The Impact of Multinationals (Cambridge (CIE) A Level Business): Revision Note

An introduction to multinationals (MNCs)

• A multinational company (MNC) is a business that is registered in one country but has manufacturing operations or outlets in different countries

  • E.g. Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80 countries

• Factors such as globalisation and deregulation have contributed to the growth of MNCs

• MNCs choose locations based on factors such as cost advantages and access to markets 

  • E.g. Nike originates from the USA but 50% of their manufacturing takes place in China, Vietnam and Indonesia due to the lower production costs in these countries

Reasons to become a multinational

1. Economies of scale

   • As they operate globally, they are able to increase their output and benefit from lowered costs created by economies of scale

2. Increased profit

   • Much of their profit is sent back to their home country

     • This point is debatable as many MNCs have offshore bank accounts and do not bring the profit back home

3. Create employment

   • New jobs are created in host countries each time a new facility is setup and this raises income, which helps to improve the standard of living in that country

4. New markets

   • MNCs can identify potential markets & begin to sell there

   • They can set up facilities close to their customers, reducing transportation costs

5. Risk management

   • By selling in many national markets, the risk of failure is reduced

     • E.g. a recession in one country can be offset by sales in a growing market elsewhere

6. Tax incentives

   • MNCs are able to increase profits by setting up in countries with low corporation tax rates or countries that offer MNCs tax breaks

7. Labour cost advantages

   • Many businesses choose to locate production facilities in countries where labour costs are low 

8. Avoidance of barriers to trade

   • MNCs can establish bases in countries that are operating protectionist measures and by doing so, they avoid the measures

     • e.g. A Chinese MNC may setup in the USA and produce there, thus avoiding import tariffs on  their products exported from China to the USA

Advantages and disadvantages of hosting multinationals

• MNCs offer both advantages and disadvantages to host countries with regard to:

  • Employment, wages and working conditions 

  • The impact on local businesses 

  • The impact on the local community and environment 

Employment, wages and working conditions

• Multinational companies can change a host country’s job market in positive and negative ways

The impact on local businesses 

• When a multinational company (MNC) sets up in a new country, its influence spreads beyond the jobs it creates directly

• Local firms can gain new customers, skills and partnership opportunities, but they can also face stronger competition for both workers and sales

Advantages and disadvantages of MNCs for local businesses

The impact on local communities and the environment

• When a multinational company operates in a new area, its presence can reshape the whole community, not just the workplaces it builds

Advantages and disadvantages of MNCs for local communities and the environment

Relationships between governments and multinationals

• Many governments are in favour of MNCs establishing in their country, as there are benefits to the wider economy

The impact of MNCs on national economies

Foreign direct investment (FDI) flows

• There will be an inflow of money into a country if a MNC decides to invest in a country through  foreign direct investment

Advantages and disadvantages of FDI flows from MNCs  

Technology and skills transfer 

• MNCs can bring new technologies and skills to local businesses 

  • This helps improve efficiency and productivity, helping domestic businesses to become more competitive in national and international markets

Consumers 

• Customers in countries which host MNCs benefit from:

  • A  wider choice of goods and services 

  • Lower prices if MNCs pass their cost advantages on in the form of lower prices

  • Better quality of goods and services

  • Improved living standards, as people may have higher incomes due to the job creation and the resulting reduction in unemployment

• However, 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

Business culture 

• Domestic businesses may be influenced by the  business culture of MNCs

  • E.g. In the 1990s, UK businesses adopted the working practices of Japanese businesses such as Nissan

  • Workplaces became more open, and employers copied ideas such as Kaizen and continuous improvement

• MNCs may also encourage a culture of entrepreneurship

  • This can help boost overall economic growth

• However, MNCs may demonstrate unethical behaviour and have a company culture of exploitation

  • E.g. Bangladesh is used by many clothing brands to produce cheap clothes and many turn a blind eye to poor working conditions

  • This encourages local firms to also ignore the working conditions

Tax revenue and transfer pricing

• The host country can earn significant tax revenue

• Governments can use this tax to invest in improving public services and infrastructure 

• However, MNCs seek to maximise profits and often try to reduce their tax liabilities

  • Transfer pricing is a method used by MNCs to shift profits from where they are generated to countries with lower tax rates