Ch 1.6 Multinational companies (MNCs) Learning objective To evaluate the impact of MNCs on the host countries What do these companies have in common? What is a multinational company? A multinational company (MNC) is an organisation that operates in two or more countries, usually with its head office (or headquarters) based in the home country. The term MNC and transnational corporation are often used interchangeably. Examples of MNCs include Apple, Louis Vuitton, Nike etc. Tesla’s Gigafactory in Shanghai In 2018, Tesla opened its first factory outside of the USA, in China. Reasons why businesses become MNCs ● ● ● ● Increased customer base Cheaper production costs (many MNCs expand overseas to benefit from cheaper production costs especially inexpensive labour). As production levels increase, MNCs are able to benefit from economies of scale. MNCs might also want to locate overseas to benefit from the host country’s infrastructure, such as its network of roads and telecommunications. Brand development and brand value can be enhanced by operating on an international scale. ● By producing within a particular country, MNCs can usually protectionist policies that the country might impose. This reason why Japanese motor vehicle manufacturers, including have established factories in the European Union and North avoid any is one Toyota America. ● MNCs are able to spread risks. This means that unfavorable market conditions in one country or region of the world might not damage the overall business if it can spread risks internationally. Host countries A host country is any nation that allows a multinational company to set up in its country. The impact on host countries can be beneficial or harmful. Positive impacts of MNCs on host countries o Job creation: MNCs create jobs opportunities in the host country. Volkswagen’s manufacturing plant in Kaluga, Russia created over 3,500 jobs with an initial investment of $400 million. o Higher national income: MNCs help to increase the host country’s Gross Domestic product (GDP). This is the value of a country’s annual output or national income. o Knowledge and technology transfer: MNCs have introduced new skills and technologies in production processes to host countries. o Increased competition: MNCs intensify the degree of competition in the host country. This should lead to greater efficiency gains to the benefit of domestic customers. Negative impacts of MNCs on host countries o Job losses: Just as they are able to create jobs, MNCs are capable of causing unemployment in the host country too. This is because MNCs are likely to pose a threat to domestic businesses. Competition can be beneficial if it causes domestic firms to improve their efficiency and productivity, but it can also be a setback if it means that local firms are unable to compete and end up making peope redundant or even having to close down. o Repatriation of profits: whilst MNCs can create wealth in a host country, the profits of the company are repatriated to the home country. This can have a negative effect on the host country’s tax revenues. o Vulnerability: this is a degree of insecurity as MNCs are increasingly footloose. This means they are not bound to a specific location so can change at very short notice for cost advantages. o Social responsibilities: anti-globalization groups are concerned about the social responsibility of MNCs in their attempt to grow and exploit the planet’s scarce resources. Host nations are often unable to control the actions of large MNCs due to their sheer market power. o Competitive pressure: due to fierce competition, domestic firms might be forced into reducing prices to remain competitive. Knowledge and technology transfer might also present a further threat as domestic businesses might not have the finances or resources to compete with large MNCs, so they become prone to takeover bids or collapse. BUSINESS MANAGEMENT Theory of knowledge Do China and India present the most important competitive threat or opportunity for global brands and multinational companies? BUSINESS MANAGEMENT Concepts in BM: change, ethics, creativity, and sustainability ● ● Change, ethics, creativity and sustainability are central to any business strategy that involves growth in overseas markets. Some of the most successful MNCs have adopted a glocalization approach to integrate local and international cultures in the consumption of goods and services.
