Are multinationals a force for good or should they be controlled?

benefits that multinationals bring to oversea countries, potential negative impacts of multinationals on oversea countries, can multinational firms be controlled?

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Multinational corporations are businesses which are active in more than one country. They might have distrubution outlets or factories abroad, or they may offer services which are brought by organisations or people located in other countries

Multinational Corporations (MNCs)

  • MNCs are businesses that operate or have assets in more than one country. they are sometims described as transnational corporations (TNCs) or multinationals enterprises (MNEs)
  • MNCs have offices or factories in different countries and usually have a centralised head office where they co-ordinate global management- this is where they are based. the other countries where they operate are described as host countries
  • MNCs can be very large organisations with turnover exceeding the GDP of many countries. But not all MNCs are large, powerful corporations; many are small scale by comparision
  • Most of the largest MNCs are American, Japanese or European but countries such as India & china now have large MNCs which are growing rapidly
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MNCs and controversy

  • many MNCs have been accused of abusing their position and have attached great criticism of their actions
  • others see them as a force for good & the driving force behind economic growth
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For and against

The case against MNCs

  • they use their size & power to exploit employees and host economies
  • they damage the environment
  • they harm the economic prospects of developing countries
  • they may leave the host country if they can find cheaper, suitable labour elsewhere

The case for MNCs

  • they create employment & wealth for their own & host economies
  • they raise incomes
  • they help poor countries to develop
  • they reap economies of scale & cater for mass markets
  • employees acquire scarce skills

Both viewpoints have some foundation in reality. All the points made above apply to some businesses in some places. But not all of them are true for all MNCs. And there could be many valid arguments as to the extent to which these positive & negative trends affect host countries

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Why have MNCs expanded?

MNCS have been around for a lng time but they have expanded significantl in recent decades. there are many reasons. But their expansion has been made easier by new trade blocs, market liberalisation & the WTO. also the expansion of India, the opening up of CHina & the fall of communism in Europe have all encouraged spread and growth of MNCS. Advances in travel & tech have made it much easier to organise & co-ordinate business operations around the world. Email & video conferencing have made some travel obsolete. Such developments cut the costs of managing MNCs.

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MNC objectives

To access new markets

  • For many MNCs, domestic markets are saturated. future growth & rising profits must come from expansion overseas where rising incomes can be tempting
  • entering new markets can form an extension straegy for the product life cycle. products which are in maturity or even decline can take off again and continue to yield profit in new markets

To reduce costs

  • there may be economies of scale leading to lower unit costs & enhanced competitive advantage
  • moving overseas to produce can reduce input costs. unskilled & semi-skilled labour may be cheaper, more available and less regulated
  • proximity to markets can also be significant in reducing transportation costs
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To control resources

  • many busiesses have to follow the resources to extract & process them
  • companies that rely on a secure, and preferably cheap, source of raw materials are likely to expand where they are found. examples include minerals, petrochemicals & many other commodities,e.g. palm oil, which is vital input for food and cleaning products. del mote has its own pineapple plantations in Indonesia

To take advantage of gov incentives

  • many govs offer substantial incentives to attract MNCs to their countries
  • these can take the form of grants, cheap loans, tax breaks & subsidies
  • these effectively cut production costs

To get round trade barriers

  • businesses that which to penetrate markets to avoid tariffs/ quotas will ofte move production into that area
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Benefits that Multinationals bring to overseas cou

Multinationals are often welcomed to overseas countries as they can bring many benefits with them. These benefits apply to a range of stakeholders including the people, the gov, other businesses & the economy as a whole

ALL economies, rich & poor can benefit from the actions of MNCs. don't forget that the majority of MNC investment still goes from 1 developed economy to another- its not all about the poorer / less developed countries. the biggest flows of FDI are between North America & Europe

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MNC benefits

Employment

MNCs create employment in a number of ways

  • The intial investment for location in a host country creates employment. buildigs & equipmet may be needed, creating work for local people
  • once operations commence a workforce will be needed
  • local businesses may be involved in supplying or servicing the MNC & see an icrease i business, taking on more workers
  • all of the local people who have found new employment will spend some of their income with local businesses. this increases local demand & in turn creates more jobs
  • there is a positive local multiplier effect
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Wages

Take care here. do not confuse low wages with exploitation of the workers. wage levels must be considered in comparision with wages elsewhere in the host countries

  • cheap labour is often important but some MNCs pay higher than average wages in the host country
  • there are several reasons for this: increased motivation, increased productivity, lower staff turnover, wider choice of workers
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Skills and techology transfer

