4.4.1 The impact of MNCs

• Multinational corporation


  A firm that has its headquarters in one country and branches, manufacturing or assembly plants in others.
• MNCs service operations has impact on local labour.

  Staff undergo training & are expected to work to rules that are different from traditional practices.
• Trade unions


  • help create fairer balance between employees & employers.
  • Allows pressure to be put on employers to provide better, safer & healthier working conditions.
  • Western MNCs could stop using suppliers without trade unions, but they don't.
• Positives of MNC


  • Western training methods may make local workforce more employable/productive.
  • MNCs pay higher wage rates than local firms, improving standards of living.
  • MNCs have international reputation to maintain, so will provide above-avg conditions.
  • Creates new jobs - increasing employment rates.
• Negatives of MNCs


  • Western employers may attract over-qualified people, possibly stripping local business & public services of skilled staff.
  • Locals may feel bitter that they are paid less than Westerners for doing same job.
  • Conditions may not be good, even when above average.
  • Even with policies, workplace reality may be worse.
  • Success of MNC is at the expense of local independent firms; the key measure is net job creation.
• Positive impact of MNC on host country

  • Bring new technology & skills.
  • Provide new choices in products/services.
  • Bring higher wages & secure employment.
• Negative impact of MNCs on host country

  • May be more efficient at exploiting resources/environment.
  • Large financial flows may destabilise the national currency.
  • Clever transfer pricing may rob the host country of tax income.
• Advantages of FDI from MNC

  • There is an initial lump sum of money that enters the country to pay for the 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
• Disadvantages of FDI from MNCs

  • Assets from the home country are now owned (or partly owned) by foreign businesses
  • The local firms or individuals who have sold the asset, may not reinvest the money into the local economy but may move it abroad/offshore
• Balance of payments is a statement showing all of the financial transactions between a country and the rest of the world.
• FDI improves balance of payments

  MNCs can help to improve the balance of payment of a country as the FDI flows into the country will help improve their 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
• Negative impact of MNC on balance payments

  • If MNC buys raw materials or equipment abroad (imports), there is a flow of money out of the country.
  • If MNC send profits back to their home country, also represents flow of money out of the country.
• Technology & Skills Transfer

  • MNCs bring new technologies & skills to local businesses.
  • Help to improve efficiency and productivity, helping domestic businesses become more competitive in national and international market.
• Benefits to consumers in host country

  •  wider choice/quality of goods and services.
  • 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 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 they have limited choice
• Tax revenue & transfer pricing

  • 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

  •  Method used by MNCs to shift profits from where they are generated to countries with lower tax rates.
  • Method of tax avoidance, means businesses will pay less tax in the host country.
• Advantage of MNCs on business culture

  • Domestic businesses may be influenced by business culture of MNCs.
  • Eg. employers start to copy ideas such as Kaizen and continuous improvement
  • MNCs may also encourage a culture of entrepreneurship
  • This can help boost overall economic growth
• Disadvantages of MNCs on business culture

  • MNCs may demonstrate unethical behaviour and have a company culture of exploitation
  • encourages local firms to also ignore the working conditions.
• Advantages of MNCs on Environment/local communities

  • Local residents benefit from job opportunities and growth in local economy
  • MNCs often invest to improve infrastructure
  • Better roads, transportation and access to water and electricity help local community & help MNC operate more efficiently.
  • MNCs 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.
• Disadvantages of MNCs on environment/ local communities

  • MNCs may cause damage to local habitats/environment during production process.
  • E.g. Shell has a track record of oil pollution in vulnerable communities in Nigeria
  • MNC's may leave unsightly production facilities behind once they have extracted all of the resources and left the country.
• Factors such as globalisation and deregulation have contributed to the growth of MNC’s.
• Advantages of MNC on local business

  • Helps boost local economy creating opportunities for local businesses.
  • If population is benefiting from higher wages, they may spend more on local business products
  • MNCs may utilise the services of local businesses
  • Potential opportunities for joint ventures and partnerships with MNCs who seek to gain knowledge of the local market.
  • Local firms may learn new skills and production methods- allow them to become more efficient .
• Disadvantages of MNC on local business

  • MNCs reduce supply of workers available to local businesses if they offer better pay and working conditions.
  • If MNCs are able to produce at lower cost and compete with local businesses - may lose local customers.
  • If local businesses lose customers - cause unemployment for workers of local businesses.
• MNCs seek to maximise profits and will try to reduce their tax liabilities.