce young workers with literacy, numeracy
and other abilities. Such services, which are attractive to MNCs, should also contribute to a better quality of life for local people. In this way, the Hambantota development in Sri Lanka could have a very positive impact.

However, where local environmental regulations are weak the local impact may be very detrimental to the lives of individuals.

● In 1984, 27 tons of deadly gas escaped from a Union Carbide plant in Bhopal, India. This killed thousands of people and injured more than 500,000.

● In 2013, 1,100 people died in Dacca, Bangladesh, when the Rana Plaza building collapsed. It contained heavy factory equipment that it was not built for; this was used to manufacture clothing for many MNC brands.

● Rules for handling toxic electronic waste and recycling have grown more stringent in many countries. Where regulation is lax, some unscrupulous MNCs use cheap processes that impose external costs on local communities and ecosystems. They may dump waste or risk dangerous working conditions

Question 36

The impact of MNCs on local firms (external costs)

Answer 36

Responsible firms would not impose external costs to make a private saving in this way. Some of the culprits pay local firms to complete the last stage of dumping, apparently giving no information on health and safety issues. External costs are imposed in some of the poorest nations by such action. Even where reasonable precautions are taken, MNCs do generate change which may not be welcome to all.

Question 37

Economic impact of MNCs: growth (capital)

Answer 37

Building up the stock of capital equipment is a key factor in economic growth and development. Many
poorer countries struggle to finance investment when low living standards require most resources to be used for consumption. This leaves them with limited capital equipment which holds down both output and
growth.

Developed countries with relatively low rates of growth, such as the UK, also tend to have relatively low rates
of investment. World Bank data suggest that China invests 46% of GDP, India 32%, Norway 28%, UK 17% and the Central African Republic 10%. Most governments welcome inward investment by MNCs; it is
particularly valuable where it supplements low internal investment.

Question 38

Economic impact of MNCs: growth (capital) 2

Answer 38

initially be confined to a small area but can ripple through the economy with a multiplier effect, particularly if early MNC involvement is successful so other firms follow. In addition, MNCs and their workers are likely to pay taxes which increase the revenue of governments. This allows governments to do more, perhaps including more development of infrastructure and services.

Accelerated and sustained growth is not guaranteed. If, say, an MNC arrives to exploit a natural resource, this resource (e.g. oil or fish stocks) can quickly be depleted and the MNC can move on. This can leave the ‘host’ country in a worse position than it started with. Benefits are fewer if an MNC invests in a marketing
operation rather than production. This will create fewer jobs and take revenue out of the country.

Question 39

Economic impact of MNCs: FDI flows

Answer 39

MNCs invest in other countries when they see business opportunities that their expertise can exploit and
when they can organise the necessary funding. Their motivation is normally to increase their profits but they are likely to benefit the host country as well. For example, UK owned car makers struggled to compete in global markets and the industry declined. FDI from Japanese car producers investing within the EU has revitalised the UK motor industry.

Question 40

Economic impact of MNCs: FDI flows (stimulus)

Answer 40

FDI can stimulate the economy. Sometimes, an MNC will introduce a new product to an economy and create a new industry from which local as well as international suppliers benefit.
This may happen, for example, if MNCs invest in a new tourist destination. However, if MNCs arrive and compete with established local producers, some local firms may not survive. The
spread of Uber, for example, has posed a major threat to established taxi services in many cities. Local firms that survive will be able to increase
efficiency while catering for the preferences of local consumers. Sometimes, though, consumers
will prefer MNC products so local firms will struggle. Even so, gains from MNC job creation and use of local suppliers are likely.

Question 41

Economic impact of MNCs: balance of payments (capital account)

Answer 41

An initial FDI inflow will benefit the capital account of the balance of payments. The MNC will have to fund the purchase or lease of land, construction of premises and the installation of fittings and equipment. When
they make payments in the local currency, they will need to buy it in the foreign exchange market. Small scale purchases will have little impact, but heavy investment in a small
economy can noticeably increase demand for the currency, leading to appreciation.

Question 42

Economic impact of MNCs: balance of payments (current account)

Answer 42

Once production starts, there will be new payments on the current account. Exported products will bring a current account inflow as foreigners pay for them. Exports from MNC plants make up a significant share of total exports for some countries, e.g. Vietnam. In other cases an MNC might produce previously imported items, so reduced imports should improve the current account.

