MNCs

Meaning
Multinational or transnational corporations (MNC/TNC) are businesses with a
headquarters in one country, but with business operations in a number of
others.
There are numerous examples of multinational corporations, car manufacturers
like Ford, GM, Toyota, Honda and Volkswagen, oil companies like Shell, Chevron
and Exxon Mobil, technology companies like IBM, Dell, Microsoft and Hewlett
Packard and food and drink companies such as Coca Cola, Pepsico, Kraft and
McDonalds.

Why the drive to become multinational?

There are some significant drivers to become multinational. Some of these
include:
1. Reduced transport and distribution costs: By producing goods and
services locally or regionally, firms can save considerable transport costs
2. Avoidance of trade and non-tariff barriers: By locating in overseas
markets, firms may avoid tariffs, quotas and other forms of protectionism.
For instance, Asian firms invested in large numbers in the UK in the 1990s
to allow then to export to the European Union and to compete with
European suppliers without a cost disadvantage.
3. Access to raw materials: by locating overseas, firms can ensure access to
raw materials at reduced prices.
4. Other cost advantages: for example lower labour, energy and property
costs.
5. Increased sales turnover: expanding overseas can provide access to large
markets, including those of the developing world such as China and other
Asian markets.
6. Economies of Scale: Increasing scale of operations can lead to both
internal and external economies of scale and spreading of risk.
Overspecialization is potentially disastrous for a business. However,
 multinationals have other markets to compensate, if one market is
suffering decline or subject to political instability or natural disasters.
7. First Mover Advantage: Getting into markets first provides marketing and
distribution advantages, e.g. Tesco chose to expand their retail business
into Eastern Europe such as Hungary and Poland, allowing them to acquire
market share and customer loyalty before other competitors appear.
8. Other Marketing advantages: Overseas brands may have an exclusive
desirability allowing premium prices to be charged.

