Economics Notes - Multi-national Corporations

Economics Notes

Multi-national Corporations

A multi-national corporation (MNC) is a business organisation which has its headquarters in one country but has operations in a range of different countries. There are numerous examples of such organisations, car manufacturers like Ford, Toyota, Honda and Volkswagen, oil companies like Shell, BP and Exxon Mobil, technology companies like Dell, Microsoft, Hewlett Packard and Canon and food and drink companies such as Coca Cola, Interbrew and McDonalds.

The following is a quote from the Ford Web site which highlights the idea perfectly:

Ford has manufacturing operations in six continents - in Europe alone there are around thirty-five sites in nine separate countries. These include assembly plants, stamping plants, engine plants, and casting, forging and aluminium plants.

Source: Ford Motors.

Dell logo

Windows XP loading page

Dell and Microsoft - two businesses operating in the high tech industry and who are both good examples of multi-national companies. Copyright: Keran McKenzie and Sam Disegno, both from stock.xchng.

These firms, by their very nature, are large organisations. Their size means they often have considerable power and influence and as a result have come in for some criticism of their actions. One of the most famous of such cases was the problem faced by Nestlé in marketing its baby milk in Africa. Critics pointed out that Nestlé was pushing the product on people when it was likely to cause harm to babies. A code of conduct on marketing the product to countries in Africa was being ignored according to a study in the British Medical Journal in 2003. In addition, events like the Bhopal chemical explosion in 1984 has attracted much criticism and, sometimes, an assumption that MNCs are of necessity a 'bad' thing.

A pair of Nike trainers

Nike - not always had the best of publicity about its manufacturing relationships with factories in less developed countries. Copyright: Simon Cataudo, from stock.xchng.

It is also assumed that MNCs tend to locate operations in poor countries only. This, of course, is not the case. Honda and Nissan have both invested heavily in production facilities in the UK but are Japanese companies. Many European countries provide a home for MNC operations of different sorts. It must also be remembered that many MNCs have interests in a country but not necessarily production facilities. Nike, for example, does not own factories that make training shoes and clothes. Instead, they make agreements with local producers to manufacture a particular range of products for them. This might bring different problems to light given that the immediate control of production is not in the hands of Nike. Of course, it could be argued that this does not absolve any corporation of any responsibility for the actions of the factories that they use to outsource production.

These notes will explore the advantages and disadvantages of MNCs. When answering questions on this area of a syllabus, it is important that you remember to avoid bringing in personal prejudice into the argument and look to try and find some evidence to support the points you are trying to make. In reality, the truth of the matter is likely to be somewhere in between the two extremes of whether MNCs are 'good' or 'bad'.

Why the drive to MNCs?

For many companies, the following might be some or all of the reasons to expand into different countries:

  • Reduce transport and distribution costs
  • Avoid trade barriers
  • Meet different rules and regulations (avoid non-tariff barriers)
  • Secure supplies of raw materials or markets
  • Cost advantages - for example low labour costs

The advantages of MNCs

Economic Growth and Employment

The essence of a MNC is that they bring inward investment to countries that are not their home base. If they choose to expand by building production facilities they will be bringing in inward investment into the country. This investment is likely to provide a boost, not only to the local economy but also the national economy.

Building a new plant requires resources - land, labour and capital. Labour has to be found to help construct the plant and all the equipment that goes into it and some firm somewhere will be hired to build the machinery and equipment, provide the bricks, steel, cement, glass etc. that go into the building. If it is announced that Company X from Germany are to build a new distribution centre in the UK at a cost of £10 million, this effectively means that a whole host of firms will be getting additional work to the value of £10 million.

Let us assume that a firm manufactures and supplies cable for electrical work. To this firm, the contract to supply the cabling for the new plant might be worth £350,000. If the plant was not built then the firm would not generate that order and not receive that work. For workers in the cabling plant, the order helps to maintain the flow of orders and can keep them in employment.

It can also be expected that the additional income will find its way through the local economy. If additional people are hired, they will receive an income which they spend. For existing workers, increased orders might equate to job security and they too might feel more confident in spending on new items - furniture, house extension, new white goods, holidays and so on. Inward investment therefore can act as a trigger to generating wealth in the local economy. If a MNC is attracted to an area then this might also lead to other smaller firms in the supply chain deciding to locate in those areas. Other firms providing services to these firms are then attracted to the area and so on.

