Multinational Corporations (MNCs) (Edexcel IGCSE Economics)

Revision Note

Written by: Lorraine

Reviewed by: Steve Vorster

A multinational corporation (MNC) is business that has production facilities in two or more countries
- E.g. Tesla makes major decisions at its headquarters in Texas while assembly operations are in China

MNCs have facilitated increased international trade and a greater choice of goods and services on the global market
They have also increased cultural globalisation, as global brands such as Coca-Cola, Nike, and Apple dominate markets and western values replace local cultures

Foreign direct investment (FDI) occurs when investment by foreign firms results in more than a 10% share of ownership of domestic firms
Businesses typically grow through FDI as mergers, takeovers, partnerships or joint ventures are created with a foreign business in order to enter new markets
- E.g. EE was formed in 2012 as a joint venture between the French company Orange and the German company T-Mobile, allowing greater share of the UK market

Inward FDI occurs when a foreign business invests in the local economy
- E.g. In 2017, Kenya opened the Kenya Standard Gauge Railway Line built by Chinese investors

Outward FDI occurs when a domestic business expands its operations to a foreign country
- E.g. Dyson has moved its manufacturing from the UK to Malaysia, China and the Philippines
The impact of FDI on economic growth depends on how the FDI occurs
- E.g. Chinese firms frequently invest overseas, but bring their own employees with them and send all of their profits home; the economy and individuals within the economy benefit less than they could have
- E.g. Indian firms frequently invest overseas, tend to hire local employees and reinvest more of the profits into the host country than Chinese firms generally do

Globalisation has made it easier for firms to do business on a global scale
- The number and size of MNCs and and the level of FDI continue to increase

Reasons for Growth of Nike (Case Study of a MNC)

Reason	Explanation
Economies of scale	By manufacturing in countries with lower labour costs like Vietnam, Nike increases output and benefits from economies of scale
Access to resources	Nike sources raw materials such as rubber, leather, and textiles from Thailand and Malaysia, while sourcing leather from countries like India and Brazil Relocating production to Vietnam results in easier access to the raw materials
Lower transport costs	Nike operates distribution centres near key markets across continents Good transportation hubs in Vietnam allow for fast and cost-effective transportation of products
Lower communication costs	Nike uses technological communications to coordinate its various production sites around the world
Access to new consumers	Nike accesses new consumers by tailoring its product to different regions, such as promoting baseball gear in the USA, football merchandise in Europe and cricket equipment in Australia In 2022, 57% of all Nike sales were outside the USA

MNC and FDI have the potential to generate significant economic growth as more economic activity, employment and output are generated

Advantages and Disadvantages of MNCs and FDI

Advantages	Disadvantages
The MNC can gain access to raw materials or cheap labour, which can lower costs and therefore lower prices Local residents may benefit from job opportunities and growth in the local economy MNCs provides training and development programmes for its employees, developing their skills 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 and authorities These funds may be reinvested back into the local community MNCs invest in capital assets E.g. Samsung Electronics has invested across Vietnam by constructing manufacturing plants and R&D centres	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 Extraction of natural resources cause resource depletion in the host economy MNC's may leave unsightly production facilities behind once they have extracted all of the resources and left the country, e.g. open mines MNCs often repatriate profits to home country Some large MNCs face criticism for using tax avoidance strategies E.g. In 2016, Apple used tax loopholes in Ireland to pay minimal tax, reducing potential government revenue

Advantages

Disadvantages

The MNC can gain access to raw materials or cheap labour, which can lower costs and therefore lower prices
Local residents may benefit from job opportunities and growth in the local economy
- MNCs provides training and development programmes for its employees, developing their skills
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 and authorities
- These funds may be reinvested back into the local community
MNCs invest in capital assets
- E.g. Samsung Electronics has invested across Vietnam by constructing manufacturing plants and R&D centres

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
- Extraction of natural resources cause resource depletion in the host economy
MNC's may leave unsightly production facilities behind once they have extracted all of the resources and left the country, e.g. open mines
MNCs often repatriate profits to home country
Some large MNCs face criticism for using tax avoidance strategies
- E.g. In 2016, Apple used tax loopholes in Ireland to pay minimal tax, reducing potential government revenue

Last updated: 27 June 2024

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