The Importance of Multi National Companies (MNCs) (Cambridge (CIE) O Level Business Studies)

Multinational Companies

• A multinational company (MNC) is a business that is registered in one country but has manufacturing, processing and/or service outlets in many different countries

  • E.g. Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80 countries

Diagram: examples of multinational companies

• Factors such as globalisation and deregulation have contributed to the growth of MNC’s

• MNC’s often 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 Mexico, China, Vietnam and Indonesia due to the lower production costs in these countries

Benefits of Becoming a Multinational

1. Economies of scale: as they operate globally, they are able to increase their output and benefit from lowered costs created by economies of scale

2. Increased profit: much of their profit is sent back to their home country. This point is debatable, as many MNCs have offshore bank accounts and do not bring the profit back home

3. Create employment: new jobs are created in host countries each time a new facility is setup, and this raises income, which helps to improve the standard of living in that country

4. New markets: MNCs can identify potential markets and begin to sell there

5. Transportation costs: MNCs are able to setup facilities closer to their customers, which reduces transportation costs

6. Risk management: By selling in many national markets, the risk of failure is reduced; e.g. if Egypt goes through a recession (with sales falling there), then this could be less impactful due to rising sales in a strong German market

7. Tax incentives: MNCs are able to increase their profits by setting up in countries with low corporation tax - or countries that offer MNCs a tax break (no tax) for their first 5–10 years of operation

8. Avoidance of protectionism: MNCs can establish bases in countries that are operating protectionistmeasures & by doing so, they avoid the measures, e.g. A Chinese MNC may set up shop in the USA and produce there, thus avoiding import tariffs on products exported from China to the USA

Impact of MNCs on Stakeholders

• MNCs can have both positive and negative impacts on business stakeholder groups, including employees, local communities, governments, consumers and suppliers

The Impact of MNCs on Stakeholders