Multinational companies: benefits and costs

Last time

Before we start: last time, in Exchange rates and the current account of the balance of payments, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Firms across borders

The soft drinks, phones and fast food you buy may be made in Pakistan by firms whose head offices are in America, Korea or China. They are multinational companies, or MNCs. In this lesson: why they exist, why they choose a country, and who gains and who loses.

What an MNC is

A multinational company is a firm that produces in more than one country. Selling abroad is not enough; it must produce abroad. Its home country is where its head office is. A host country is any other country where it produces. MNCs are often very large, with economies of scale and well-known brands.

Why MNCs set up abroad

To cut costs: cheaper labour, cheaper land, or lower taxes in the host country. To reach raw materials, such as minerals, oil or crops, where they are found. To be close to customers, and to get past trade barriers: producing inside a country avoids its tariffs.

Benefits to the host country

Jobs and incomes, both in the MNC and in local firms that supply it. Investment and tax revenue, plus new technology and skills that spread to local workers and firms. More exports, which help the current account, and more choice for consumers.

Costs to the host country

Profits are sent back to the home country, so not all the value stays. Local firms may be forced out by the MNC's lower costs and strong brands. Workers may be poorly paid, natural resources used up and the environment damaged. And an MNC may leave suddenly.

For the host country

Here are the main benefits and costs to a host country, side by side.

The home country

The home country gains the profits sent back, and its firms grow larger and stronger. But it may lose jobs when production moves abroad. So MNCs affect both countries, not just the host.

Why an MNC may close a plant

The resource may run out, such as the ore in a mine, or its world price may fall so it is no longer profitable. Costs in the host country may rise: higher wages, higher taxes, or stricter environmental rules. A cheaper location elsewhere, political instability, or falling demand can also make it leave.

What keeps an MNC in a country

It stays while costs stay low, the market keeps growing, and the government is stable and welcoming. Good infrastructure, skilled workers and reliable power make staying attractive. So whether it stays depends on whether these advantages last compared with other countries.

MNCs and globalisation

Globalisation is the growing links between economies through trade, investment and the movement of people and ideas. MNCs drive it: they make parts in one country and assemble them in another, linking many economies in one supply chain. This spreads jobs and technology, but also spreads problems quickly when demand falls.

Government policy towards MNCs

Governments attract MNCs with tax breaks, cheap land and good infrastructure. They control them with rules on pay, safety, the environment, and on using local suppliers. The aim is to keep the benefits, and limit the costs.

Mistakes that lose marks

Mistake one: defining an MNC as a firm that sells abroad. It must produce in more than one country. Mistake two: giving only benefits, or only costs, when asked to discuss. Mistake three: mixing up the home and the host country. The fix: produces abroad, both sides, and name which country.

The full-marks tip

The full-marks tip: define an MNC as a firm producing in more than one country, and name the home and host. For effects, say which country, which group, and whether it gains or loses.

On one card

So, on one card: multinational companies. Keep it for revision.