4.4 Global companies and industries (MNC's)

Multinational company

A company that has branches or manufacturing plants in several countries

What has contributed to the growth of MNC’s?

• Globalisation

• Deregulation

What is impacted by MNCs

• Employment

• Wages

• Working conditions

• Job creations

• Local businesses

• Local communities and the environment

Advantages of MNCs on employment, wages and working conditions

• It leads to job creation in local communities

• MNCs may offer more competitive wages than local businesses

• MNCs may offer better working conditions than local businesses

Disadvantages of MNCs on employment, wages and working conditions

• MNCs may exploit local workers if employment regulations are weak or not enforced

• MNCs tend to establish production facilities in regions where labour costs are lower - and relatively low wages are paid

• MNCs may not create jobs for local workers, as they may relocate workers from their own country to work abroad

Advantages of MNCs for local businesses

• MNCs boost the local economy by creating opportunities for local businesses

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

  • MNCs may utilize the services of local businesses

• There is a potential opportunity for joint ventures and partnerships with MNCs that seek to gain knowledge of the local market

  • Joint ventures means that local firms learn new skills and production methods, allowing greater efficiency

Disadvantages of MNCs on local businesses

• Higher competition

  • The MNC could be able to produce at a lower cost and compete with local businesses - and those businesses may lose customers

• MNCs reduce the supply of workers available to local businesses if they offer better pay and working conditions

  • Local businesses may need to offer higher wages to compete

Advantages of MNCs for local communities and the environment

• Local residents may benefit from job opportunities and growth

• MNCs often invest in improving infrastructure

  • Better roads, transportation and access to water would benefit the local community

• Taxes are paid to local communities, which can be reinvested

Disadvantages of MNCs for local communities and the environment

• May cause damage to local habitats/environments during production

• May leave unattractive production facilities behind

  • Communities wont like this, and it can result in a bad brand image

Foreign direct investment

When a business purchases non-current assets in a local economy

Impact of MNCs on the national economy

• FDI flows

• Balance of payments

• Technology and skills transfer

• Consumers

• Business culture

• Tax revenues and transfer pricing

FDI flows and its impact on the national economy (MNCs)

• The initial lump sum of money that enters the country to pay for the investment

  • This money enriches local firms or citizens who now have more money to spend

  • If the money is reinvested - it can help generate new jobs and boost economic growth

• However, the profit made from this may be repatriated, so money may not be reinvested

  • Assets are also held by a foreign firm, which is less secure as it can be withdrawn

Impact of MNCs on the Balance of payments

The inflow of FDI can cancel account the current account deficit (where imports > exports)

• Any goods exported by the firm improves the current account

However, the FDI may be withdrawn, which further worsens the balance of payments, and since it is a large company that can be withdrawing from a small economy, the effects will be larger than a smaller company withdrawing.

• If the firm imports, then the current account may worsen

Impact of MNCs on technology and the transfer of skills to the economy

When an MNC opens facilities in a new nation, the skills and methods may be new to the country.

The local businesses can copy these methods, which is likely to improve efficiency. The access of new tech can be the key to unlocking economic development, and skills can be developed among the workforce.

Impact of MNCs on consumers in the host country

• A wider choice of goods

• Lower prices, if cost advantages are passed down

• Better quality

• Improved living standards due to job creation

However, in the long run:

• MNCs can push domestic firms out the market, meaning less choice

  • This can lead to exploitation of consumers as there is less choice

Impact of MNCs on tech and skills transfer

• MNCs can bring new technologies and skills to local firms

  • This improves efficiency and productivity

Impact on business culture by MNCs

• Domestic firms may be influenced by the business culture

  • This can lead to ideas being copied, which can mean improvements in efficiency

• There’ll also be greater entrepreneurship

  • This boosts economic growth

• However, MNCs may demonstrate unethical behaviour, and exploit using their company culture

  • Poor working conditions shown by the MNC can encourage local firms to do the same

Impact of MNCs on tax revenue and transfer pricing

• MNCs provide tax revenue for the government, in which the government can reinvest

• However, MNCs seek to maximise profits and will try to reduce their tax liabilities

  • Transfer pricing may occur, where profits are moved out the country to tax havens

  • This is a method of tax avoidance, and means less tax is paid

Transfer pricing

a technique used by multinationals to adjust the internal prices paid by one branch of their operations to another as a way of minimising the total tax bill paid by the company.

