The Impact of MNCs (Edexcel A Level Business)

• A multinational company (MNC) is a business that is registered in one country but has manufacturing operations/outlets in different countries
  • E.g. Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80 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 
  • Nike originates from the USA but 50% of their manufacturing takes place in China, Vietnam and Indonesia due to the lower production costs in these countries
      
• 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 and Disadvantages of MNCs on Employment, Wages and Working Conditions

Advantages	Disadvantages
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	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 and Disadvantages of MNCs for Local Businesses 

Advantages

Disadvantages

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

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 and Disadvantages of MNCs to Local Communities and Environment

Advantages

Disadvantages

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

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

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

MNCs impact several metrics in the national economy

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 and Disadvantages of FDI Flows from MNCs  

Advantages	Disadvantages
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	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

• 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 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
    
    
• 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 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 

• 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
     
• 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
     

Business Culture 

Advantages and Disadvantages of MNCs on Business Culture 

Advantages

Disadvantages

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  [popover id="-eNPhrJf1dSfjDYU" label="Economic Growth"]

MNCs may demonstrate unethical behaviour and have a company culture of exploitation E.g. Bangladesh is used by many clothing brands to produce cheap clothes and many turn a blind eye to poor working conditions 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