The Impact of MNCs (Edexcel A Level Business): Revision Note

Impact of multinational companies on the local economy

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

Example

Starbucks's headquarters is in Washington, USA, but the company has almost 41,000 stores in more than 80 countries

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

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

Example

Nike originates from the USA, but Vietnam, Indonesia and China together manufacture around 96% of its footwear, due to lower production costs

China's individual share has fallen sharply from over 60% a decade ago to just 17% today, as production has shifted toward Vietnam

• MNCs offer both advantages and disadvantages with regard to:

  • Employment, wages and working conditions 

  • The impact on local businesses 

  • The impact on the local community and environment 

MNCs and employment, wages and working conditions

• MNCs often create jobs in local communities 

  • They may offer more competitive wages than local businesses 

  • They may also offer better working conditions than local businesses

• However, MNCs may exploit local workers if employment regulations are weak or not enforced

  • They tend to establish production facilities in regions where labour costs are low

• MNCs may not create jobs for local workers, as they may relocate workers from their own country to work abroad

  • This practice has been observed among some multinational construction and infrastructure firms operating overseas

MNCs and local businesses

• MNCs can help boost the local economy by creating opportunities for local businesses

  • If the population is benefiting from higher wages, citizens may spend more on local business products

  • MNCs may utilise the services of local businesses

• There may be potential opportunities for joint ventures and partnerships with MNCs that seek to gain knowledge of the local market

  • Local firms may learn new skills and production methods that allow them to become more efficient

• However, MNCs reduce the supply of workers available to local businesses if they offer better pay and working conditions 

• If MNCs are able to produce at a lower cost and compete with local businesses, those businesses may lose local customers and may need to make redundancies

MNCs, local communities and the environment

• Local residents may benefit from job opportunities and growth in the local economy

• MNCs often invest in improving infrastructure

  • Better roads, transportation and access to water and electricity would help the local community as well as the MNC operate more efficiently

• They 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 initiatives that have a positive effect on the local community

• However, they may cause damage to local habitats/environments during the production process

Example

Shell has a track record of causing oil pollution in vulnerable communities in Nigeria

• MNCs may also leave unsightly production facilities behind once they have extracted all of the resources and left the country

Impact of MNCs on the national economy

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

The impact of MNCs on national economies

Foreign direct investment flows

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

  • This money enriches local firms or citizens who now have more money available to spend in the economy

  • If this money is reinvested into the local economy, it may help to generate new jobs and boost economic growth

• However, the home country's assets are now owned (or partly owned) by foreign businesses

• Local firms or individuals who have sold an asset might not reinvest the money into the local economy and instead move it abroad/offshore

Balance of payments

• The balance of payments is a statement showing all of the financial transactions between a country and the rest of the world 

• MNCs can help to improve a country's balance of payments, as the FDI flows into the country will help improve its balance of payments 

  • Any goods and services exported for sale by the MNC will generate further inflows to the country’s balance of payments

  • This is especially beneficial to a country when the MNC is exporting a rare and valuable raw material, e.g. cobalt

• MNCs can also have a negative impact on the balance of payments

  • If the MNC buys raw materials or equipment abroad (imports), there is a flow of money out of the country 

  • If the MNC sends profits back to its home country, this is also a flow of money out of the country

Technology and skills transfer 

• MNCs can bring new technologies and skills to local businesses 

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

Consumers 

• Customers in countries that 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 goods and services

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

• 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 customers have limited choice

Business culture 

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

Example

In the 1990s, UK businesses adopted the working practices of Japanese businesses such as Nissan

Workplaces became more open, and employers started to copy 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

Example

Many clothing brands produce cheap clothes in Bangladesh - and many turn a blind eye to the poor working conditions

This encourages local firms to also ignore working conditions

Tax revenue and transfer pricing

• There is the potential for the host country to gain significant tax revenue

• Governments 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 is a method used by MNCs to shift profits from the countries in which they are generated to countries with lower tax rates

  • This is a method of tax avoidance and means that the businesses will pay less tax in the host country