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Multinational corporations (MNCs)

Multinational corporation (MNC): A company that operates in more than one country.

Foreign direct investment (FDI): Investment in one country that is made by a business, organisation or a government from another country.

MNCs are very large and powerful firms, e.g. Toyota, Microsoft and Coca-Cola. They sell worldwide and run factories, offices and other sites in many countries. Most FDI comes from MNCs.

Common forms of FDI:

• Building new sites abroad: e.g. a factory, a warehouse, a store or a mine.
• Buying a stake in a foreign business: buying 10% or more of its shares, or buying the whole company.
• Joint ventures: working with a firm in the host country on a shared business project.

Reasons for the emergence of MNCs and FDI

• To benefit from economies of scale: a firm that sells to global markets produces far more than one selling only at home, so its average costs fall. Huge firms can also press suppliers for lower prices.
• To access natural resources and cheap materials: firms invest abroad to get the raw materials they need, e.g. oil, gas and metals, so much FDI goes into mining in resource-rich countries.
• Lower transport and communication costs: cheaper, faster transport makes selling abroad more attractive, and instant communication, e.g. video calls, makes it much easier to run operations in many countries.
• To access customers in different regions: a firm can sell to billions of customers worldwide instead of millions at home, which can greatly increase its revenue and profit.

Advantages and disadvantages of MNCs and FDI

Many governments try to attract MNCs, e.g. by offering tax breaks, subsidies and grants, relaxing regulations, investing in infrastructure and investing in education.

Advantages for the host country:

• Creating jobs: MNCs employ local people in their factories, stores and offices, and local suppliers win new orders. MNCs often pay more than local employers, and the extra output and jobs raise economic growth and living standards. However, wages are not always higher, working conditions may be poor, and some MNCs leave after a short time.
• Investing in infrastructure: to attract MNCs, governments invest in roads, ports, power and telecommunications, which benefits everyone. Some MNCs also build infrastructure themselves, e.g. a road to a new mine.
• Developing skills: MNCs train local workers in new skills and technology, and help local suppliers learn new methods. Some local people go on to set up their own businesses. However, some MNCs bring in their own managers and skilled staff instead.
• Developing capital: MNCs install up-to-date machinery and technology in their new sites, and local firms may invest in new equipment to win orders from them.
• Contributing to taxes: the host government taxes the MNC’s profits, which can pay for better public services.

Disadvantages for the host country:

• Avoiding paying taxes: some MNCs use legal schemes to pay very little tax in the countries where they operate. If they can do this in countries with strong legal systems, poorer countries may find it even harder to collect their fair share.
• Environmental damage: many MNCs work in mining and oil, which can be very destructive, e.g. oil spills that poison water supplies and crops. The host government may be left to pay for the clean-up.
• Moving profits abroad: MNCs often send their profits back to the country where they are based, so the host country loses out. Because the head offices of most MNCs are in developed countries, those countries may gain more than developing ones.

Tax avoidance: practice of trying to pay less tax in legal ways.

Repatriation (of profit): where a multinational returns the profits from an overseas venture to the country where it is based.