BM Chapter 6 - Multinational Companies (MNCs)

BM Chapter 6 - Multinational Companies (MNCs)

6.1 Multinational Companies (MNCs)

MNCs have benefited greatly from globalisation (growing integration and interaction between markets, businesses, people and governments globally). They produce goods and services in more than one country. The biggest have annual sales turnovers exceeding the size of many country’s entire economies.

Globalisation

Economic integration of different countries through increasing freedoms in the cross-border movement of people, goods/services, technology and finance. This integration of global economies has impacted national cultures, spread ideas, speeded up industrialisation in developing nations and led to de-industrialisation in developed nations. Has been increasing for thousands of years - it is not a new phenomenon. Improvements in technology and the speed of global connections have exponentially increased the level of interdependence between nations in the past 50 years. Consumers now source products globally recognising global brands wherever they travel.

Main Characteristics of Globalisation

Increasing foreign ownership of companies.

Increasing movement of labour & technology across borders.

Free trade in goods/services.

Easy flows of capital (finance) across borders.

Impacts of Globalisation

Domestic businesses face increased competition as a result of globalisation. This incentivises them to improve efficiency in order to remain competitive against global brands. Some domestic businesses may drastically cut staffing or require higher levels of productivity from workers.

Transfer of Skills

The transfer of skills between global and domestic businesses can be mutually beneficial. Domestic workers can gain skills and knowledge from an international competitor. Global businesses will gain local knowledge, market insight and experience from domestic workers.

Domestic Business Competition

Domestic businesses can compete by developing or emphasising a persuasive unique selling point (perhaps the fact they are local).

Collaboration

Both domestic and global businesses can benefit from close collaboration through joint ventures or strategic alliances.

Multinational Company (MNC)

Business that is registered in one country but has manufacturing operations/outlets in different countries. E.g. Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80 countries.

Factors Contributing to Growth of MNCs

Factors such as globalisation and deregulation have contributed to the growth of MNC’s. Globalisation has made it easier for firms to do business on a global scale and the number and size of MNCs continues to increase. Deregulation through trade liberalisation and the harmonisation of financial and technical standards has made it easier for businesses to operate in diverse locations.

Why Become a Multinational? - Economies of Scale

As they operate globally, they are able to increase their output & benefit from lowered costs created by economies of scale.

Why Become a Multinational? - 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.

Why Become a Multinational? - Create Employment

New jobs are created in host countries each time a new facility is setup & this raises income which helps to improve the standard of living in that country.

Why Become a Multinational? - Markets

MNCs can identify potential markets & begin to sell there. Closer to main markets, better market info, may be viewed as a local company and gain customer loyalty as a result.

Why Become a Multinational? - Transportation

MNCs are able to setup facilities closer to their customers which reduces transportation costs.

Why Become a Multinational? - Risk Management

By selling in many national markets, the risk of failure is reduced. 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.

Why Become a Multinational? - Tax Incentives

MNCs are able to increase their profits by setting up in countries with low corporation tax rates, or government grants and tax incentives designed to encourage industrialisation in such countries. Countries that offer MNCs a tax break (no tax) for their first 5-10 years of operation.

Why Become a Multinational? - Cost of Production Advantages

Lower labour rates, cheaper rent and site costs. Many businesses choose to locate production facilities in countries where labour costs are low. Nike originates from the USA but 50% of their manufacturing takes place in China, Vietnam and Indonesia due to the lower production costs in these countries.

Why Become a Multinational? - Avoidance of Barriers to Trade

MNCs can establish bases in countries that are operating protectionist measures or import restrictions and by doing so, they avoid the measures. E.g. A Chinese MNC may setup in the USA & produce there, thus avoiding import tariffs on their products exported from China to the USA.

Why Become a Multinational? - Access to Local Natural Resources

MNCs can access and use natural resources from host countries.

Potential Problems for Multinationals

Communication links may be poor, language/legal/cultural differences could lead to misunderstandings. Coordination with other plants will need to be monitored carefully to ensure that products that might compete with each other on world markets are not produced and that conflicting policies are not adopted. It is likely that the skills levels of the local employees will be low and this could require $$ in training programmes.