  • MNCs may require skilled workers & train up the local workforce
  • they may acquire useful skills that will benefit them if they move on
  • locals trained as managers may learn new business techniques
  • MNCs often bring new technologies, techniques & methods which can be learnt & adopted in the host country
  • new work practises & technology help the host country to become more competitive & grow- this is called technology transfer
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Effect on the wider economy

  • increased employment & wages should enlarge the tax base & increase gov revenue
  • if benefits were paid to the unemployed, this bill may decrease
  • profits of the MNC can be taxed
  • increased gov expenditure can benefit the wider population & the economy is general
  • exports may increase, improving the balance of payments

Corporate Social Responsibility (CSR)

  • all companies will claim to have some kind of CSR policy in place
  • this may be centred on the workforce, the local community or the local enivronment
  • it may include better pay & conditions, improvements to infrastructure, use of sustainble resources & environmental protection
  • those companies that take CSR seriously can greatly benefit the communties they operate in
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MNCs: the downside

Negative impact of MNCs on overseas countries

Critics argue that MNCs have a negative impact on the host country that outweighs any possible benefits. MNCs are driven by an obligatin to their owners & shareholders to make a profit. They may use their size & influence to bully host governments to offer benefits that are costly. They may get away with dubious, unethical & sometimes illegal behaviour towards their employees, the local community & the wider economy

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Employment

  • wages can be low & working conditions poor. sweatshops are sometimes found
  • health & safety conds are often poor & regulations may be ignored
  • child labour may be used & exploited

Skills & technology transfer

  • MNCs may not train local workers to a high level
  • skills may be brought in by hiring expat workers; locals may only get the unskilled jobs
  • managers are often not recruited locally
  • R&D facilities may be kept in the home country, reducing opportunties to develop skills/ tech transfer
  • many MNCs enter another country simply to access a new market, so onyl sales & marketing facilities are established
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Effects on the local community

  • local busiesses suffer at the hands of the MNCs that reduce their market share
  • they mass-poduce standardised products, threatening national product variety
  • they act as agents for cultural imperialism, which replaces & even destroys the native culture with unwanted products & values
  • MNCs cause great damage to the enirvonment by their processes & the transportation of their products. this damage can be short/ long term & the resulting situation may be unsustaiable

Cultural imperialism is the practise of promoting, distingushing, seperating, or artifically injecting the culture of 1 society into another. it is usually the case that the former belongs to a larger, economically / military more powerful nation & the latter belongs to a smaller, less important one

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putting profit first

effects on the wider economy

  • profits can be repatriated to the home country
  • taxation can be reduced / avoided by transfer pricing
  • MNCs are likely to take whatever incentives are on offer, stay for a while & then move to the newest low cost location in another country, leaving behing unemployed workers & a weakened economy
  • they encourage a so-called 'race to the bottom'
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Transfer pricing occurs when one part of an MNC in one country transfers (sells) goods/ services to another part in another country. The price charged is the 'transfer price'. This may be unrelated to costs incurred & can be set at a level which reduces / cancels out profit 7 hence the total tax paid by the MNC

Race to the bottom a phrase used to describe the way MNCs move to the country that offers the lowest tax rates or the weakest environmental controls. In order to hold onto their MNCs each country will offer them successively more advantageous trms at the expense of their own economy or environment, until the potential benefits of having a MNC are outweighed by the costs.

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Are MNCs a force for good or bad?

  • The problem is that almost every MNC that is assumed to be good can also be accused of doing something that can be called bad
  • on the other hand many so-called villains contribute to impotant social programs or do something that can be called 'good'
  • in reality, it is not possible to be black & white & there are undoubtedly many shades of grey. some MNCs do many things that are not usually associated with either CSR or ethical business practise. Some do better & contribute considerably to growth & wellbeing in their host countries

If you are asked about this in the exam it is important to understand both sides of the argument & present a balanced answer with examples

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Are MNCs a force for good or bad?

GOOD

  • creates FDI
  • brings jobs
  • regional multiplier effect
  • skills and technology transfer
  • increased demand for local businesses/ suppliers
  • increased tax revenues- gov has more revenue to spend
  • export earnings
  • other MNCs may follow
  • CSR policies bring benefits
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Are MNCs a force for good or bad?

Bad

  • illegal & unethical behaviour
  • exploitation of labour- low wages, poor working conds, lack of health & saftey, child labour
  • environmental degradation/ pollution
  • unsustainable practises
  • tax avoidance
  • 'race to the bottom'
  • cultural inperialism
  • local businesses pushed out
  • profits repatriated & not put back into local economy
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Control is difficult

Can MNCs be controlled?

