SDL Second Lecture- Teacher in charge Ms.

Anshu

The impact of MNCs on host

countries (AO3)


 1 - Intro to BM
 1.6 Multinational companies
 The impact of MNCs on host countries (AO3)

The impact of MNCs on the host countries (AO3)

The growing importance of international trade has intensified the role and importance of
multinational companies across the world. A multinational company (MNC) is any business
organization that has operations in overseas markets, irrespective of whether it produces/sells
goods and/or provides services, i.e., MNCs have physical business operations in two or more
countries, such as offices, factories, or subsidiaries, in those countries. It is distinguished
from businesses that simply export goods or services without having a local base of
operations.
Although the MNC has its headquarters (or central administrative office) in one country, it
has operations and premises (such as offices, factories, assembly plants, and retail outlets) in
other countries. This means MNCs spend on foreign direct investment (FDI) in overseas
markets. FDI refers to cross-border investment in which a foreign company establishes an
ongoing and significant stake (financial interest and degree of influence) in its operations in
another economy.
Examples of large multinational companies with operations in many parts of the world
include Adidas, Amazon, Apple, BMW, Coca-Cola, HSBC, McDonald's, Royal Dutch Shell,
Samsung, Saudi Aramco, Tesla, Toyota, and Walmart. In some cases, The biggest
multinationals generate annual sales revenues in excess of the gross domestic product (GDP)
of entire economies. For example, Saudi Aramco, the world's largest oil company, earns
annual sales revenues that exceed the GDP Italy, Brazil, Canada, and Russia.

Did you know...?

 You probably know that the Burj Khalifa is the tallest building in the world. However, did
you know that it was constructed by Samsung?
Note: a business that only exports products to overseas markets does not qualify it to be a
MNC as it operates from the domestic (home) country.
To understand the impact MNCs on host countries, it can be useful to first understand the
costs of and benefits of operating as a multinational company. Click on the icon below to
read more about this.

The business operations of multinational corporations (MNCs) can have both positive and
negative impacts on their host countries.

Positive impacts
The positive impacts of MNCs include the following points:

 Employment opportunities – MNCs can account for a significant number of jobs in the host
country. This has huge economic benefits, such as higher incomes, consumption,
savings and tax revenues. Overall, this can raise the quality life for citizens in the host
country.
 Support for the workforce – In addition to job creation, MNCs create other opportunities for
domestic workers. For example, the wages offered by MNCs are often better than those
offered by local firms (even if the wages paid by MNCs are low by international standards).
Local workers may also benefit from training and development opportunities.
 Support for local businesses – MNCs can provide a range of benefits to local businesses,
directly or indirectly. For example, they are likely to purchase stocks from domestic
suppliers of raw materials, semi-finished goods and finished goods. This provides revenue
for local firms and supports domestic industries. In addition, MNCs are also likely to use the
services of local firms, such as insurance and distribution.
 Choice and quality – MNCs offer consumers in host countries more choice and often better
quality products. Domestic customers no longer have to rely only on local suppliers and
must compete with the prices and quality of the products offered by MNCs.
 Efficiency gains – Similarly, MNCs create increased competition for local suppliers, forcing
the domestic businesses to improve their operational efficiency. This covers aspects of the
prices, quality and customer care of local firms.
 Technology transfer – This refers to the sharing or dissemination of technological
knowledge, skills, or processes between multinational companies to host countries, thereby
helping to boost domestic productivity and improve production efficiency.
 Tax revenues – The host country’s government benefit from profitable multinational
companies as they pay corporate taxes. The additional finance can be spent to further
improve the economy, such as better infrastructure to further entice foreign direct
investment.
 Multinational supermarkets use produce from local farms

Case study 1 - McDonald’s: the world’s largest fast food

chain

McDonald’s is the world’s largest restaurant chain as measured by sales revenue. According
to its website, the American fast food giant serves over 69 million customers every day in
over 100 countries - that's the equivalent of almost 48 000 customers served each minute of
each day!
The company employs over 210 000 workers, making it one of the world's largest private
sector employers. The monetary value of the output from McDonald’s therefore contributes
to the gross domestic product (GDP) and employment in the 100+ countries that the company
operates in.