Benefits to Host Country of Inward Investment by MNCs - Boosting the Local Economy

MNCs can help boost the local economy creating jobs and opportunities for local businesses.

Benefits to Host Country of Inward Investment by MNCs - Competitive Wages and Better Working Conditions

MNCs often offer competitive wages and better working conditions than local businesses.

Benefits to Host Country of Inward Investment by MNCs - Higher Wages and Local Business Spending

If the population is benefiting from higher wages, they may spend more on local business products.

Benefits to Host Country of Inward Investment by MNCs - Utilisation of Local Businesses

MNCs may utilise the services of local businesses. Local businesses are likely to benefit from supplying services, leading to additional jobs and incomes.

Benefits to Host Country of Inward Investment by MNCs - Investment in Infrastructure

MNCs often invest to improve infrastructure. Better roads, transportation, and access to water and electricity would help the local community, in addition to helping the MNC operate more efficiently.

Benefits to Host Country of Inward Investment by MNCs - Economic Growth through Money and Tax Revenue

Initial lump sum of money and ongoing tax revenue generate economic growth. 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. Also will bring foreign currency and further exchange.

Benefits to Host Country of Inward Investment by MNCs - Boost in Tax Revenues

Tax revenues will be boosted from any profits made by the multinational.

Benefits to Host Country of Inward Investment by MNCs - Increase in GDP

Total output of the economy will be increased and this will raise gross domestic product.

Benefits to Host Country of Inward Investment by MNCs - Influence on Domestic Business Culture

Domestic businesses may be influenced by the business culture of MNCs. Workplaces became more open and employers started to copy ideas such as Kaizen and continuous improvement.

Benefits to Host Country of Inward Investment by MNCs - Management Expertise

Management expertise in the community will slowly improve when and if the foreign supervisors are replaced by local staff. E.g. In the 1990s, UK businesses adopted the working practices of Japanese businesses such as Nissan.

New Technologies and Skills to Local Businesses

This will help to improve efficiency and productivity, helping domestic businesses become more competitive in the national and international market.

Customers

Wider choice of goods and services. Lower prices if MNCs pass their cost advantages on in the form of lower prices. Better quality of goods and services.

Potential Disadvantages to a Country - Exploitation of the Local Workforce

MNCs may exploit local workers if employment regulation is weak or not enforced and may reduce the supply of workers available to local businesses if they offer better pay and working conditions. Lack of health/safety in some countries = suppliers can employ cheap labour for long hours with few of the benefits. There is also a risk that child workers will be employed by unethical MNCs. MNCs tend to establish production facilities in regions where labour costs are lower and pay relatively low wages. 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.

Potential Disadvantages to a Country - Job Opportunities

MNCs may not create jobs for local workers as they may relocate workers from their own country to work abroad. Chinese companies are notorious for this.

Potential Disadvantages to a Country - Push Domestic Businesses Out of the Market

If MNCs are able to produce at a lower cost and compete with local businesses, they can push domestic businesses out of the market, leaving customers with less choice and higher prices.

Potential Disadvantages to a Country - Damage to the Local Environment

MNCs may cause damage to the local environment during and after the production process. Pollution from plants might be higher than allowed in other countries. This could be because of slack rules or convenience. Shell has a track record of oil pollution in vulnerable communities in Nigeria.

Potential Disadvantages to a Country - No Reinvest into the Local Economy

Assets from the home country are now owned (or partly owned) by foreign businesses, which may not reinvest the money into the local economy, but may move it abroad/offshore.

Potential Disadvantages to a Country - Tax Avoidance

MNCs seek to maximise profits and will 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 businesses will pay less tax in the host country.

Potential Disadvantages to a Country - Local Competing Businesses

May be squeezed out of business if they are unable to compete effectively.

Potential Disadvantages to a Country - Reduction in Cultural Identity

Some large Western-based businesses have been accused of imposing Western culture on other societies.

Potential Disadvantages to a Country - Profits Reduction

Profits may be sent back to the country where the head office of the company is based, rather than kept for reinvestment in the host nation.

Potential Disadvantages to a Country - Extensive Depletion of the Limited Natural Resources

Some countries have been blamed on some large multinational corporations.