MNCs Impact on National Economy

Impact of MNCs on the National Economy

• Most governments favor multinational corporations (MNCs) operating within their borders.
• MNCs are believed to generate income, employment, wealth, and overall prosperity.

Economic Growth

• A major benefit of a large MNC establishing operations in a country is the boost to national income.
• Foreign direct investment (FDI) creates employment through factories, warehouses, and shops.
• Income in countries with multinational operations rises, along with work for local suppliers.
• Increased output and employment from MNCs lead to economic growth and higher living standards.
• Jobs created by FDI often pay higher wages than domestic employers, as seen in Hungary and Brazil where wages are 4.5-6% higher.

FDI Flows

• Money spent by an overseas business to establish a new facility in a foreign country qualifies as FDI.
• In 2014, Honda invested $800 million in a factory in Guanajuato, Mexico.
• Honda's Mexico factory employed 3,200 workers and produced approximately 200,000 cars annually.
• Host countries welcome FDI because it benefits the national economy.

Increase in Income

• FDI flows generally lead to higher levels of GDP for the host nation.
• Additional output and employment from FDI increase economic growth and raise the living standards in the host country.

Increase in Tax Revenue

• Taxes on MNC profits by the host nation increase government revenue.
• Increased tax revenue can improve government services like healthcare, education, housing, and transportation.

Increase in Employment

• FDI generates new jobs in the host nation.
• Honda's investment in Mexico created 3,200 jobs in the Guanajuato region.
• Reduction in unemployment from FDI saves the government money on unemployment benefits.
• Local businesses in the host country also benefit due to the need for local suppliers.

Reduce National Debt

• Money received from FDI may be used to reduce national debt.
• Reducing debt improves a country's financial stability, potentially reducing interest payments and making future borrowing easier.

Balance of Payments

• Investment by MNCs positively impacts the host nation's balance of payments in two ways.
• Initially, FDI inflows improve the balance of payments as money enters the host nation.
• The $800 million Honda spent building its Guanajuato plant improved Mexico’s balance of payments.
• Once the facility is operational, exporting output further boosts the balance of payments.
• If cars produced in Guanajuato are sold to the USA, the value of those sales flows into Mexico's account.
• This is beneficial for a host nation's international trade.
• The impact on balance of payments may be more significant for less-developed countries by boosting overseas sales.
• If MNCs buy resources (machinery, tools, equipment) from overseas, this negatively affects the host country's balance of payments.
• Repatriated profits (returned to the MNC's base country) also represent a flow of money away from the host country, creating a negative impact.

Technology and Skills Transfer

• MNC investment often introduces new technologies and working practices into the host nation.
• This can result in the transfer of technologies and knowledge to local businesses both horizontally and vertically.
• Horizontal transfers involve knowledge transfer across the same industry.
• The technologies and working practices used by Japanese car manufacturers like Nissan and Toyota have been copied by other car producers (e.g., just-in-time manufacturing and kaizen).
• Vertical transfers can be forward or backward; MNCs may provide technical assistance, training, and information to their suppliers, helping them modernize production facilities.
• Forward vertical transfers happen when businesses in the host nation buy goods/services from MNCs.
• Domestic businesses may also adopt technologies, working practices, and managerial methods used by the MNC to improve efficiency and productivity, which increases competitiveness.
• Copying technologies, products, and working practices can lead to the development of domestic producers, posing a threat to MNCs.
• Reverse engineering involves closely analyzing a rival's product to identify valuable features for copying. Reverse engineering is commonly used in computer hardware and software.

Consumers

• Consumers benefit from the arrival of MNCs with more choice.
• Products supplied by MNCs expand available choice in the host country (e.g., Coca-Cola, Starbucks, McDonald’s).

Lower Prices

• The arrival of MNCs increases competition in the host country.
• Products made by MNCs may be cheaper due to efficient production techniques, so they can offer products at lower prices.
• Competitive pressure may also force domestic producers to lower their prices.

Improved Quality

• New technologies, materials and efficient working practices used by MNCs improve product quality
• Products may be better designed, of higher quality, more efficient, and more attractive.

Better Living Standards

• Better living standards may result from MNC operations in a host nation.
• Benefits may come from employment opportunities, higher incomes, more choice, and access to cheaper and better-quality products.
• If products are cheaper, consumers have more income for other expenses.
• In some cases, the annual revenue of a multinational can be huge which can give them influence.
• Too much domestic producer market exit due to competition may reduce consumer choice in the long term
• If MNCs dominate with little competition, they may exploit consumers.

Business Culture

• MNCs can impact business culture, with employees eventually starting their own businesses due to saved capital, new skills, or encouragement from MNCs.
• If quality standards can be maintained, it provides MNCs with more flexibility.
• As MNCs expand globally, it becomes more culturally acceptable for people to create enterprises, encouraging entrepreneurship.
• Business cultures in the host country may be influenced by MNC cultures.

Tax Revenues

• MNCs pay taxes to national economies, which fund government spending on health and education.
• MNCs are often accused of minimizing tax by seeking low-tax locations.
• Transfer pricing is a common technique to avoid taxes on profits.
• If Slovakia offers lower taxes than Spain, this will affect where a US multinational will locate a new plant in Europe.
• Governments must assess the benefits of attracting investment with low taxes against the loss of tax revenues, while also ensuring multinationals pay their fair share.

Drawbacks of MNCs

• Negative effects of MNCs include damage to the environment, exploitation of local workers, and negative impacts on local businesses, which may them to close.