Economics Student Answers
OK, using the StudyZones search engine, I was able to find this:
First of all you should explain exactly what a MNC is: a company which has it main office (or parent) in one country and its other offices/manufacturing departments/bases/assembly plants in another country eg BP/Sanyo/Coke-a-cola/etc.
Multinational corporation, business enterprise with manufacturing, sales, or service subsidiaries in one or more foreign countries, also known as a transnational or international corporation. These corporations originated early in the 20th cent. and proliferated after World War II. Typically, a multinational corporation develops new products in its native country and manufactures them abroad, often in Third World nations, thus gaining trade advantages and economies of labor and materials. Almost all the largest multinational firms are American, Japanese, or West European. Such corporations have had worldwide influence—over other business entities and even over governments, many of which have imposed controls on them. During the last two decades of the 20th cent. many smaller corporations also became multinational, some of them in developing nations. Proponents of such enterprises maintain that they create employment, create wealth, and improve technology in countries that are in dire need of such development. Critics, however, point to their inordinate political influence, their exploitation of developing nations, and the loss of jobs that results in the corporations' home countries.
MNCs are, of course, of enormous benefit to countries, and particularly the UK. Overseas investment in the UK now exceeds £370B, much of it coming from the US and the EU, and much of it focusing upon manufacturing. Hence MNCs contribute 25% of the UK's manufacturing output, 35% of man. investment and 30% of our visible exports.
The drawbacks are as follows:
1. MNCs look for low cost locations and/or places where market access is easy. The UK fits the bill very well - low business taxes, cheap sites, relatively few regulations, weakish unions and lowish labour costs, tariff-free access to EU markets. But ny of this can change - and thus MNCs can then reconsider their strategy, and pull out at short notice. The effect on national output and employment could then be very severe.
2. Though there is often 'technology transfer' (i.e. domestic firms copy the advanced working practices found in most MNC plants) the more uncompetitive firms are likely to be taken over, or else may have to close down, resulting in unemployment, and still greater dependency upon MNCs for domestic growth.
3. All of the profits made by the MNCs in this country are repatriated to the parent company overseas - this is a net outflow on the invisible account of the balance of payments.
4. Any recession in the MNC's home country is likely to see a cutback in overseas operations, as confidence, sales and funds dry up - many US companies are currently cutting back on their overseas investments.
In principle a nation needs to resort to supply side policies to correct such imbalances - in other words policies designed to promote the growth of domestic firms, and thus reduce the reliance upon MNC plants. Such policies might include: privatisation, opening up of monopoly markets to greater competition, creation of flexible labour markets, tax incentives to domestic firms for investment, promotion of small firms (largely in niche markets), training and retraining schemes, direct government employment creation in the public sector, etc. Or of course the government can encourage UK firms to merge, to gain economies of scale and thus be able to compete more ffectively. It should be noted that UK MNC investment abroad actually exceeds overseas MNC investmrent in the UK, so the problem isn't quite as great as at first it seems.
Most of the multinational companies are likely to be large so your answer should include the benefits of economies of scale such as bulk buying, specialisation of process, specialisation of product, leading to a decrease in the average cost curve.
Specifically, multinational companies are able to benefit from a larger market than they would otherwise domestically. You may wish to expand your answer by considering the different types of multinational company. Some have production facilities in one country and merely have branches worldwide, others have multiple production centres. There are good reasons why some firms may wish to produce within one of the economic trade groupings such as the EU. They can be considered a domestic producer rather than be discriminated against as a foreign company.
Multinationals are able to use different pricing strategies worldwide and also transfer assets (and profits) as they wish between different parts of the company. This can save tax. They are able to earn larger profits in low tax countries and smaller profits in high tax countries.
FDI - An investment abroad, usually where the company being invested in is controlled by the foreign corporation. An example of FDI is an American company taking a majority stake in a company in China.
Foreign direct investment (FDI) is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. Thus it is distinct from portfolio investment which may cross borders, but does not offer such control. Firms which source FDI are known as ‘multinational enterprises’ (MNEs). In this case control is defined as owning 10% or greater of the ordinary shares of an incorporated firm, having 10% or more of the voting power for an unincorporated firm or development of a greenfield branch plant that is a permanent establishment of the originating firm.
In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction wrought by the conflict. The U.S. accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20% of global GDP.
The estimated stock of FDI in the UK at the end of 2002 was £367 billion. Of the FT top 500 companies operating in the UK, 313 were foreign-owned in 2002.
The benefits to the UK economy are:
1. FDI represents an injection into the circular flow of income; this has
multiplier effects at both national and regional levels.
2. Much of the FDI is in depressed regions, which contributes to regional prosperity and employment.
3. FDI increaes the nation's stock of capital, and therefore raises productive potential and shifts he aggregate supply curve to the right. 4. FDI raises the overall productivity level of the economy, together with a technology transfer effect on other UK firms; it also improves the skills level of the UK workforce.
5. FDI widens the range of goods and services available to UK consumers, and also tends to lower their prices.
6. It accounts for about 30% of manufacturing employment, 35% of manufacturing investment, 35% of manufacturing output, and nearly 40% of UK manufacturing exports, allowing the UK to penetrate EU markets. 7. It helps, through the surplus it creates on the capital account, to finance the growing current account deficit.
The Advantages and Disadvantages of FDI for the MNE:
- More costly travel/communications abroad.
- Not having a close familiarity with local business tax laws, business scene in general, and various government regulations.
- The MNEs face risks such as exchange rate changes, expropriation by the government, and other actions that can be taken against them.
- Language and culture differences
- Higher wages/benefits must be paid to the personnel going abroad.
- Jumping the tariff wall (and other non- tariff
- Securing access to minerals located in the host country
- Lower wage in host developing countries for labor.
- Protection of market shares in exports if MNE's competitors also have established plants in the area.