Business ethics

This is what concerns the morality of business decisions and actions

What needs to be considered in terms of ethics

• Marketing considerations

• Supply chain considerations

• Environmental considerations

• Stakeholder conflicts

Stakeholder conflicts

A stakeholder is an individual/group that has an interest in or can be affected by a business

• Different stakeholders have different levels of power, and also have different priorities. This means the potential to create conflict is higher

Types of stakeholder conflicts

• Management vs workers

• Management vs owners

• Company profits vs resource depletion

Stakeholder conflict - Manager vs workers

Management may be more focused on output or reducing costs than on worker safety, or creating a positive working environment

• Workers want to be safe and have a comfortable environment

• If managers focus on output, revenue, costs etc too much, then working conditions may be sacrificed

Stakeholder conflict - Manager vs owners

• The owners (shareholders) want management to maximise the business’s profits

• They want them to be less interested in the mental wellbeing of employees

• Management works daily with employees, and will often sacrifice some profit in the interest of looking after workers mental/physical health

Stakeholder conflict - company profits vs resource depletion

• The owners (shareholders) aim to maximise output, so as to generate increasing levels of output

• However, higher output requires more rapid use of natural resources and generates more environmental damage

Ethical issues on pay and working conditions

MNCs often operate in countries that have different employment regulations and working conditions

• MNCs need to decide if they will comply with the regulations of their base location, or the other country

Exploitation of workers

• This can be done by providing lower wages, particularly in less economically developed countries, wages should cover living expenses

Poor working conditions

• This is usually as a result of cutting costs

• Factories and warehouses with poor working conditions are referred to as sweatshops

Child labour

Working conditions that can be acceptable

• Cramped and hot, where profit margins are too low to allow space and air conditioning

• Longer working hours, perhaps 12 a day

• Physically demanding (bending over alot for example.)

Working conditions that are unacceptable

• Dangerous conditions with fire and machinery risk. Perhaps even chemical pollution

• Forcing people to work long hours, possibly by threat of dismissal

• Little pay for jobs which are physically demanding.

Environmental considerations - Business ethics

• Emissions

• Waste disposal

Emissions - (env considerations) (Business ethics)

For products that produce emissions, they are regulated in all developed countries. Consumers may also be attracted to products with lower emissions

Issues arise when considering who measures emissions. Although independent measures take place, if the firm has to pay an independent tester, the tester will be tempted to adjust results with the hopes of securing a long term customer.

• Emissions can cause health impacts on local communities

Waste disposal - (env considerations) (Business ethics)

Products produced by business face problems when their life is complete.

Developed countries tend to have regulations on this.

However, less developed countries tend to have weaker regulation on waste and then firms can exploit this because waste can be disposed in these countries at higher costs, which is unethical

Supply chain considerations (Business ethics)

The major issues associated with this are exploitation of labour and child workers

• Child labour

  • Some MNCs have manufacturing facilities in countries where child labour is common

  • This can face backlash causing a bad brand reputation

• Exlploitation of labour

  • Exploitation of labour can be low wages, or poor working considerations

  • MNCs are under pressure from governments, customers and institutions to take action to ensure their products do not involve exploitation

Marketing considerations (Business ethics)

• Misleading product labelling

• Inappropriate promotional activites

Misleading product labelling

Labelling must comply with the regulations of the country

• Information provided must be correct and must not contain any false info

  • This includes size, content, features, and the function

Inappropriate promotional activities

• Promotional activities must not be offensive or illegal

  • It should not disrespect ones culture for example.

Controlling MNCs

Both governments of LEDCs and MEDCs find it difficult to manage MNCs.

• MEDCs often benefit from the profits of MNCs, and these firms carry significant political influence on gov policy

• LEDCs often have key decision makers, who recieve payment for access to the country’s resources.

Why should MNC activities be controlled?

To enhance the benefits and reduce the disadvantages

Factors to consider when controlling MNCs

• Political influence

• Legal control

• Pressure groups

• Social media

Political influence and controlling MNCs

Political institutions enforce laws and regualtions that a business must adhere to

• MNCs are often able to exert pressure on national governments through lobbying to create favourable conditions for their business

• MNCs in developing countries can influence governments, as they mey establish deals that are beneficial to politicians

Legal control and MNCs

Governments can use legislation and regulations to control MNC operations

• Having clear rules ensures that there is no exploitation, and it also can be seen as attractive for MNCs, as clear rules mean higher stability

Pressure groups

Organisations that operate to influence company and public policy in the interest of a particular cause

Pressure groups and MNCs

Pressure groups can name and shame, take direct action, or protest. They can also lobby meaning issues are taken directly to the government

Social Media and MNCs

MNCs can use Social media to their advantage to spread awarensss and promote their business on a global scale.

• However, social media enables stakeholders to freely share information about unethical behaviour.

• MNCs are forced to address the issues raised on social media, as there’s high public exposure

  • Some countries have limited social media access which means the overall effect may be limited