  • by their very nature MNCs are hard to control because they transcend national boundaries
  • there is no such thing as a 'world government' or 'world court' that can prevent MNCs from doing what they want or force them to modify their behaviour
  • there is a range of factors which can influence MNCs to a certain event

In practise, keeping MNCs under control often requires a combination of factors. Public opinion can lead to the creation of pressure groups which may mount media campaigns to persuade the MNC to modify its actions, or persuade Governments to intervene, or bring about legal proceedings. However the effectiveness of these factors in controlling MNCs varies according to circumstances

Pressure groups are organisatons that attempt to influence public policy & especially Government legislation, regarding their particular concerns & priorties

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key considerations

Factor that affect the ability to control MNCs

  • size of MNC: larger companies can be less susceptible to outside pressure. They can afford better publicists, PR agents & legal teams
  • Size and importance of the host government: China is likely to be much more effective in controlling MNC behaviour than say, Zambia or Madgascar. Some governments are desperate for FDI and overlook low pay & working conditions.
  • Importance of the MNC to the host country: smaller/ emerging economies may be reluctant to confront a company that may be important to it both economically and in terms of employment. National objectives may override concern for local communties
  • Strength of public opinion: the level of public awareness, the number of people who are concerned and the depth of their feelings all affect the degree of influence that public opinion can have.
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  • The degree to which public opinion matters to the MNC: a company that relies on consumers for its sales is more likely to be influenced by tactics such as protests and boycotts than one that supplies other businesses.
  • Social media/ internet: can work both ways! Businesses use it to promote their products & to boost their own image
  • The strength and vigour of a pressure group: some prssure groups are more effective than others in their campaigns. Greenpeace is renowned for its direct actions & headline grabbing stunts

Attempts to control MNCs have had some success. They have made itimperative for many MNCs to think about the impact of their operations. Many are making some attempt to limit the negative impact they have on people who have little power to protect themselves. However, many MNCs simply make a show of concern & set up programmes that have a v.small impact on the people affected. Constant vigilance is required to exposure the facts & counter exaggerated caims, on both sides

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more examples. Factors that can control behaviour

Public opinion

  • the way people feel about a company can influence its actions. If the public decide not to buy a certain product/ brand because they disapprove of the company's actiosn it can persuade them to change policies.

Example. The boycott of Nestle is the world's longest running. It began in 1977 in response to aggresive marketing of Nestle baby milk formula in poorer countries. Public concern over phone hacking by the media led to the closure of the News of the world


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Pressure groups

  • An organised group that seeks to influence either the political & legal process/ whole indsutries or inidividual companies. Pressure groups can organise campaigs, protests or even direct action

Example. Greenpeace campaigns for enivronmental causes. Action on smoking and health (ASH) is a campaigning public health charity that works to eliminate the harm caused by tobacco. Tescopoly is concerned witht the negative impact of supermarkets' power & Tesco in particular

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Social Media and the Internet

  • More and more campaigns aimed at affecting the behaviour of MNCs make use of the internet & sites such as Facebook & Twitter. These speed up the flow of information & can make the actions of groups & individuals much more effective

Example. SOHO is an organisation which investigates multinational corporations & the consquences of their activities for people & the environment around the world. It uses twitter, facebook & youtube to spread its information & campaigns

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The media

  • Newspapers & TV programmes can mount campaigns to mobilise public opinion & affect MNC's behaviour

Example. The BBC Panorama programme investigated working conditions in Primark's supply chain

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Self-regulation

  • Many MNCs follow a code of conduct which sets their own standards of behaviour. This may be because of altruism or to prevent adverse criticism

Example. Multinational seed companies, Emergent Genetics & Proagro, have launched a scheme of incentives & disincentives to persuade their suppliers to discontinute the use of child labour on their farms

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Government Control & Regulation

  • Governments can set up regulatoru bodies to monitor the behaviour of businesses or industries. They can have advisory/ legally enforceable powers. Governments can insist that MNCs form joint ventures

Example. In the UK the Competition Commission and the OFT (Office of Fair trading) have far reaching powers to investigate a business or industry. For a time, China insisted on joint ventures for FDI projects

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Legal enforcement

  • All countries have legal codes, i.e. laws, and MNCs that break them are subject to prosecution

Example. NAtional Minimum Wage Act, Health and Safety at Work acctm & similar laws in other countries

Shareholder Groups

  • Shareholders who are the owners of a business can try affect an MNC's behaviour by protest or votes at the AGM

Example. BP shareholders mounted a rebellion & protest at BP's AGM over its plans for Canada's oil sands.

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Comments

Ezio

Hi, your notes are very detailed and helpful :) Do you have notes for Unit 4a: making business decisions? thanks!!

Anna

would of given you 5 stars but it wouldnt let me. Thank you so much this is amazing 

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