If parts and components are imported, that will bring an outward flow to pay for them. If the MNC makes a profit, repatriating it to their headquarters creates another outward flow.

Question 43

Economic impacts of MNCs: balance of payments (Profit repatriation)

Answer 43

If MNC operations are based on marketing exports rather than local production, the effect on the current
account will be predominantly negative as imports rise and have to be paid for. There is no simple either/or
choice between importing and making locally. Leading soft drink MNCs, for example, might export concentrated syrup to overseas branches, then use local water and bottling facilities to make the final product.

Some assembly plants are ‘screwdriver’ operations which do little more than assemble imported components.

Question 44

Economic importance of MNCs: technology and skills transfer

Answer 44

Leading MNCs tend to be at the forefront of technology in their industry. When they start producing in a new country there will be technology transfer. Workers learn to operate the technology so skills are developed in the labour force. Local educators might develop training in the skills which are now required. Local rivals might be forced to adopt new and more efficient technologies to compete. All of these elements contribute to technology transfer, spreading skills within the economy.

At the most basic level, MNCs might simply introduce division of labour and the necessary disciplines for factories to work effectively. At a higher level, they can contribute to better education, training and skills levels, helping the economy to move up the value chain by efficiently producing high technology goods and
services.

As with all benefits from MNCs, such developments are not guaranteed. In some cases production might be highly automated and depend on a limited number of very skilled workers who come from the MNC home country temporarily and spend most of their time with their colleagues, largely insulated from local people and culture. This might leave only low paid and unskilled jobs for locals.

Question 45

Economic importance of MNCs: consumers

Answer 45

If MNCs operate efficiently or use economies of scale to reduce costs below those of local firms, availability
of products of a reliable quality at competitive prices is a likely gain for consumers. But not everyone will
welcome the arrival of McDonald’s, for example; their food may attract customers away from local suppliers
of traditional foods. On the credit side, some MNCs have introduced medicines and health treatments that
were not previously available in their target markets.

Question 46

Economic importance of MNCs: consumers (modernisation vs tradition)

Answer 46

If MNCs operate efficiently or use economies of scale to reduce costs below those of local firms, availability
of products of a reliable quality at competitive prices is a likely gain for consumers. But not everyone will
welcome the arrival of McDonald’s, for example; their food may attract customers away from local suppliers
of traditional foods. On the credit side, some MNCs have introduced medicines and health treatments that were not previously available in their target markets.

The arrival of MNCs can prompt the upgrading of infrastructure such as improvements in transport, electricity supplies and communications services. Such improvements will benefit households as well as businesses. If injections from MNCs have sparked economic growth, consumers could find themselves with both higher incomes and an improved range of products available.

Question 47

Economic importance of MNCs: consumers ( modernisation vs tradition)

Answer 47

One limitation here is that newly available products could include things which don’t offer consumers quite
the benefit they expect. When tobacco sales started to decline in countries where the cancer link became
better understood, some MNCs increased promotion in markets with less awareness. Similarly, infant formula
milk sales declined where the benefits of breast feeding were better understood and again suppliers sought to develop sales in less informed markets. From another angle, some people regret losing traditional goods and culture when standardised global products increase their market share at the expense of local producers and specialities.

Question 48

Economic importance of MNCs: business culture

Answer 48

Over time, people get used to the way things are done in their country. It is easy to slip into and then follow traditional ways of operating in business and elsewhere. Seeing a different business culture can set us thinking about what we do. When MNCs introduce new approaches they threaten the success of established cultures.

The rapid growth of China is closely linked to taking business ideas from abroad and blending them with
Chinese culture and business methods in an attempt to get the best of both approaches. This is not always entirely successful, but made a major contribution to sustaining economic growth averaging 10% per annum
for more than 30 years.

Question 49

Economic importance of MNCs: tax revenues and transfer pricing (contribution to tax revenue)

Answer 49

Most countries have a sales tax equivalent to VAT, so MNC products are likely to generate tax revenue.
Once the business is profitable, tax generally becomes payable on profits too. Workers’ pay is also normally
taxable. In total, this can amount to a significant boost to government revenues. In the case of Nigeria, for
example, oil and gas industry MNCs provide the majority of government income. Many developing countries
find tax collection difficult, especially if accounting procedures are vague. Income drawn from MNC activity,
employment and profits helps governments to improve their budget position and provide better services.

