Growth of Multinationals (Edexcel IGCSE Business)

Revision Note

Written by: Lisa Eades

Reviewed by: Steve Vorster

An Introduction to Multinationals

A multinational company (MNC) is a business that is registered in one country but has manufacturing operations or sales outlets in different countries
- For example, 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, especially in developing countries
MNC’s 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

Benefits & Drawbacks of Multinationals

Approximately 60,000 multinationals are responsible for around half of the global trade
- Many of the world's largest multinational corporations have their headquarters in developed countries such as the United States, Japan and Germany
- Increasingly, MNCs base some of their operations in China, one of the world's fastest-growing economies
  - China is the headquarters of many growing multinational corporations, such as Huawei Technologies, Lenovo and Haier

The benefits of operating as a multinational

The Benefits of Operating as a Multinational Company

Advantage	Explanation
Low costs	MNCs can access lower-cost labour and/or raw materials by moving to cheaper locations or exploiting economies of scale
Potential for high sales	They have access to a large customer base with potential for high levels of sales
High profile	Multinationals are well-know businesses whose products have a greater chance of becoming household names and achieving market dominance
Bypass trade barriers	Multinationals can set up operations inside trade blocs or in countries that impose import tariffs or quotas
Low tax liabilities	Multinationals can locate their head office in countries with low tax rates such as Ireland or Cyprus This allows them to maximise profits to distribute as dividends to shareholders

The drawbacks of being a multinational

Legal and tax complexities

Different countries have varied tax rules and laws in areas including contracts, the environment and employment
- MNCs usually need to employ local legal and tax specialists to navigate these differences, increasing business costs

Public relations

MNCs are often accused of sending jobs outside of the company’s home country or exploiting local workers, resources and laws in foreign countries
- Effective public relations can counter these accusations and emphasise the benefits the MNC brings to the countries in which it operates

Political instability

Most MNCs locate headquarters in politically stable, developed countries but operate in less developed locations
Sometimes the less developed country will experience political turmoil or corruption, which can disrupt business operations
- Careful risk management and plans for business continuity need to be developed

The Impact of Multinationals on Stakeholders in Host Countries

Stakeholders are individuals, groups or organisations that have a direct or indirect interest in the outcomes of a particular development or business decision
Multinationals can have a range of impacts on stakeholders in the countries in which they operate

Impacts of Multinationals on Stakeholders

Stakeholder	Impact
Local residents	Residents in countries with multinationals benefit from well-paid high-quality job opportunities and growth of other local businesses MNCs provide training for their employees, improving their skills E.g. Drinks company Diageo employs and trains 6,500 well-paid workers in African countries, including Tanzania, Cameroon and Nigeria The presence of MNCs in an economy encourages entrepreneurship as citizens' skills and motivation to succeed are increased In some instances, multinationals have been found to pay low wages, employ child labour and offer poor working conditions
Local businesses	Local businesses grow and employ more workers to meet demand created by an MNC MNCs may share knowledge with local suppliers and support them with funding to invest in new technology E.g. Electronics manufacturer Samsung transferred patented technologies free of charge to support the growth and innovation of SMEs in South Korea
Local government	MNCs may have to pay taxes and business rates to local councils and authorities These funds may be reinvested back into the local economy to fund local amenities E.g. Nissan's decision to locate in Sunderland, a city in the North-East of England, provided much-needed funds for the council to invest in infrastructure to support the growth of export businesses
National government	MNCs output is recorded in the country it is produced in, so when exported, it has a positive impact on the country's balance of payments which benefits the government E.g. Exports from MNCs located in Poland, such as Pfizer and Merck, make up around two-fifths of the country's total MNCs may invest to improve infrastructure Better roads, transportation and access to water and electricity help the economy and allow the MNC to operate efficiently E.g. In exchange for market access for its MNCs, the Chinese government has invested more than $600 million in Costa Rican infrastructure, such as improvements to roads and sports venues, including its national football stadium Multinationals have been accused of poor behaviour in the countries in which they operate Causing environmental damage Paying minimal tax revenue Lacking accountability to the countries in which they operate Once resources have been used, they leave the country to locate elsewhere, causing unemployment

Examiner Tips and Tricks

A common error is to confuse stakeholders with shareholders. A stakeholder is any individual or group with an interest in a businesses operations, whereas shareholders are specifically stockholders who own a part of a business.

Last updated: 10 October 2024

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