4.4.1 The impact of MNCs

• multinational company (MNC)


  a business that is registered in one country but has manufacturing operations/outlets in different countries
• • Factors such as globalisation and deregulation have contributed to the growth of MNC’s
• MNC’s will choose locations based on factors such as cost advantages and access to markets 
• 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 
• Advantages on Employment, Wages and Working Conditions


  • MNCs lead to job creation for the local community 
  • MNCs may offer more competitive wages than local businesses 
  • MNCs may offer better working conditions than local businesses
• Disadvantages of MNCs on Employment, Wages and Working Conditions


  • MNCs may exploit local workers if employment regulation is weak or not enforced
  • MNCs tend to establish production facilities in regions where labour costs are lower and pay relatively low wages
  • MNCs may not create jobs for local workers as they may relocate workers from their own country to work abroad (Chinese companies are notorious for this) 
• Advantages of MNCs for Local Businesses 


  • MNCs can help to boost the local economy creating opportunities for local businesses 
  • If the population is benefiting from higher wages, they 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 who seek to gain knowledge of the local market
  • Local firms may learn new skills and production methods that allow them to become more efficient  
•  Disadvantages of MNCs for Local Businesses 

  • 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, they may lose local customers
  • If local businesses lose customers, this may also cause unemployment for workers of local businesses
• Advantages of MNCs to Local Communities and Environment

  • Local residents may benefit from job opportunities and growth in the local economy
  • MNCs often invest to improve infrastructure
  • Better roads, transportation and access to water and electricity would help the local community in addition to helping the MNC operate more efficiently
  • MNCs 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
• Disadvantages of MNCs to Local Communities and Environment

  • MNCs may cause damage to local habitats/environment during production process  
  • MNC's may 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 in their country as there are benefits to the wider economy
• Impact of MNCs on the National Economy

  
• Impact of MNCs on the National Economy


  • FDI flows
  • Consumers
  • Business culture
  • Tax revenue and transfer pricing
  • Technology and skills transfer
  • Balance of payments
• Foreign Direct Investment (FDI) Flows


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


  • There is an initial lump sum of money that enters the country to pay for the investment
  • This money enriches local firms or citizenswho 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 Flows 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


  a statement showing all of the financial transactions between a country and the rest of the world 
• MNCs can help to improve the balance of payment of a country


  FDI flows into the country will help improve their balance of payments
• Goods and services exported for sale by the MNC


  Generate further inflows to the country's balance of payments
• MNC is exporting a rare and valuable raw material e.g cobalt


  Especially beneficial to a country
• 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
• MNC send profits back to their home country

  It will also represent 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 to improve efficiency and productivity, helping domestic businesses to become more competitive in the national and international market 
• Consumers Benefit


  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
• Disadvantages of MNCs

  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
• Advantages of MNCs on 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 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
• Disadvantages of MNCs on Business Culture 


  • MNCs may demonstrate unethical behaviour and have a company culture of exploitation 
  • This encourages local firms to also ignore the 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 where 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