Negative impacts
The negative impacts of MNCs on their host countries include the following:

 Negative impacts on local businesses – Many local firms, especially smaller ones, may lose
customers to the larger foreign multinational companies. A fall in their market share and
profit can eventually lead to bankruptcies and some job losses in the economy.
 The repatriation of profits – Any profits declared at interest and tax payments are accounted
for may be repatriated (sent back) to the home country, rather than the funds being used to
invest further in the host country.
 Exploitative business practices – MNCs have been known to be socially irresponsible,
especially when operating in less economically developed countries where rules and
regulations are less stringent. This has often resulted in workers being exploited (poor pay
 and working conditions) and business operations that cause damage to the environment
(such as air pollution and destruction of natural habitats). For example, Coca-Cola’s bottlers
have been accused of causing water shortages in certain parts of India and South America.
 Dependence on foreign firms – Host countries could become economically reliant on the
presence of MNCs, leaving their economies vulnerable to decisions made abroad, including
shifts in corporate strategy.
 Loss of cultural identity – The growing presence of multinational companies, and the
convergence of habits and tastes brought about by globalization, can cause a depletion of
local cultures. MNCs and globalization have been blamed for causing a cultural shift in how
people live, especially for the younger generation.

Multinational companies have positive and negative impacts on host countries

Did you know?

Did you know the following brands/companies are now owned by Chinese or Indian firms?

Chinese owned Indian owned

AMC Theatres American Swan

Club Med Blackburn Rovers Football Club

General Electric (GE) Appliances Daewoo

Hoover Jaguar

House of Frazer Land Rover

 Motorola Louis Philippe

The London Taxi Company Peter England

Volvo Tetley

Did you know?

The Drive-Thru concept

Many people know that the Drive-Thru is an American cultural export. But, did you know
that the first McDonald’s Drive-Thru was opened near a military base in Arizona, USA in
order to serve soldiers as they were not allowed to get out of their vehicles while wearing
military fatigues (combat uniform or army uniform)? The first commercial Drive-Thru was
established in 1975, and the multinational company now has operations in over 100 countries,
with Drive-Thru restaurants across the globe.

Case Study 2 - The Walt Disney Company

The Walt Disney Company is the world's largest entertainment company. The infographic
below lists all the companies and subsidiaries owned by The Walt Disney Company at the
time of writing. These companies include well-known companies and brands, such as ESPN,
ABC, Marvel, Lucasfilm, Touchstone Pictures, The History Channel, Pixar, plus many more.
Besides these companies, The Walt Disney Company also owns other global businesses
under its family brand name, including Disney Channel, Disney retail stores, Disney radio
stations, and Disney theme and leisure parks (including Walt Disney World Resort,
Disneyland Resort, Disneyland Paris, Hong Kong Disneyland, Disney Cruise Line, and a host
of other vacation-related properties). The Walt Disney Company's media networks and its
theme parks and property portfolio tend to be the corporation’s biggest cash cows.
 To what extent is it possible to determine if one country knows what is right or best for
another country to do?

ATL Activity 1 (Thinking skills)

Have a go at this A – Z MNCs Quiz to see how many of these multinational companies you
recognise.

ATL Activity 2 (Research and communication skills)

In small groups of 2 or 3, investigate the main ways in which host countries can attract more
multinational companies. Use real-world examples to substantiate your findings. Be prepared
to share your findings with the rest of the class.