Competition to attract MNCs might involve costly concessions. A government might agree to fund
infrastructure improvements. Perhaps it might offer grants to attract MNCs; ‘sweetheart’ tax deals to reduce
MNC tax payments are not unusual. Even where taxes should apply, MNCs with highly developed skills find
ways to minimise what they pay, making payment almost voluntary. Some governments effectively collude
in this by modifying their rules on business taxation.

Question 50

Economic importance of MNCs: tax revenues and transfer pricing (Transfer pricing)

Answer 50

When, for example, a subsidiary sells its output to the parent company, the price that is set can be used to influence tax liability. If the subsidiary is in a high tax country, setting a very low and unprofitable price can leave the subsidiary making no taxable profit. This is transfer pricing. The parent company then pays tax at a lower rate. Alternatively, if the parent company pays higher tax, paying a high price for products from overseas subsidiaries reduces parent company’s profits and tax. To avoid tax in both countries, it can be useful to have another subsidiary in a country (such as Switzerland) which charges no tax on items which
just pass through.

Transfer pricing is not limited to physical products. ‘Intellectual property’ such as brand names and secret recipes can also be used. Starbucks, for example, charged royalties for the use of its brand name to reduce the tax liability of its UK subsidiary. There can also be charges for ‘global management services’ or ‘global
marketing’, for example. EU members such as Ireland and the Netherlands are said to have allowed subsidiaries to be set up just to take advantage of tax rules. For a decade, for example, Amazon paid £10m on £23billion of UK sales by using a Luxembourg subsidiary. Google used an Irish subsidiary. Public disapproval and both national and EU action are closing some legal loopholes at present. MNCs will either pay more tax or find new loopholes. This is known as tax inversion.

Question 51

Economic importance of MNCs: tax revenues and transfer pricing (gains and losses)

Answer 51

Possible gains from MNC FDI:
-Jobs, skills, income
-Training and education gains
-Exports
-Tax revenue
-Technology transfer
-Supplier business and revenue
-Infrastructure improvement

Danger from MNC activity:
-Exploitation of unskilled workers
-Footloose- could move elsewhere
-Revenue and profits repatriated
-Costly concessions and transfer pricing
-External costs
-Local competitors squashed
-Resource depletion.

Question 52

The ethical issues with MNCs: Stakeholder conflict

Answer 52

Every business has its stakeholders and sometimes has to balance the interests of different groups. MNCs are distinctive in that some of what they do is outside their home country. This can lead to a shift in their approach to stakeholders, such as prioritising the interests of shareholders in their home country and
showing less concern for workers, communities and governments overseas. Shareholders and others in the
home country may be unaware of issues somewhere far away. People may care less about the fate of foreigners than about their local community.

Question 53

The ethical issues with MNCs: Shareholder conflict (The shareholder Model)

Answer 53

Some shareholders believe that MNCs must put the interests of shareholders above all else. The Shareholder
Model sees managers’ responsibility as entirely devoted to maximising shareholder value, i.e. dividends and
share values. In contrast the Stakeholder Model prioritises corporate social responsibility. MNCs may argue
that they will be vulnerable to legal action from discontented shareholders if they do not maximise dividends. Frequent comparisons with rival firms can increase the pressure to prioritise profit. However, Warren Buffett, possibly the most successful investor globally, said “everyone else is doing it are the five
most dangerous words in business.” If, say, other garment firms are cutting costs by exploiting poorly treated
overseas workers, being ethical and operating with higher costs can seem to entail getting left behind.

Question 54

The ethical issues with MNCs: Stakeholder conflict (CSR)

Answer 54

CSR principles suggest that businesses should consider all stakeholders. Some MNCs fear that their overseas
activity may attract negative publicity. Equally, rising wages or other costs, or concerned governments switching to a tougher line, may reduce the gain from being in a particular location. Many MNCs are ‘footloose’, able to switch production to another economy. This is one reason to sub-contract work to other
firms.

Question 55

The ethical issues with MNCs: Pay and working conditions ( Subcontracting)

Answer 55

Employment law sets standards in many countries, for minimum wages, maximum hours and basic working
conditions, for example. As a generalisation, standards are less expensive to meet, less rigorous and less well enforced in developing than in developed countries. MNCs often employ people in developing countries
to reduce labour costs. This is a complex issue as income levels, living standards and working conditions are normally lower in developing countries. Research suggests that many MNCs pay more than local employers and are more concerned about corporate social responsibility (CSR). The jobs and output of MNCs have
often contributed to economic growth and living standards. However, there are MNCs which exploit the
potential for abuse in order to minimise their costs and maximise profit. Fear of adverse publicity leads many MNCs to do this by sub-contracting rather than employing people directly.

