Growth of Multinationals (Edexcel IGCSE Business)
An introduction to multinationals
Spec point —
1.2.3
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A multinational company (MNC) is a business that is registered in one country but has manufacturing operations or sales outlets in different countries
- For example, Starbucks headquarters are in Washington, USA but they have 32,000 stores in 80 countries
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Factors such as globalisation and deregulation have contributed to the growth of MNC’s, especially in developing countries
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MNC’s choose locations based on factors such as cost advantages and access to markets
- 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
Benefits and drawbacks of multinationals
Spec point —
1.5.2· benefits of a business becoming a multinational • benefits to a country and/or economy where a multinational company is located • possible drawbacks to a country and/or economy where a multinational is located.
Benefits and drawbacks of multinationals
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Approximately 60,000 multinationals are responsible for around half of the global trade
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Many of the world's largest multinational corporations have their headquarters in developed countries such as the United States, Japan and Germany
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Increasingly, MNCs base some of their operations in China, one of the world's fastest-growing economies
- China is the headquarters of many growing multinational corporations, such as Huawei Technologies, Lenovo and Haier
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Benefits of operating as a multinational
| Advantage | Explanation |
|---|---|
| Low costs | - MNCs can access lower-cost labour and/or raw materials by moving to cheaper locations or exploiting economies of scale |
| Potential for high sales | - They have access to a large customer base with potential for high levels of sales |
| High profile | - Multinationals are well-know businesses whose products have a greater chance of becoming household names and achieving market dominance |
| Bypass trade barriers | - Multinationals can set up operations inside trade blocs or in countries that impose import tariffs or quotas |
| Low tax liabilities | - Multinationals can locate their head office in countries with low tax rates such as Ireland or Cyprus - This allows them to maximise profits to distribute as dividends to shareholders |
The drawbacks of being a multinational
Legal and tax complexities
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Different countries have varied tax rules and laws in areas including contracts, the environment and employment
- MNCs usually need to employ local legal and tax specialists to navigate these differences, increasing business costs
Public relations
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MNCs are often accused of sending jobs outside of the company’s home country or exploiting local workers, resources and laws in foreign countries
- Effective public relations can counter these accusations and emphasise the benefits the MNC brings to the countries in which it operates
Political instability
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Most MNCs locate headquarters in politically stable, developed countries but operate in less developed locations
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Sometimes the less developed country will experience political turmoil or corruption, which can disrupt business operations
- Careful risk management and plans for business continuity need to be developed
The impact of multinationals on stakeholders in host countries
Spec point —
1.5.2· benefits of a business becoming a multinational • benefits to a country and/or economy where a multinational company is located • possible drawbacks to a country and/or economy where a multinational is located.
The impact of multinationals on stakeholders in host countries
- Stakeholders are individuals, groups or organisations that have a direct or indirect interest in the outcomes of a particular development or business decision
- Multinationals can have a range of impacts on stakeholders in the countries in which they operate
Impacts of multinationals on stakeholders
| Stakeholder | Impact |
|---|---|
| Local residents | - Residents in countries with multinationals benefit from well-paid high-quality job opportunities and growth of other local businesses - MNCs provide training for their employees, improving their skills - E.g. Drinks company Diageo employs and trains 6,500 well-paid workers in African countries, including Tanzania, Cameroon and Nigeria - The presence of MNCs in an economy encourages entrepreneurship as citizens' skills and motivation to succeed are increased - In some instances, multinationals have been found to pay low wages, employ child labour and offer poor working conditions |
| Local businesses | - Local businesses grow and employ more workers to meet demand created by an MNC - MNCs may share knowledge with local suppliers and support them with funding to invest in new technology - E.g. Electronics manufacturer Samsung transferred patented technologies free of charge to support the growth and innovation of SMEs in South Korea |
| Local government | - MNCs may have to pay taxes and business rates to local councils and authorities - These funds may be reinvested back into the local economy to fund local amenities - E.g. Nissan's decision to locate in Sunderland, a city in the North-East of England, provided much-needed funds for the council to invest in infrastructure to support the growth of export businesses |
| National government | - MNCs output is recorded in the country it is produced in, so when exported, it has a positive impact on the country's balance of payments which benefits the government - E.g. Exports from MNCs located in Poland, such as Pfizer and Merck, make up around two-fifths of the country's total - MNCs may invest to improve infrastructure - Better roads, transportation and access to water and electricity help the economy and allow the MNC to operate efficiently - E.g. In exchange for market access for its MNCs, the Chinese government has invested more than $600 million in Costa Rican infrastructure, such as improvements to roads and sports venues, including its national football stadium - Multinationals have been accused of poor behaviour in the countries in which they operate - Causing environmental damage - Paying minimal tax revenue - Lacking accountability to the countries in which they operate - Once resources have been used, they leave the country to locate elsewhere, causing unemployment |
Exam Hint A common error is to confuse stakeholders with shareholders. A stakeholder is any individual or group with an interest in a businesses operations, whereas shareholders are specifically stockholders who own a part of a business.
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