4.4 The impact of MNC's

Multinational corporation (MNC)

a business that is registered in one country but has manufacturing, operations and outlets in different countries e.g. starbucks HQ is in Washington, USA but has 32,000 in 80 countries

impact of MNCs on the local economy

• increase in jobs

• good wages and improved quality of life

• more local businesses involved e.g. construction of factories

• may provide additional infrastructure e.g. schools, hospitals, local amenities etc

impac tof MNCs on the national economy

• FDI flows

• balance of payments

• technology and skills transfer

• consumers have increased choice

• business culture

• tax revenues and transfer pricing

business ethics

refers to the principles and norms that govern business behaviour. the ethics will determine how they operate and their decision making process

ethical pay

MNCs often operate in countries which have different employment regulations and working conditions. the MNCs decide if they will comply with the regulations of their base location or the country abroad

ethical working conditions

some MNCs behave unethically by providing poor working conditions in order to cut costs. factories and warehouses with poor working conditions are referred to as sweatshops (profits before people)

ethical environmental considerations

waste management and emissions

ethical waste management

developed countries have regulations about how businesses should dispose of their waste

LDEs have less enforcement and fewer regulations

MNCs often dispose of waste in LDEs at cheaper costs allowing high profits to be maintained

ethical emissions

emissions are often relased from factories or from products made by MNCs

the emissions produced have negative impacts on local communities causing health issues such as asthma, cancer and skin conditions

ethical supply chain considerations

MNCs have supplies around the world and are increasingly held accountable for the working conditions of these suppliers

ethical marketing considerations

misleading labelling

inappropriate promotional activities

misleading labelling

labelling must comply with the regulations of the country with correct information not including false information aimed at generating higher sales

inappropriate promotional activities

promotional activities should not be offensive or illegal

Controlling MNCs

Political influence

Legal control

Pressure groups

Social media

Political factors

When MNCs establish themselves in a new country, they must work within the institutional framework of that country

Political factor benefits

• MNCs may wish to get political approval from the gov of host nations → help trade and setting up in a new country

• If the MNC gains political approval → trading mat be smoother and less troublesome

Political factor drawbacks

• Politicians can be bribed, not such an issue in the UK but quite common in other countries

• Some MNCs bring so much wealth and employment into an economy that a weaker government might ignore unethical activities e.g. Brazil, Nigeria, Mali

Legal controls

Governments can enforce legislation and regulations to control the operations of MNCs

Legal controls benefits

• Laws can be passed at any point to control the actions of a MNC which are already established in a country

• Laws mean that consumers have some rights against the MNC

Legal controls drawbacks

• The MNC may simply move production to a country where there are less laws and restrictions

• The host nation does not want to lose the economic input of the MNC so this deters laws being passed

• MNCs can afford expensive legal defence of any challenge

Pressure groups

Organisations which campaign for changes in the law or new legislation in specific areas such as Greenpeace. They can have a strong influence on public opinion and behaviours of MNCs; if they want to avoid a PR disaster

Pressure group benefits

• Pressure groups can raise public awareness of MNCs activities in host countries

• Pressure groups can create PR problems for MNCs peacefully, which can lead to a change in their behaviour

Social media

can turn a product scare into a national crisis within hours. It can be used to orchestrate a boycott which will affect the sales and reputation of the MNC

Social media benefits

• Can be very powerful way to change the behaviour of MNCs

Social media drawbacks

• Can only affect short term change. The internet is dynamic, customers become bored easily and move onto next scandal

• A MNC can just dust itself down and carry on with very little impact on their activities

Global merger

Permanent agreement between 2 businesses from 2 different countries to join together

Joint venture

Two businesses join together to share their knowledge, resources and skills to form a separate business entity for a limited period of time

Reasons for mergers or joint ventures

Spreading risk

Entering new markets/ trading blocs

Acquiring national (international) brand names / patents

Securing resources/ supplies

Maintaining/ increasing global competitiveness

Spreading risk

Business operating in different markets spreads the risk associated with fluctuations in economic conditions

Entering new markets/ trading blocs

Entering a market using a merger/ joint venture is a quicker method than using organic growth. Emerging economies often insist that foreign businesses operate as joint ventures

Acquiring national/international brand names/patents

Patent= legal right given by the government to an individual or business to make, use or sell an invention and exclude othering from doing so.

This process of developing intellectual property can be long and extensive. Using a merger / aquisition is a method businesses can use to get access to intellectual property or a biz with a strong rep

Securing resources / supplies

Business can strategically merge or create joint ventures with another business which has access to resources- allows production processes to speed up

Businesses have to be aware of any ethical issues concerning the resources, as this can damage the reputation of the business e.g. perhaps being unaware that the company they are joining with uses child labour.

Maintaining / increasing global competitiveness

Businesses can increase their global dominance by merging /joining with another business. By expanding a business can benefit from economies of scale which leads to lower costs. Businesses can reduce their prices- increased sales- higher market share

Benefits of global mergers/ joint ventures

Economies of scale

Diversifying risk

Opportunity to enter new markets

Drawbacks of global mergers and joint ventures

Diseconomies of scale

Culture clash between two businesses can affect the quality of the biz= poor sales

Redundancies can occur- affect motivation of remaining workers