Multinational Companies (MNCs) (Cambridge (CIE) IGCSE Business): Revision Note

Definition of multinational companies

• A multinational company (MNC) is a business that is registered in one country but has manufacturing, processing and/or service outlets in many different countries

  • For example, Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80 countries

Examples of multinational companies

• Factors such as globalisation and deregulation have contributed to the growth of MNC’s

• MNC’s often choose locations based on factors such as cost advantages and access to markets 

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

Advantages of becoming a multinational company

• Multinational companies benefit in many ways by operating in different countries

• These advantages help increase profits, reduce costs and lower business risks

Advantages to a country of hosting a multinational company

• Many governments are in favour of MNCs establishing in their country, as there are benefits to the wider economy, but their presence can also have negative consequences

Positive impacts of MNCs on the national economy

Foreign direct investment (FDI)

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

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

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

Balance of payments

• MNCs can help improve the balance of payments of a country as FDI flows into the country 

  • 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

Technology and skill transfer 

• MNCs can bring new technologies and skills to local businesses 

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

Consumers 

• Customers in countries which host MNCs often benefit from

  • Better quality, a wider choice of goods and services and lower prices if MNCs pass their cost advantages on in the form of lower prices

  • Improved living standards, as people may have higher incomes due to job creation and lower unemployment

Business culture

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

  • For example, in the 1990s, European 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

Tax revenue

• There is the potential for the host country to earn significant tax revenue from MNCs

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

Disadvantages to a country of hosting a multinational company

• Multinational companies can also present some challenges, which governments sometimes struggle to mitigate

Loss of assets

• Business assets from the home country are now fully or partly owned by foreign businesses

• Local firms or individuals who have sold the asset may not reinvest the money into the local economy but may move it abroad or offshore

Balance of payments

• MNCs can 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 send profits back to their home country, it will also represent a flow of money out of the country

Consumers

• 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

Business culture 

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

  • For example, Bangladesh is used by many clothing brands to produce cheap clothes and many ignore poor working conditions

  • This encourages local firms to also ignore the working conditions

Transfer pricing

• MNCs often seek to maximise profits and 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

  • This is a method of tax avoidance and means that the businesses will deprive the host country of tax revenue