Multinational Companies and Foreign Direct Investment

• Key features of MNCs:

  • Huge assets and revenue: MNCs are extremely well resourced
  • Highly qualified and experienced professional executives and managers
  • Powerful advertising and marketing capability
  • High advanced and up-to-date technology
  • Highly influential both economically and politically
  • Very efficient since they can exploit huge economies of scale
• What is Foreign Direct Investment?

  FDI - occurs when a company makes an investment in a foreign country mostly to develop a business venture.
• Reasons for emergence of MNCs/FDI:

  • Economies of Scale
  • Access to natural resources/cheap materials
  • Lower transport and communication costs
  • Access to customers in different regions
• Reasons for emergence of MNCs/FDI: Economies of Scale

  In some countries, firms that exploit economies of scale can reduce costs. MNCs can do this because they are so large.
• Reasons for emergence of MNCs/FDI: Access to natural resources/cheaper mats


  Many large companies invest overseas because they need to buy huge quantities of resources.
• Reasons for emergence of MNCs/FDI: Lower transport and communication costs


  Developments of transport and communication have helped to drive the growth in MNCs/FDI activity.
• Reasons for emergence of MNCs/FDI: Access to customers in different regions


  They can sell far more G&S in global markets than in domestic markets.
• Advantages of MNCs/FDI:

  • Job creation
  • Investment in infrastructure
  • Developing skills
  • Developing capital
  • Contributing to tax
• Advantages of MNCs/FDI: Job Creation

  MNCs establish factories, warehouses, shops and other business facilities overseas, putting local suppliers to work. Income and economic growth rises, also rising the living standard for people in these countries.
• Advantages of MNCs/FDI: Investment in Infrastructure

  Countries with poor infrastructure often struggle to attract FDI. It is difficult to do business in these countries.
• Advantages of MNCs/FDI: Developing Skills

  MNCs provide training and work experience for workers when they locate operations in foreign countries. Governments in less developed countries often spend more on education to help attract MNCs.
• Advantages of MNCs/FDI: Developing Capital

  Boosts the stock of capital in host countries. When a business sets up a new facility, it is likely to install up-to-date technology.
• Advantages of MNCs/FDI: Contributing to Taxes

  Profits made by MNCs are taxed by the host country. This increases tax revenue for the government which then can improve government services.
• Disadvantages of MNCs/FDI:

  • Tax avoidance
  • Environmental damage
  • Moving profits abroad
• Disadvantages of MNCs/FDI: Tax Avoidance

  Powerful MNCs have been accused for not paying taxes.
• Disadvantages of MNCs/FDI: Environmental Damage

  Many environmentalists are suspicious of MNCs because they may cause environmental damage. This is because MNCs are heavily involved in the extraction industries.
• Disadvantages of MNCs/FDI: Moving Profits Abroad

  Profits made by MNCs are often subject to repatriation. This mean that profits are returned to the country where the MNC is based, so the host country loses out. This suggests that MNCs bring more benefits to developed countries rather than less developed countries.