Benefits & Drawbacks to Countries of Hosting MNCs (Cambridge (CIE) O Level Business Studies)

Benefits to a Country of Hosting an MNC

• Many governments are in favour of MNCs establishing in their country as there are benefits to the wider economy, but their presence can also have negative consequences

• The extent to which their activities are regulated and the behaviour of individual companies determine the overall effect 

Diagram: impact of MNCs on the national economy

Foreign direct investment (FDI)

• There will be an inflow of money into a country if a MNC decides to invest into a country through  foreign direct 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

Balance of payments

• MNCs can help improve the balance of payments of a country as FDI flows into the country 

  • 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

Technology and skill transfer 

• MNCs can bring new technologies and skills to local businesses 

  • This will help to improve efficiency and productivity, helping domestic businesses become more competitive in national and international markets 

Consumers 

• Customers in countries which host MNCs often benefit from

  • Better quality, a wider choice of goods and services and lower prices if MNCs pass their cost advantages on in the form of lower prices

  • Improved living standards as people may have higher incomes due to job creation and the resulting reduction in unemployment

Business culture

• Domestic businesses may be influenced by the  business culture of MNCs

  • E.g. In the 1990s, European 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"]

Tax revenue

• 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 

Limitations for a Country of Hosting an MNC

• Multinational companies can also present some challenges, which governments sometimes struggle to mitigate

Loss of assets

• Assets from the home country are now owned (or partly owned) by foreign businesses

• Local firms or individuals who have sold the asset may not reinvest the money into the local economy but may move it abroad or offshore

Balance of payments

• MNCs can 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

Consumers

• 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 

• 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

Transfer pricing

• MNCs often seek to maximise profits and 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 deprive the host country of tax revenue