However, some firms have found expansion into overseas markets problematic
because of:
 Cultural differences which may mean products and services need to be
adapted or will not sell at all, e.g. dairy products in Asian countries.
 Lack of experience in the local market - no core competence
 Language difficulties, e.g. Vauxhall Nova translated as 'no go' in Spain
 Little brand awareness.
 Currency fluctuations and instability
 Political instability
 Local opposition or pressure group activities, e.g. over low rates of pay or
use of child labour e.g. Nike and BAT in Burma/Myanmar
 Possible legal restrictions on access - e.g. must find a local partner to
operate.
 Limited control over supply and distribution chains
 Greater set-up costs
Impact of multinational companies on the host country
Clearly, multinational corporations can provide developing countries with
critical financial infrastructure for economic and social development. However,
these institutions may also bring with them relaxed codes of ethical conduct
that serve to exploit the neediness of developing nations, rather than to provide
the critical support necessary for countrywide economic and social
development.
When a multinational invests in a host country, the scale of the investment
(given the size of the firms) is likely to be significant. Indeed governments will
often offer incentives to firms in the form of grants, subsidies and tax breaks to
attract investment into their countries. This foreign direct investment (FDI) will
have advantages and disadvantages for the host country.
Advantages
The possible benefits of a multinational investing in a country may include:
 Improving the balance of payments - 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.
 Providing employment - FDI will usually result in employment benefits 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.
 Source of tax revenue - profits of multinationals will be subject to local
taxes in most cases, which will provide a valuable source of revenue for
the domestic government.
 Technology transfer - multinationals will bring with them technology and
production methods that are probably new to the host country and a lot
can therefore be learnt from these techniques. Workers will be trained to
use the new technology and production techniques and domestic firms
 will see the benefits of the new technology. This process is known as
technology transfer.
 Increasing choice - if the multinational manufactures for domestic markets
as well as for export, then the local population will gain form a wider
choice of goods and services and at a price possibly lower than imported
substitutes.
 National reputation - the presence of one multinational may improve the
reputation of the host country and other large corporations may follow
suite and locate as well.
Disadvantages
The possible disadvantages of a multinational investing in a country may
include:
 Environmental impact - multinationals will want to produce in ways that
are as efficient and as cheap as possible and this may not always be the
best environmental practice. They will often lobby governments hard to
try to ensure that they can benefit from regulations being as lax as
possible and given their economic importance to the host country, this
lobbying will often be quite effective.
 Access to natural resources - multinationals will sometimes invest in
countries just to get access to a plentiful supply of raw materials and host
nations are often more concerned about the short-term economic benefits
than the long-term costs to their country in terms of the depletion of
natural resources.
 Uncertainty - multinational firms are increasingly 'footloose'. This means
that they can move and change at very short notice and often will. This
creates uncertainty for the host country.
 Increased competition - the impact the local industries can be severe,
because the presence of newly arrived multinationals increases the
competition in the economy and because multinationals should be able to
produce at a lower cost.
 Crowding out - if overseas firms borrow in the domestic economy this may
reduce access to funds and increase interest rates.
 Influence and political pressure - multinational investment can be very
important to a country and this will often give them a disproportionate
influence over government and other organisations in the host country.
Given their economic importance, governments will often agree to
changes that may not be beneficial for the long-term welfare of their
people.
 Transfer pricing - multinationals will always aim to reduce their tax liability
to a minimum. One way of doing this is through transfer pricing. The aim
of this is to reduce their tax liability in countries with high tax rates and
increase them in the countries with low tax rates. They can do this by
transferring components and part-finished goods between their
operations in different countries at differing prices. Where the tax liability
is high, they transfer the goods at a relatively high price to make the costs
appear higher. This is then recouped in the lower tax country by
transferring the goods at a relatively lower price. This will reduce their
overall tax bill.
 Low-skilled employment - the jobs created in the local environment may
be low-skilled with the multinational employing expatriate workers for the
more senior and skilled roles.
 Health and safety - multinationals have been accused of cutting corners
on health and safety in countries where regulation and laws are not as
rigorous.
 Export of Profits - large multinational are likely to repatriate profits back
to their 'home country', leaving little financial benefits for the host
country.
 Cultural and social impact - large numbers of foreign businesses can dilute
local customs and traditional cultures. For example, the sociologist George
Ritzer coined the term McDonaldization to describe the process by which
more and more sectors of American society as well as of the rest of the
world take on the characteristics of a fast-food restaurant, such as
increasing standardization and the movement away from traditional
business approaches.
Role of MNCs
1. Filling Savings Gap: The first important contribution of MNCs is its role in
filling the resource gap between targeted or desired investment and
domestically mobilized savings. For example, to achieve a 7% growth rate of
national output if the required rate of saving is 21% but if the savings that can
be domestically mobilized is only 16% then there is a ‘saving gap’ of 5%. If the
country can fill this gap with foreign direct investments from the MNCs, it will
be in a better position to achieve its target rate of economic growth.
2. Filling Trade Gap: The second contribution relates to filling the foreign
exchange or trade gap. An inflow of foreign capital can reduce or even remove
the deficit in the balance of payments if the MNCs can generate a net positive
flow of export earnings.
3. Filling Revenue Gap: The third important role of MNCs is filling the gap
between targeted governmental tax revenues and locally raised taxes. By taxing
MNC profits, LDC governments are able to mobilize public financial resources
for development projects.
4. Filling Management/Technological Gap: Fourthly, Multinationals not only
provide financial resources but they also supply a “package” of needed
resources including management experience, entrepreneurial abilities, and
technological skills. These can be transferred to their local counterparts by
means of training programs and the process of ‘learning by doing’.
Moreover, MNCs bring with them the most sophisticated technological
knowledge about production processes while transferring modern machinery
and equipment to capital poor LDCs. Such transfers of knowledge, skills, and
technology are assumed to be both desirable and productive for the recipient
country.
5. Other Beneficial Roles: The MNCs also bring several other benefits to the
host country.
(a) The domestic labour may benefit in the form of higher real wages.
(b) The consumers benefits by way of lower prices and better quality products.
(c) Investments by MNCs will also induce more domestic investment. For
example, ancillary units can be set up to ‘feed’ the main industries of the MNCs
(d) MNCs expenditures on research and development (R&D), although limited is
bound to benefit the host country.
Apart from these there are indirect gains through the realization of external
economies.