Benefits of Multinationals

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Benefits that multinationals bring to overseas countries

A2 Economics and Business

Unit 3

By Mrs Hilton for revisionstation

Lesson Objectives

To be able to discuss how multinationals have contributed to an improvement in local living standards, employment and economic growth in overseas countries

To be able to answer past paper questions based on the topic

Starter

From what you know – would you consider that MNEs are good for the poorer countries that they operate in?

Suggested answers to starter

Incoming multinationals bring FDI (Foreign Direct Investment

MNEs Create jobs

New investment will increase output of goods & services

Any extra output sold abroad, thus increasing exports, also imports could be reduced

Taxes paid increases government funds enabling them to improve their services

An efficient multinational might make high-quality products available at lower prices than there were previously found, helping consumers

Increased competition

Improved trade flows

Multinational Defined

A multinational company, sometimes called a transnational corporation, is a company that owns or controls production or service facilities in more than one country.

You may see it written as:

MNC – multinational corporation or company

MNE – multinational enterprise

These are both the same

Great website with videos and activities

In support of MNEs

Multinationals are a beacon of global

capitalism

, bringing employment, income and new technologies to poorer countries, driving up incomes and aiding development.

In return wealthier countries (Like UK) get cheaper goods.

Can you argue against?

BIG MNEs

Most of the largest

MNEs are US, Japan, or

European

India and China growing rapidly

Example Tata

Tata:

Why have they grown? - To access new markets

Domestic market saturated, profits from expansion overseas is tempting

Extension strategy for the product life cycle

PMI (Phillip Morris

International) and BAT have aggressive expansion in developing markets

Why have they grown? - To reduce costs

Economies of scale

Lower unit costs

Enhanced competitive advantage

Especially if products can be standardised across markets

Available, cheap adaptable labour see

Global services location

Index (Most attractive offshore destinations)

Off shoring video

Positive effects of MNEs in other countries

Creates employment

Improves infrastructure

Increases skills base

Positive effects

Improves balance of payments

Increased standard of living

Raises country’s profile

Video

Positive impact

Creates employment

There are jobs available for local people, thus reducing numbers of unemployed and the resultant drain on local resources

Increases skills base

Many MNCs operate training schemes for local people to learn how to use machinery. Such skills also attract other firms to the country

Increased standard of living

An increase in earnings increases taxes paid within the country and gives more money to spend on services

Positive impact

Raises country’s profile

MNCs plan their moves carefully. This is known worldwide and the movement into a particular country is a statement about its pro-business environment and political stability.

Improves balance of payments

Many goods made by MNCs are exported to other nearby countries. This increases amount of money earned by the country.

Improves infrastructure

MNCs often improve communication links within a country, e.g. road, rail and port facilities are updated and expanded. This benefits the country.

FDI

FDI stands for Foreign Direct Investment. Foreign direct investment is investment of foreign money into domestic structures, equipment, and investment in businesses and organisations based in the host country

FDI creates direct, stable and long-lasting links between economies. It encourages the transfer of technology and know-how between countries, and allows the host economy to promote its products more widely in international markets.

FDI is also an additional source of funding for investment and, under the right policy environment, it can be important for the development of the economy of the country.

Sample question 1

Evaluate the likely impact of multinationals on the economic growth of countries such as

Chile. [12]

Answer question 1

• e.g Chile is a developing economy, greater development of Chile’s

Infrastructure e.g. job creation given Foreign direct investment (FDI) e.g. Technology and skills transfer may lead to improved domestic businesses and economic growth. Alternatively downside may be developed to show damaging effect on economic growth e.g. Competition and possible loss of production for domestic rivals, race to the bottom e.g. employment created may be only temporary or of menial variety, profits repatriated, limited technology and skills transfer e.g. evaluation becomes more sophisticated perhaps with short term contrasted with long term etc. Multinationals may be contrasted with one another with different outcomes for growth. Tradeoffs may be considered such as environmental damage vs. long term supplies of cheap power to aid economic growth.

[15]

Sample question 2

2

3

Level

1

4

How marks are awarded for Q2 [15]

Mark awarded

1-2

3

4-7

8-15

Knowledge

Application

Analysis

Evaluation

Answer question 2

e.g. defines multinationals or identifies aspects of economic development such as living standards e.g. any specific examples illustrating the points made such as

BP and the Gulf of Mexico, or Microsoft and Egypt e.g. FDI, job creation, technology transfer, multiplier effects, raising productivity and wages OR negative aspects such as environmental damage etc.

At this level candidates may just contrast the positive and negative effects of multinational activity, e.g. wages higher than local employers yet cause further inequality of incomes.

e.g. weighs relative significance of points raised such as employment and incomes are often more important to the unemployed than some externalities

[6]

Sample question 3

Answer question 3

Knowledge 2, Application 2, Analysis 2

Knowledge: up to 2 marks (one for each reason) for identifying possible reasons. e.g. government incentives, infrastructure, skills/education of workforce, part of EU

Application: up to 2 marks (one for each reason) for contextual answers such as linking the above specifically to

London or Britain, e.g. familiarity with the English language, access to EU markets, time zone and access to skilled labour.

Analysis: up to 2 marks (one for each reason) are for developing the reasons e.g. government incentives such as grants or tax concessions may be greater in the UK which reduce costs and can increase profitability.

[6]

Sample question 4

Answer question 4

Knowledge 2, Application 2, Analysis 2

Knowledge: up to 2 marks are available for stating two reasons why a government might want to attract FDI, e.g. increased employment/reduce unemployment, increased investment from other MNCs, GDP growth etc.

Application: up to 2 marks are available for relating the above to the context e.g. Croatia is getting ready for EU accession, evidence shows current negative growth and unemployment of 9.5%

Analysis: up to 2 marks are available for consideration of why this might lead to growth e.g. jobs are created, extra incomes are earned which leads to multiplier effect and economic growth. If only one reason cap at 3 marks

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