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Unit 1.6 - Multinational Companies

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20 views3 pages

Unit 1.6 - Multinational Companies

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devduttchiplunkar21
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© © All Rights Reserved
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1.

6 - Multinational companies

This section of the IB Business Management syllabus examines the growth and evolution
of businesses. Almost all businesses strive to grow, whether this is measured in terms of
sales revenue, profits, number of stores / outlets, number of employees or market share.
Businesses often have to evolve their practises and/or products in order to survive. For
example, although Samsung is best known for its smartphones and consumer electronic
products, the multinational conglomerate is also involved with weapons manufacturing,
life insurance and theme park management. Samsung originally started traded as a
grocery store.
The single learning outcome (or assessment objective) for this section of the syllabus are:

 The impact of multinational companies (MNCs) on the host countries (AO3)

The impact of MNCs on the host countries


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 overseas, irrespective of whether it
produces/sells goods and/or provides services, i.e., MNCs operate in two or more
countries.
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.

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.

 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.

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.

 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.

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