4.4.1: The impact of MNCs

impact of MNCs on the local economy

impact of MNCs on the local economy

• local labour and job creation:

  • creates jobs

  • opportunity to work full time + regular income + financial security + training + career building

• wages and working conditions:

  • rising wages in locality

  • demand for workers drives up wage rates

  • job creation with favourable working conditions

  • international standards for MNCs

• local businesses:

  • give them new jobs i.e. construction, electricians, suppliers

  • people taking jobs from MNCs have increased spending power = benefits local businesses by demand

  • may attract workers from other businesses (better conditions, wages)

  • competing products supplied

  • take trade from local rivals

  • loss of jobs

  • competition may create pressure reaping long term benefits

• local community and environment:

  • improvements in infrastructure

  • contributions to local government taxes

  • help with links in local community

  • environmental damage

impact of MNCs on the national economy

• economic growth

  • boosts national income

  • employment created due to FDI

  • raises living standards

  • gives work to local suppliers

  • increased economic growth

  • higher wages

• FDI flows

  • FDI = amount of money spent on establishing a facility in a foreign country

  • FDI welcomed into host country due to benefits:

    • increased income

      • higher GDP

      • extra output and employment

      • raises living standards

    • increased tax revenue

    • increased employment

      • saves benefit money

      • boosts spending power

      • range of local suppliers needed may upsize

    • reduce national debt

      • lower interest

      • stability

• balance of payments

  • flow of FDI improves balance of payments

  • further flow into balance of payment through overseas sales

  • helps with international trades

  • helps boost sales of goods overseas

  • MNCs buying resources from overseas negatively affects balance of payments of host country due to flow of money out of country

  • negative impact if profits are repatriated to MNC base as they represent flow of money away from host country

• technology and skills transfer

  • horizontal transfer

    • knowledge transfer across same industry

  • vertical transfers

    • forward - businesses in host nation buy from MNC

    • backward - MNC buys from business in host nation

  • improves effiency and productivity

  • makes domestic producers competitive

  • generates home and abroad sales

  • reverse engineering

    • analysing a rival’s product closely

    • identify features worth copying

    • poses a threat to MNCs

    • may be duplicated in domestic markets

• consumers

  • increased choice

  • lower prices

    • increased competition

    • economies of scale

    • low cost = low price

    • modern and efficient production techniques

  • improved quality

    • new technologies

    • efficient practices

  • better living standards

    • employment opportunities

    • higher incomes

• business culture

  • people employed by MNCs may eventually leave job to start their own business due to:

    • saved money

    • developed skills

    • encouragement by MNCs

  • create culture of enterprise

  • changes in corporate culture

• tax revenues

  • MNCs pay taxes to national economy

  • pay for government spending

  • are often accused of paying as little tax as possible

  • avoiding tax on profits by transfer pricing

    • reduce tax burdens by recording transactions in other countries where tax rates are lower

  • MNCs are profit seeking and want to minimise tax liabilities

  • governments assess benefits of attracting investments by offering low taxes against loss of tax revenues

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