4.4.1 - Impacts

Positive impacts of MNCs on the local economy

• Creates local jobs with often better working conditions → decreases unemployment

• MNCs may improve the host country’s infrastructure by developing or improving road, rail, sea and air transportation links which benefit the local community and businesses

Negative impacts on the local economy

• Profit leakage may occur as profits MNCs make often go to the home country of the MNC

• Even though MNCs offer more jobs, in developing countries, they are often low paid and higher paying managerial jobs are in the home country

• Developing countries have lower safety standards and governments turn a blind-eye to exploitation, pollution and law breaking

Impacts of MNCs on the national economy

• FDI flows

• Balance of payments

• Technology and skills transfer

• Customers

• Tax revenues and transfer pricing

FDI Flows

Governments often offer incentives to MNCs in the form of grants, subsidies and tax breaks to attract investment into their countries

Balance of payments

Inward investment by a MNC will help a country’s balance of payments by increasing the number of exports and maybe encouraging domestic production of goods and raw materials, reducing imports. However, it may hurt the balance of payments if the MNC imports products in order to manufacture them

Technology and skills transfer

MNCs will bring technology and production methods that are likely new to the country. This knowledge can be transferred to the host country increasing nation wide efficiency leading to long-term economic growth

Consumers

If the MNC produces for the domestic market also, the local population will benefit from a wider choice of goods and services

Tax revenues and transfer pricing

MNCs often practise transfer pricing which causes less money to be pooled into the government to develop important areas such as infrastructure