Impact of MNCs

Impact of MNCs

__Question: __What benefits do MNCs bring to the local economy? Explain those outlined in the spec.

Key Concepts: Employment provides local people with local jobs and disposable income, thus a positive regional multiplier effect. Local businesses might benefit from becoming their supplier etc. Local community/environment might benefit from CSR initiatives.

Further notes from the Getting Started Guide:

The initial investment for location in a host country creates employment. Buildings and equipment may be needed, creating work for local people. Once operations commence, a workforce will be needed. Local businesses may be involved in supplying or servicing the MNC and see an increase in business, taking on more workers. All of the local people who have found new employment will spend some of their income with local businesses. This increases local demand and, in turn, creates more jobs. There is a positive local multiplier effect. The local community and environment may benefit from CSR programmes.

__Question: __What drawbacks do MNCs bring to the local economy? Explain those outlined in the spec!

Key Concepts: Exploitation of local labour with poor wages/conditions, even worse if the MNC just brings in ex-pat workers and thus no local jobs are created. Local businesses suffer from competition as well. Local community suffers from pollution and negative externalities.

Further notes from the Getting Started Guide:

MNCs may exploit the local labour force with poor wages and conditions. Local labour may only be used for menial tasks, with MNCs bringing in their own personnel. Local businesses may be exploited or driven out by competition from the MNC, and there can be considerable damage to the local community and environment from pollution and despoliation – this is particularly common for the oil, mining and extractive industries.

__Question: __What benefits do MNCs bring to the national economy? Explain those outlined in the spec!

Key Concepts: Economic growth via employment and contributions to GDP. FDI inflows and exports help current account balance and balance of payments. Technology transfer – transfer of skills/equipment to the locals, will help push entrepreneurship and an economy on further. Consumers benefit from products/choice and business culture benefits from the MNCs corporate culture. Lastly, corporation tax revenues paid give more money to the government to spend on public/merit goods.

Further notes from the Getting Started Guide:

MNCs also affect the national economy. Employment and growth at a local level contributes to overall economic growth and increased tax revenues that aid government spending and development. Production that is exported improves the balance of payments. Other MNCs may be attracted to follow suit and the flow of FDI increases, thus a growing business culture is created. MNCs bring skills and technology that can be passed on to the host country for future benefit.

Question: Drawbacks do MNCs bring to the national economy? Explain those outlined in the spec.

Key Concepts: Transfer pricing may occur where a MNC does some clever accounting to avoid paying the correct tax revenue in the host nation (Apple, Starbucks, Google and Amazon have all been caught at this recently). Thus the benefits of tax revenues are diminished. A lack of ‘good’ technology transfer might occur with the MNC just using the market to sell, not produce. Lastly, ‘race to the bottom’ can occur – where the MNC uses the grants/incentives, exploits the natural resources/workforce and then in due course moves onto the next country rolling out the red carpet!

Further notes from the Getting Started Guide:

However, MNCs can be adept at avoiding tax liabilities by such practices as transfer pricing. Profits can be repatriated and have little impact on the host economy. R&D facilities may be kept in the home country, reducing opportunities to develop skills and for technology transfer. Many MNCs enter another country simply to access a new market, so only sales and marketing facilities are established. MNCs are likely to take whatever incentives are on offer, stay for a while and then move to the newest low-cost location in another country, leaving behind unemployed workers and a weakened economy. They encourage a so called ‘race to the bottom’.

This is a classic AO4 question, so well worth learning off A 2 VS 2. The benefits are obvious, thus a ‘one-sided’ question is a risk. Watch the following videos and appreciate the drawbacks as well. Remember balance is essential to get into Level 4 of the AO4 marking criteria.