Cost savings on working conditions can take many forms. Some workers in developing countries work very
long hours. Savings on amenities such as restrooms and pleasant working environments are possible where
expectations are lower. Noise levels, for example, are unregulated in many developing countries. Health and
safety at work regulations in developed countries cause extra bureaucracy and expense, making them unpopular with many businesses even though they reduce accidents and fatalities. Escaping regulations by shifting production to developing countries can appeal.

Question 56

The ethical issues with MNCs: pay and working conditions (cost minimisation)

Answer 56

Cost minimisation can lead to exploitation, ignoring obligations towards employees that would be taken for granted in developed countries; employees are less likely to be valued as an asset to the business. Some sub-contractors find ways to cut corners on costs in order to win contracts.

Question 57

The ethical issues with MNCS: The environment (carbon emissions)

Answer 57

Businesses can damage the environment both in production and later when waste is disposed of. When
MNCs locate production far away from major markets, this necessitates more transportation – more ‘food
miles’ and travel for other goods and resources. This increases the pollution associated with transport. Processes using heat from fossil fuels emit CO2 and other gases. Developed countries have specific targets to reduce these emissions and use schemes such as EU tradable permits to make high pollution levels expensive. Waste disposal also tends to be tightly controlled in developed countries, but is often less
regulated in developing countries.

Question 58

The ethical issues with MNCs: The environment (External costs)

Answer 58

Cost conscious MNCs can reduce expense by shifting polluting activities to developing countries. This can
increase global emissions as products are shipped back to developed countries for sale. For an MNC, though, externalising emission costs increases profit. Local (and global) communities are left with a choice between doing nothing, suffering environmental damage, or paying for clean-up activities. Some MNCs seem guided by narrow self-interest and only consider the internal costs that they cannot avoid. However, enlightened MNCs can and do educate other businesses and communities on responsible approaches to the environment, wages and working conditions.

Question 59

The ethical issues with MNCs: Supply chains

Answer 59

Many leading global brands see their greatest expertise as in marketing and design. Some of them set up subsidiaries to produce and assemble in lower wage economies; others sub-contract manufacturing, with a long supply chain between raw materials and finished goods. This passes the work to independent businesses that are not regulated as the brand holder would be. The ultimate seller of the goods may have no contact with businesses further down the supply chain.

Question 60

The ethical issues with MNCS: Supply chains (subcontracting)

Answer 60

Sub-contracting work such as assembly of products to specialist firms makes it easier for an MNC to award the next contract to a supplier in another country, if there is an advantage in going elsewhere. It also allows MNCs to pass the blame for poor behaviour to the sub-contractor and plead ignorance. So, for example, exploited workers whose plight attracts attention might easily find that MNCs shift the work elsewhere, so they lose their jobs rather than see any improvement in their situation.

MNCs sometimes take little interest in wages and labour conditions at even their immediate suppliers.
Adverse publicity about worker exploitation by suppliers has threatened to damage some brands in the
past (Nike and Primark, for example) and made major brands wary of being associated with such exploitation. However, examples are still spotlighted fairly regularly. For example, January 2016 saw allegations that some Turkish garment firms were exploiting Syrian refugees with low wages, poor working
conditions and the use of child labour. Next and H&M reacted by pressing their suppliers to stop employing children (Source: Reuters); some other leading brands simply made no comment.

In 2013 the UN’s International Labour Organisation estimated global child labour at 168 million. The UN defines child labour as “work for which the child is either too young – work done below the required minimum age – or work which, because of its detrimental nature or conditions, is altogether considered unacceptable for children and is prohibited.” Many children are in in family businesses such as farms, others are in mines and equally unpleasant employment. Such children are consistently paid far less than adults.

Question 61

The ethical issues with MNCS: Supply chains (exploitation)

Answer 61

There is no simple choice between good corporate social responsibility and complete selfishness. A more accurate image is of a trade-off between cost minimisation and fully ensuring that all stakeholders are treated as well as possible. Different MNCs strike different balances between these things. Cost minimising MNCs have more scope for exploitation and abuse of power in developing countries. Some of them make extensive use of this. Lack of awareness may be more common than deliberate exploitation. The need to
stay competitive is often cited as an explanation when cases of exploitation are publicised. This argument
has some validity in price competitive industries, but less when leading brands with market power and high
prices are involved.

