The Impact of Multinational Corporations (MNCs)
Multinationals and Host Countries
Multinational corporation (MNC): a business with operations, such as factories, offices or shops, in more than one country (unit 2.4.1).
Host country: a country an MNC sets up in. Its home country is where its head office is.
An MNC brings money, jobs and new methods to a host country, but it can also squeeze out local firms and send its profits home. The same factory can help one group and harm another, which is why exam questions ask you to weigh the effects.
Impact on the Local Economy
When an MNC opens a large site in a town:
- Local labour and job creation: the site hires local people → unemployment in the area falls → the new workers spend more in local shops → jobs are created in businesses that never deal with the MNC.
- Wages and working conditions: the MNC pays more than local employers to attract staff → local firms raise pay to keep theirs → wages across the area rise. Many MNCs also bring training and safety standards from home.
- Local suppliers gain: the MNC buys parts, food, cleaning and transport nearby → local firms win contracts → their sales and profits rise, and they hire too.
- Local competitors lose: the MNC has economies of scale and a known brand → it undercuts small local rivals → they lose sales, and some close with the loss of their jobs.
- The community and environment: more lorries, noise and pollution → air and water quality fall → residents' health and quality of life suffer. Some MNCs pay for roads or local projects to win support.
The effect on a local area depends on:
- Where it buys its inputs: an MNC that imports most of its parts gives local suppliers little. One that buys locally spreads its spending further.
- The jobs it creates: low-skilled assembly work raises incomes less than skilled jobs, especially if the senior posts go to staff from the home country.
- Local laws: where rules on pay, safety and pollution are weak or poorly enforced, workers and residents are more likely to lose out (unit 3.4.2).
Impact on the National Economy
The same effects add up across the whole economy. How MNCs raise economic growth is covered in unit 3.1.2.
| Area | Possible benefit | Possible cost |
|---|---|---|
| Economic growth | New capital adds to productive capacity, and spending by workers and suppliers raises demand | Growth may be limited to one region or industry, and stops if the MNC leaves |
| FDI flows | Inward foreign direct investment pays for new factories and equipment | An MNC that leaves takes its investment with it, and some FDI just buys existing firms |
| Balance of payments | Exports from the new site earn foreign currency, and goods once imported are made at home | Imported parts and profits sent to the home country are outflows on the current account |
| Technology and skills transfer | Workers learn new methods, and local suppliers copy them | Research and skilled jobs often stay in the home country |
| Consumers | More choice, and lower prices from economies of scale | If local rivals close, choice falls and the MNC can raise prices |
| Business culture | New management methods, such as lean production, spread to local firms | Practices that clash with local customs, such as long hours or refusing to deal with trade unions |
| Tax revenues | Corporation tax on profits, plus income tax paid by the new workers | Tax breaks offered to attract the MNC, and profit moved abroad by transfer pricing |
How much a country gains depends on:
- The deal it struck: a government that offers large grants or tax breaks to win an MNC gets less back in tax.
- Where profits go: profit reinvested in the host country keeps adding to growth. Profit sent home does not.
- The size of the economy: in a small, developing economy, one large MNC can dominate whole industries and gain power over the government (unit 3.4.3).
Tax Revenues and Transfer Pricing
Transfer pricing: the prices one part of an MNC charges another part, in a different country, for goods, services or the use of its brand.
Tax rates on profit differ between countries. By setting these internal prices, an MNC can report less profit where tax is high and more where it is low.
Take a UK shop chain owned by an MNC, making £10 million profit a year. If a sister company in a low-tax country charges it £6 million more for using the brand, UK profit falls to £4 million. The £6 million is taxed at the lower rate abroad, so the MNC pays less tax in total.
When an MNC shifts profit out of a country:
- The government: less profit reported → less corporation tax collected → less to spend on schools and roads, or other taxes must rise.
- Domestic firms: the MNC pays a lower tax rate on the same profit → it keeps more to cut prices or invest → local rivals compete at a disadvantage.
Transfer pricing is legal if the prices are close to what two independent firms would charge each other. Tax authorities challenge prices set to move profit, but that is hard to prove for something like a brand name, which has no market price.
Say who gains and who loses. "MNCs create jobs" earns little on its own. Name the group affected, such as local workers, suppliers, rival firms or the government, and finish the chain. Then use the extract to judge which effect is largest, for example whether the MNC buys locally or imports its parts.
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