Impact of MNCs on the national economy - 4.4.1

Multinational Corporation (MNC) - is a business that is based or registered in one country but has outlets/affiliates or does business in other countries.  Such companies have offices and/or factories in different countries (typically emerging economies or undeveloped countries due to cost savings) and usually have a centralised head office (typically in western markets e.g. UK and US) where they coordinate global management.

Balance of payments - A record of a country's trade/transactions with the rest of the world. A surplus is when the sum of exports of goods/services/investment income/transfers is greater than imports. A deficit is when the sum of exports of goods/services/investment income/transfers is less than imports.

Foreign direct investment (FDI) - is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased.

Transfer pricing - Two companies that are part of the same MNC use internal pricing to artificially transfer profits from high to low tax countries.
 

Characteristics of a MNC include;

• Dominant players in the market
• Complex structures, multi-site and multi-product
• Grown through organic and inorganic growth
• Heavy investment in R&D
• Globally recognised brands

Globalisation is one of the major reasons for the growth in MNCs. A number of businesses in order to grow and develop have had to take on a global or internationak perspective, MNCs have also caused further globalisation.

MNCs impact the national economy in the following ways;

• FDI flows
• Balance of payments
• Technology and skills transfer
• Consumers
• Business culture
• Tax revenues and transfer pricing

FDI Flows

 Advantages of MNC's on FDI flows;

• The costs associated with setting up operations abroad is likely to be substantial.  
• FDI will usually result in employment benefits such as job creation for the host country as most employees will be locally recruited. These benefits may be relatively greater given that governments will usually try to attract firms to areas where there is relatively high unemployment or a good labour supply.
• An injection into the host economy through economic growth (GDP). MNCs add to the host country GDP through their spending, for example with local suppliers and through capital investment.
• Generation of revenue for the local government

However, potential disadvantages of MNC's on FDI Flows include; 

• Following initial investment, a lot of the profits are likely to flow back to the domestic economy of the MNC.
• Profits made by the MNC may try to avoid the tax system. Tax avoidance can result in fewer benefits from FDI than had been expected.

Balance of Payments 

 Advantages of MNC's on Balance of payments;

• FDI, such as an MNC, represents a flow of investment into the host country and will therefore improve the BoP
• Exports sold from the MNC will also represent an inward flow of cash, contributing to the BoP. 
• Inward investment will usually help a country's balance of payments situation. The investment itself will be a direct flow of capital into the country and the investment is also likely to result in import substitution and export promotion. Export promotion comes due to the multinational using their production facility as a basis for exporting, while import substitution means that products previously imported may now be bought domestically.

 However, potential disadvantages of MNC's on Balance of Payments include;

• If materials and services are imported to support the MNC in the host country, this represents an outward flow and will give a negative impact on the BoP. 

Technology and Skills transfer

 Advantages of MNC's on technology and skills transfer;

• New technologies and skills will be introduced to the host economies, this can lead to a better educated and innovative workforce that allows the country to become more competitive in the global market.
• Collaborative work between countries to further development
• Spread of technology and skills across sectors and to domestic companies

However, potential disadvantages of MNC's on technology and skills transfer include;

• This may lead to "brain drain", where newly highly skilled and qualified workers that benefitted from the MNC may choose to emigrate out of the country in the search for better work. This leaves the nation with reduced levels of highly skilled workers.

Consumers 

Advantages of MNC's on consumers;

• Wider choice of goods and services
• Access to global brands
• Better quality products
• Lower costs products with higher quality than local brands. This is particularly true if the MNC has glocalised the product. 

However, potential disadvantages of MNC's on consumers include;

• Losing local and more traditional businesses. This could lead to bad publicity on the MNC as it gains the reception of ruining domestic businesses/jobs and so may not be welcomed as well by consumers who may cause sales revenue to not increase like they had expected. 

Business culture

Advantages of MNC's on Business culture;

• May introduce more aggressive cultures based on a profit motive. Typically a MNC business culture is highly professional with its focus on growth, profit, efficiency and quality. This will benefit an emerging economy as the MNC brings with it a consistent and professional way of working which will ultimately be learnt by domestic businesses.
• Traditional businesses may be more likely to be family based 

However, potential disadvantages of MNC's on business culture include; 

• Some MNC's have shown to operate in unethical ways, with a culture that may bring more harm than good to overseas markets in which they are operating. For example, in December 2010 the British defence giant British Aerospace was fined £28m for bribing official in Tanzania when trying to get the local government to purchase a military radar system.

Tax revenue 

Advantages of MNC's on Tax revenue;

• Taxes paid within the host country will boost the governments revenue allowing for greater spending on public services such as health care and infrastructure 

However, potential disadvantages of MNC's on Tax revenue includes;

• However, MNC's may spread their tax liabilities amongst a number of countries many of which will have different rates of tax and so an MNC will wish to minimise its tax liability. For example through transfer pricing where MNC manipulates profits between subsidiaries in order to minimise tax liability.