Question 62

The ethical issues for MNCs: marketing considerations (advertising)

Answer 62

Promotion and packaging play an important role in developing and maintaining the strength of brands. This
is another context in which MNCs can stay honest and ethical or can push the boundaries. As explained
earlier, tobacco producers and makers of some baby formula milks were accused of targeting developing countries as new markets when their sales in developed countries shrank. Adverts linking smoking with social success and health have targeted impressionable young people.

Some MNCs see advantage in linking their products with a developed economy lifestyle which many people
in developing countries aspire to. This can be used misleadingly as an extension strategy when a product
is actually declining in its home market. Michael O’Donnell of Save the Children said: “The law that is supposed to stop formula milk companies from promoting their products and protect babies and parents is not working. Formula companies are finding increasingly devious ways to beat the ban and continue to bombard parents with misleading information about the alleged similarities of breast and bottle.”

Question 63

The ethical issues for MNCs: Marketing considerations (Product labelling)

Answer 63

Consumers everywhere need to be wary about product labelling. Attempts to create a favourable impression
may have no basis in fact. Sometimes, claims are simply wrong. This was the case, for example, when ‘beef’
products were found to contain horsemeat. Expressions are often chosen to make a positive impression
rather than for being genuinely informative. The table below gives examples of developed country labelling
to make food appear healthy. Consumers in developing countries often have less experience and knowledge
of how labelling can be misused, and tend to have less legal protection. The potential to mislead people is
then greater.

Once again, although there are many firms which behave entirely responsibly and ethically, there is a potential gain from unethical behaviour which tempts some firms. Whilst nobody expects real wings from Red Bull, claims that the drink boosts physical and mental performance more than caffeine alone does are unproven. Similarly, L’Oréal has claimed that some skincare products ‘boost genes’ or ‘stimulate production
of youth proteins’, but has not produced sound supporting evidence.

Question 64

The ethical issues for MNCs: potentially misleading food product labelling (Greenwash)

Answer 64

Image builders have often been accused of greenwashing. One important example here is the extraction
of oil from tar sands in Canada. Greenpeace maintain that the processes cause heavy environmental damage.
The Athabasca River has become heavily polluted, toxins are released in the air, farmland has become wasteland, large tracts of forest have been felled. The industry is a fast growing source of greenhouse gas emissions.

By contrast, a factsheet from the producers says: “We are doing our part to move the world towards a clean
energy future.” The industry sees the main cause of climate change as high levels of demand for fossil fuels;
success will rely on curbing global consumption while reducing emissions at all stages. An implementation
plan gives a scientific foundation to continue promoting environmentally sustainable development.

Question 65

Can MNCs be controlled?: Political influence (Positive development)

Answer 65

MNC foreign direct investment brings jobs and stimulates economic development. Their activities can help
nations to become integrated in a growing global economy. They often bring technological progress and
intellectual property. National governments compete to attract and to retain MNC activity. Many MNCs
make an overwhelmingly positive contribution.

Their size and impact can give MNCs ‘carrot’ and ‘stick’ powers over national governments. Power has potential for abuse. A helpful government can be rewarded by fresh investment. An uncooperative government risks MNCs withdrawing from their market. At worst, MNCs could bribe people in power to get
what they want. Africa has a poor corruption image and we see less corruption in developed countries.
Scandinavian countries and New Zealand top the Transparency International index for low perception of public sector corruption.

Question 66

Can MNCs be controlled?: Political influence (Lobbying)

Answer 66

Behind the democratic work of government decision making in many countries, there are lobbying and
deal making processes which are often kept out of sight. For example, only after the public outcry over Google’s UK tax deal did it emerge that there had been more than 20 official meetings between Google representatives and ministers in the 19 months before the tax deal was agreed. There were also meetings
with the HMRC tax authorities.

22,000 pages of UK tax legislation (about the size of 200 of these books) leave plenty of room for minor
contradictions and imaginative interpretation by rich individuals and corporations. Top accountancy firms
advise both the UK government and MNCs. Margaret Hodge of parliament’s public accounts committee said
in 2015 that the big four accountancy firms ran an industry in tax avoidance which should be made illegal.
This adds to their profits. One of the big four, Ernst & Young, voluntarily paid $123m to the US government
to avoid prosecution for similar activity there.