Teacher only box

Teachers' notes
The purpose of this task is to highlight why governments might want to attract more MNCs to
operate in their respective countries due to the positive impacts of MNCs on the host
countries.
Whether MNCs decide to expand in a particular overseas country will depend on both the
objectives of the business and how welcoming the host country is towards MNCs operating in
their nation.
This task also creates an opportunity to apply STEEPLE analysis as a business management
tool (as part of the BMT). For example, possible ways that host countries can make things
easier and more attractive to MNCs include:

 Economic factors - economic growth rates, tax incentives for MNCs, government grants and
subsidies, exchange rate stability, inflation rates, wages and salaries, cost of land/premises,
access to raw materials, etc.
 Political factors - political stability, the level of corruption, government attitudes and
incentives towards FDI, national minimum wage legislation, legal constraints on business
activities and operations, health and safety laws, employment rights, etc.
 Social factors - availability of suitable/skilled labour, labour productivity rates, attitudes
towards labour unions (trade unions), number of potential customers in foreign markets, etc.
 Technological factors - infrastructure (transportation and telecommunications networks),
reliable and affordable energy sources, cybersecurity, etc.

Essentially, the easier and more welcoming it is to operate in an overseas country, the more
likely it will be to attract multinational companies to locate their operations in that nation.

ATL Activity 3 (Research and communication skills)

Foxconn is a Taiwanese company that makes electronics products such as the iPhone,
PlayStation, Kindle, and Wii. It has operations throughout the world, including in Brazil,
China, India, Malaysia, and Mexico. Investigate the various reasons why MNCs such as
Amazon, Apple, Nintendo, and Sony might choose to outsource production to manufacturers
such as Foxconn to make goods on their behalf.
Key terms

 Corporation tax refers to a tax imposed on the profits of a business by the domestic
government.
 Economies of scale are the cost advantages gained by businesses as production output
increases, reducing the average cost per unit.
 Exchange rate refers to the value of one currency in terms of another, which affects
international trade and the profitability of multinational companies.
 Foreign direct investment (FDI) refers to cross-border investment in which an overseas
company establishes an ongoing and significant stake in its operations in another economy.
 Globalization refers to the increasing interconnectedness of countries through international
trade, investment, technology, and cultural exchange.
 Infrastructure refers to the physical and organizational structures needed for the operation
of a society or businesses, such as transportation, communication systems, and utilities.
 Innovation refers to the development and implementation of new ideas, products, processes,
or technologies to improve business performance.
 A multinational company (MNC) is a business organization that has operations overseas,
i.e., it operates in two or more countries.
 Outsourcing is the act of contracting out certain business functions or operations to external
companies, often to reduce costs.
 Skills development refers to the training programmes designed to improve the knowledge
and capabilities of employees.
 Tax incentives are the financial benefits offered by governments, such as reduced tax rates,
to attract multinational companies to invest in a country.
 Technology transfer refers to the sharing or dissemination of technological knowledge,
skills, or processes between multinational companies to host countries.
 Trade restrictions are the barriers to international trade, such as tariffs, quotas, and import
regulations imposed by governments to control foreign trade.
Exam Practice Question - Chery createS JV with Ebro EV-Motors
In April 2024, Chinese automaker Chery and Catalonia's Ebro EV-Motors signed a joint
venture (JV) agreement to produce electric vehicles (EV) in Barcelona, the regional capital.
The deal meant that Chery became the first Chinese car manufacturer to establish a
production plant in Europe, although Ebro EV-Motors holds a majority stake in the JV.
Initial forecasts suggest annual production could reach 50 000 EVs, potentially creating 300
jobs in Barcelona. The JV aims to boost the local economy by supporting suppliers and
advancing the EV industry. The JV is expected to create up to 1250 jobs and produce 150 000
cars by 2029.
Production will take place at the former Japanese multinational company Nissan plant in
Zona Franca, which closed in 2021 following labour strikes and negotiations after Nissan
announced its exit in 2020. Efforts to reindustrialize the enterprise zone focused on securing
projects to re-employ over 1300 laid-off workers, providing opportunities for sustainable
growth and innovation.
Source: adapted from Catalan News

Define the term joint venture. [2 marks]

(a)

Explain two potential benefits for Catalonia of hosting multinational companies [4 marks]
(b) like Chery.

Explain two possible drawbacks for Catalonia of hosting multinational companies [4 marks]
(c) like Chery.