Honda sign

Honda located a factory in Swindon, Wiltshire, a town known for its railway industry. Now the town is synonymous with car manufacturing. The Honda plant was an investment of over £1.3 billion. It is one of 120 Honda manufacturing facilities in 29 different countries. Copyright: Niels Laan, from stock.xchng.

This type of wealth generation has been witnessed in many UK regions. The siting of the car manufacturing plants in Sunderland, Swindon and Derby has done much to help those regions experience a boost to the local economy. In the case of Sunderland and Derby, the investment has partly helped to offset the decline in other industries that caused unemployment. For less developed countries, inward investment can again act as a catalyst for other forms of investment. The effects of the investment might be less dramatic but nevertheless, it can be something that is seen as essential for helping a country escape from poverty.

Skills, production techniques and improvements in the quality of human capital

It can be argued that MNCs bring with them new ideas and new techniques that can help to improve the quality of production and help boost the quality of human capital in the host country. Many will not only look to employ local labour but also provide them with training and new skills to help them improve productivity and efficiency.

In Sunderland, one of Europe's most productive car manufacturing plants, the workers have had to get used to different ways of working and different expectations than many might have been used to if working for other British firms. In some cases this can prove a challenge but in others it can lead to improvements in motivation and productivity. The skills that workers build up can then be passed on to other workers and this improves the supply of skilled labour in the area. This makes the area even more attractive to new industry as it helps to reduce the costs of training and skilling of workers.

Availability of quality goods and services in the host country:

In some cases, production in a host country may be primarily aimed at the export market. However, in other cases, the inward investment might have been made to gain access to the host country market to circumvent trade barriers. In the case of many Japanese car manufacturers the investment made into UK production has enabled them to get a foothold in the EU and to avoid tariff barriers. The UK has had access to high quality vehicles at cheaper prices and the competition this has created has also led to improvements in working practices, prices and quality in other related industries.

A Ford Focus on a presentation dais at a car show

The location of businesses in different countries might mean the availability of high quality and relatively cheap products being available to the home market. Copyright: Jannes, from stock.xchng.

Tax Revenues

For the host country, there is a likelihood that the MNC will have to be subject to the tax regime in that country. As a result, many MNCs pay large sums in taxes to the host government. In less developed countries the problem might be that there is a large amount of corruption and bad governance and as a result MNCs might not contribute the tax revenue they could and even if they do it might not find its way through to the government itself.

Improvements in Infrastructure

In addition to the investment in a country in production or distribution facilities, a company might also invest in additional infrastructure facilities like road, rail, port and communications facilities. This can provide benefits for the whole country.

The Costs of Multinationals

The costs can be summarised in the points below - for the most part, the costs are closely linked to the benefits but it will depend on the extent of the benefits that might arise as a result of the activity of the MNC.

  • Employment might not be as extensive as hoped - many jobs might go to skilled workers from other countries rather than to domestic workers.
  • There might be a limit in the effect on the local economy - it will depend on how big the investment into the local economy actually is.
  • Some MNCs may be 'footloose'; this means that they might locate in a country to gain the tax or grant advantages but then move away when these run out. As a result there might not be a long term benefit to the country.
  • How many new jobs are created depends on the type of investment. Investment into capital intensive production facilities might not bring as many jobs to an area as hoped.
  • The size and power of multinationals can be used, it is argued, to exploit weak or corrupt governments to get better deals for the MNC. Mittal, for example, a major steel producer, negotiated a $900 million deal to secure rights to mine iron ore in Liberia. The government that negotiated the deal was not elected. When a new, elected government came to power, they re-negotiated the deal and took the investment to well over $1 billion.
  • Pollution and environmental damage. Some countries may have less rigorous regulatory authorities that monitor the environmental impact of MNC activities. This can cause long term problems. In India, Coca-Cola has been accused of using up water supplies in its bottling plant in Kerala in Southern India and also of dumping waste products onto land and claiming it was useful as fertiliser when it appeared to have no such beneficial properties.

Production can cause problems - in any country - but in some countries the rules may be less rigorously enforced. Copyright: Sean Carpenter, from stock.xchng.

  • De-merit goods. Some companies might be producing goods that are not beneficial. Examples might include tobacco products and baby milk - mentioned earlier.
  • Repatriation of profits. Profits might go back to the headquarters of the MNC rather than staying in the host country - the benefits, therefore, might not be as great.

| Back to Economics Notes Index |