Question 67

Can MNCs be controlled?: Political influence (Using PR to influence)

Answer 67

MNCs can afford the best specialist advice. A few £millions spent on tax specialists and lawyers is a small
price to save many hundreds of £millions in tax. Once high profile MNCs and business rivals set an example,
this can have a corrosive effect if others copy their behaviour. Similarly, the heavy cost of limiting emissions from fossil fuels can be postponed by effective public relations work. ‘Merchants of Doubt’ by Conway and Oreskes documents ‘successes’, such as obscuring public perceptions of damage caused by tobacco over several decades, thereby sustaining tobacco industry profits.
The financial strength of large MNCs can sometimes allow them to sway opinion. Consumer trust in MNCs
can reach high levels. They can allocate large budgets to promoting their viewpoints. Saying things loudly
and often is enough to convince some people. MNCs influence the public via public relations campaigns
and sponsorships, or through media outlets they control. For example, News Corporation’s ‘The Sun’ has urged its readers to support every general election winner since 1979. (Source: The Guardian, 8 May 2015.)

Question 68

Can MNCs be controlled?: Legal control

Answer 68

Operations within any country are subject to the laws of that country. So, for example, workers in any
country should be paid at least that country’s minimum wage, and products should always meet local
standards. MNCs in EU countries face a second set of EU requirements. At first sight this might seem simple enough, but legal action against MNCs faces several obstacles.

Question 69

Can MNCs be controlled?: Legal control (Independent subsidiary companies)

Answer 69

Firstly, MNCs often operate via local subsidiaries. Even if these are wholly owned by the parent company
they are legally separate businesses. This means that legal action might only be possible against the local ‘branch’ business. Fines and similar punishments might be difficult to enforce if the ownership of assets has been transferred to the parent firm. The ability of MNCs to shift activity or formal responsibility between countries can help them to avoid or evade legal controls.

Question 70

Can MNCs be controlled?: legal control (security)

Answer 70

China and India, with more than a billion consumers each, are in a strong position to regulate MNCs. In these
countries MNCs accept tighter controls such as legal requirements to work as joint ventures. Corruption,
monopoly, price fixing or food safety issues can bring fines of 10% of revenue in China, and enforcement
is relatively active. MNCs have been pressed to accept punishments without full legal hearings, and have
sometimes been advised not to bring lawyers to meetings. Small countries might be less important to MNCs
and might struggle to control them. Even in developed countries, MNCs can have a significant say in how
laws are interpreted and even on whether proposed new legislation is passed.

Question 71

Can MNCs be controlled?: Legal control (Anti-competitiveness activities)

Answer 71

Successive EU competition commissioners have shown more appetite for tackling MNCs than some member governments. Margrethe Vestager, the competition commissioner, ruled that ‘sweetheart’ Belgian tax deals with 35 MNCs amount to illegal state aid of 700 million euros. EU authorities currently aim to end the practice of transfer pricing and also to tackle the use of outside tax havens. In 2016, the UK government supported measures to tackle tax avoidance in principle, yet Conservative members of the European parliament voted against clamping down on tax havens such as Bermuda.

Question 72

Can MNCs be controlled?: Pressure groups (working conditions)

Answer 72

Most pressure group members and supporters are motivated by their strength of feeling rather than by
direct financial gain, and the finances of pressure groups are often stretched. Internet technology and social media have enabled pressure groups to spread their messages widely and relatively cheaply, so they can have significant impact. In the past, leading MNC brands such as Nike, Gap and Primark have lost sales after publicity about their reliance on sweatshop labour. These MNCs have changed their supply chain policies as a result and there has clearly been a degree of improvement.

Question 73

Can MNCs be controlled: Pressure groups (environmental issues)

Answer 73

One widely known pressure group is Greenpeace; their targets include slowing climate change, defending
oceans, protecting forests, eliminating toxic chemicals, saving the Arctic and opposing fracking. These targets create conflict with MNCs, particularly those exploiting fossil fuels. Direct action (e.g. blocking whaling ships) can put Greenpeace members outside the law. Opponents attack them as irresponsible ‘ecowarriors’, but Greenpeace have succeeded in spreading awareness of environmental issues and governments
now at least pay lip service to ‘green’ ambitions.

