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4-4-1-the-impact-of-mncs

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Impact of multinational companies on the local economy

A multinational company (MNC) is a business that is registered in one country but has manufacturing operations/outlets in different countries
- E.g. Starbucks’s headquarters is in Washington, USA, but the company has 32,000 stores in 80 countries
Factors such as globalisation and deregulation have contributed to the growth of MNCs
MNCs will choose locations based on factors such as cost advantages and access to markets
- Nike originates from the USA, but 50% of its manufacturing takes place in China, Vietnam and Indonesia due to the lower production costs in those 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 in local communities 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 regulations are weak or not enforced MNCs tend to establish production facilities in regions where labour costs are lower and relatively low wages are paid 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 boost the local economy by creating opportunities for local businesses If the population is benefiting from higher wages, citizens 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 that 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, those businesses may lose local customers If local businesses lose customers, this may also cause unemployment for workers of local businesses

Advantages

Disadvantages

MNCs can help boost the local economy by creating opportunities for local businesses
- If the population is benefiting from higher wages, citizens 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 that 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, those businesses may lose local customers
- If local businesses lose customers, this may also cause unemployment for workers of local businesses

Advantages and disadvantages of MNCs for local communities and the environment

Advantages	Disadvantages
Local residents may benefit from job opportunities and growth in the local economy MNCs often invest in improving infrastructure Better roads, transportation and access to water and electricity would help the local community as well as 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/environments during the production process E.g. Shell has a track record of causing oil pollution in vulnerable communities in Nigeria MNCs may leave unsightly production facilities behind once they have extracted all of the resources and left the country

Advantages

Disadvantages

Local residents may benefit from job opportunities and growth in the local economy
MNCs often invest in improving infrastructure
- Better roads, transportation and access to water and electricity would help the local community as well as 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/environments during the production process
- E.g. Shell has a track record of causing oil pollution in vulnerable communities in Nigeria
MNCs 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 operations in their countries, as there are benefits to the wider economy

The impact of MNCs on national economies

Diagram showing the impact of MNCs on the national economy, including FDI flows, consumers, balance of payments, business culture, technology transfer, and tax revenue. — **MNCs impact several metrics in the national economy, including foreign direct investment flows and the balance of payments**

Foreign direct investment flows

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

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 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 an asset might not reinvest the money into the local economy and instead 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 a country’s balance of payments, as the FDI flows into the country will help improve its 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 sends profits back to its home country, this is also 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 improve efficiency and productivity, helping domestic businesses to become more competitive in the national and international markets

Consumers

Customers in countries that 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 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 customers 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 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 the poor working conditions This encourages local firms to also ignore 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 the countries in which 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

Examiner Tips and Tricks

In Papers 1 and 3, when assessing the impact of MNCs on the local and national economies, consider the scale of the multinational in comparison to the country in which it is looking to establish itself. For example, if the MNC makes more profit than the GDP of the country in a year, it is likely to have a strong influence on the country.

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