Benefits & Drawbacks to Countries of Hosting MNCs | Business Studies for GCSE/IGCSE - Year 11 PDF Download

Benefits to a Country of Hosting an MNC

• Numerous governments welcome the establishment of multinational corporations (MNCs) within their borders due to the broader economic advantages they bring, but their presence can also yield adverse outcomes.
• The overall impact is determined by the level of regulation governing their activities and the conduct of individual companies.

Diagram: Impact of MNCs on the National Economy

Foreign Direct Investment (FDI)

• When multinational corporations (MNCs) invest in a country through FDI, it results in an influx of capital into that nation.
• This capital benefits local firms and citizens, who then have increased spending power within the economy.
• If this capital is reinvested domestically, it can stimulate job creation and foster economic growth.

Balance of Payments

• MNCs can contribute to improving a country's balance of payments through FDI inflows.
• Any goods and services exported by MNCs generate additional revenue for the country's balance of payments.
• This is particularly advantageous when MNCs export rare and valuable raw materials, such as cobalt.

Technology and Skill Transfer

• MNCs have the capability to introduce new technologies and skills to local businesses, enhancing efficiency and productivity.
• This, in turn, enables domestic businesses to enhance their competitiveness in both domestic and global markets.

Consumers

• Customers in countries hosting MNCs often enjoy several benefits, including improved quality, a broader range of goods and services, and potentially lower prices if cost advantages are passed on.
• The presence of MNCs can lead to improved living standards through job creation, reduced unemployment, and increased incomes.

Business Culture

• Domestic businesses may adopt the business culture of MNCs, impacting practices and approaches.
• For instance, in the 1990s, European businesses embraced working practices from Japanese counterparts like Nissan, leading to more open workplaces and the adoption of concepts such as Kaizen (continuous improvement).
• Encouragement of Entrepreneurship: MNCs may foster a culture of entrepreneurship, which can contribute to overall economic growth.

Tax Revenue

• Host countries stand to gain significant tax revenue from MNCs.
• Governments can utilize this revenue to invest in enhancing public services and infrastructure.

Limitations for a Country of Hosting an MNC

• Multinational corporations can also pose certain challenges, which governments may find difficult to address.

Asset Loss

• Assets from the home country are now under foreign ownership, potentially leading to funds being reinvested abroad instead of in the local economy.

Balance of Payments

• MNCs can adversely affect the balance of payments by importing raw materials or equipment, resulting in an outflow of funds.
• Profits repatriated by MNCs to their home countries also contribute to money leaving the host country.

Consumer Impact

• Over time, MNCs may dominate the market, reducing consumer choice and potentially leading to exploitation with higher prices and lower-quality products.

Business Culture

• MNCs may exhibit unethical practices and foster a culture of exploitation, as seen in cases like the garment industry in Bangladesh, where poor working conditions are overlooked.

Transfer Pricing

• MNCs often engage in transfer pricing to maximize profits and minimize tax liabilities by shifting profits to countries with lower tax rates, thereby reducing tax revenue for the host country.