The Impact of MNCs (Edexcel A Level Business)

Impact of MNCs 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 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 and Disadvantages of MNCs for Local Businesses 

Advantages and Disadvantages of MNCs to Local Communities and Environment

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

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  

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 

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