Pressure groups and MNCs battle for the minds and support of the public and politicians. Three main variables influence their chances of success. Some groups are ‘insiders’, almost part of the establishment and so treated with respect. The British Medical Association (effectively the doctors’ union) was in dispute over changes to contracts in early 2016 but is routinely consulted on many medical matters. By contrast, the Animal Liberation Front is an ‘outsider’ group; its use of violence and extreme tactics make it unpopular in many circles.

Question 74

Can MNCs be controlled?: Pressure groups (Influence)

Answer 74

Influence will also vary according to the government in power. As a generalisation, Conservative
governments are often considered closer to MNCs than to pressure groups. How far pressure groups match
the current cultural climate is also important. In Western European countries, groups pressing for gender
equality are respected. In some Arab cultures women have yet to win the vote or the right to drive cars. A long term target for pressure groups can be to change the culture so that their views become shared. Over the last 20 years, for example, environmental groups have helped to raise the profile of recycling and to shift attitudes on greenhouse gases. MNCs increasingly accept some costs of operating in cleaner ways as
unavoidable.

Question 75

Can MNCs be controlled?: The influence of social media (Evidence)

Answer 75

Social media creates opportunities for everyone to share their views. On one level this greatly enhances the
democratic process because it fosters discussion. It can also have very pernicious effects.

● MNCs can use subtle ways to influence the general public. For example, they may use ‘greenwash’ to
promote awareness of their environmental targets while actually doing much less than they could do to
reduce harmful practices.

● Political parties can use social media to draw attention to attractive suggestions which actually benefit particular groups of people rather than society as a whole.

● People who have very little expertise outside of their own lives can rubbish the opinions of knowledgeable people whose ideas have enormous potential for progress in many fields. Distrust of data has led to policy making by hunch; it is far better to base policy decisions on the best factual data we can get, carefully analysed by experts in their field.

Question 76

Can MNcs be controlled?:Self-regulation (profit vs CSR)

Answer 76

Some MNCs see their first responsibility as satisfying their shareholders. Shareholders and executive
incentive schemes give a high priority to profit. Even consistent profit is not enough to satisfy everyone.
The combination of high and increasing profits signals success. Corporate social responsibility and satisfying other stakeholders matter too, but where there is a trade-off between the interests of owners and other groups some MNCs give limited weight to CSR.

Against this background, there is an obvious problem with expecting MNCs to regulate themselves. Attempts have been made to make ethical behaviour attractive and to set expectations on doing the right things. The Fairtrade Foundation, for example, licenses the use of its Fairtrade Mark on items meeting agreed Fairtrade
standards. Ethical consumers are drawn to such products and often willing to pay a little more for them.
Similarly, membership of the Ethical Trading Initiative (ETI) benefits firms by showing that they behave
well.

Question 77

Can MNCs be controlled?: self-regulation (International Guide lines)

Answer 77

International organisations have set out standards that they wish MNCs to follow. The UN Global Compact is “a call to companies to align strategies and operations with universal principles on human rights, labour, environment and anti-corruption, and take actions that advance societal goals.” The OECD has guidelines for multinational enterprises. Both organisations promote ethical behaviour. The United Nations Conference on Trade and Development (UNCTAD) has five yearly reviews of ‘Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices’.

Such standards are essentially wish lists without legal power. Governments can be influenced by them when setting their own legislation. Individual MNCs can follow them. However, MNCs can find ‘wriggle room’ to describe dubious behaviour as acceptable and there is no compulsion to take such international standards seriously. If we take the example of EU fines for anti-competitive behaviour by Microsoft, the MNC has been forced (reluctantly) to pay repeated fines but has never accepted that its behaviour was anti-competitive
so has continued with strategies that many see as dubious.

Question 78

Can MNCs be controlled?: Self-regulation (Voluntary codes of conduct)

Answer 78

Those MNCs that feel entitled to challenge and influence decisions taken by authorities might also rely on their own interpretation of what is appropriate behaviour rather than on the views of others. Imagine how motorists would behave if speed limits were scrapped and self-regulation took over, with authorities just issuing a voluntary code of conduct. Limited law enforcement already results in many drivers breaking speed limits; the situation would be unlikely to improve with self-regulation.

Question 79

Can MNCs be controlled?: self-regulation (Image)

Answer 79

Self-regulation of MNCs is not certain to be any more successful than self-regulation of drivers would be. The most effective limit on non-compliance is probably the risk of damage to their public image if dubious
behaviour is widely publicised. One critic of self-regulation (in The Lancet) said “It is like having the burglars install your locks. You think it might work and you are safe, but you are not.”