globalisation and business - multinationals
The Influence of Multi-Nationals
Multinational Companies ("MNCs") have become very large and very powerful. Some, for example, are worth more than the entire GDP of many countries. So MNCs can have an enormous effect, for good and for ill, on the countries they do business in, especially if those countries are small and/or poor. This revision note examines the main areas of influence:
The Balance of Payments
MNCs import large amounts of capital in order to pay for their new business investments; factories, offices or whatever. This surplus on the capital account creates a deficit on the current account ie the country is importing more goods and services than it is exporting. This lifts local standards of living until the import of capital stops for whatever reason and then standards fall again.
If the new business is for import substitution (ie producing locally what had been imported) then imports fall and the current account improves. If the new business is developing local raw materials for export (eg oil exploration) then the exports of raw material also improve the current account.
But, the MNC may need to import large amounts of technical equipment not available locally, and this will worsen the current account. If the MNC re-invests its profits then there is no effect on the Balance of Payments, but if it repatriates its profits, the current account worsens. Further, the exchange market of a small country may not be well-developed, so the attempt by a business to buy or to sell large amounts of foreign exchange will send the price of that currency sharply up or down unless things are managed very carefully
Employment
Generally, MNCs set up new businesses which need new workers and so employment is improved; jobs are created. However, it depends on the skills match between the new jobs and the local employment market. The business may set up a factory specifically designed to suit the local employment market. But in the Middle East oil states, for example, there are many factories producing for the local consumer markets. Sometimes the jobs are too demanding for the locals, and sometimes the jobs are too demeaning. Either way, the result is huge numbers of expatriate workers from India, Bangladesh, the Philippines and so on and at the same time large local unemployment.
But, MNCs can sometimes provide devastating competition for local businesses which may end up closing which creates unemployment. MNCs usually employ fewer workers; that is part of their greater efficiency. The MNC may then relocate again after a period of years.
Technology transfer
An MNC invariably operates to a higher standard of managerial and technical expertise than the local economy. Local employees can learn about these things and the local economy can benefit from this new expertise. Even the UK can benefit, so we are not simply talking about developing countries where technology transfer is enormously important. This will depend on how willing the MNC is to employ and train local workers.
Social responsibility
Standards and regulations are another kind of business cost, and MNCs are always looking for lower costs. So there is an advantage to locating in countries with few regulations. Some poor countries are prey to corruption and bribery which means their few regulations are ineffective. India, for example, has excellent environmental protection laws, on paper. In practice, the inspectors are so badly paid it only costs a matter of dollars to get them to look the other way. This opens the way for a slippage of standards below the levels considered acceptable in the MNCs home country.
One of the most scandalous cases was in the 1980s where the US chemical business Union Carbide tolerated very poor safety standards at a factory in Bhopal, India.. The result was an explosion which released clouds of toxic gas and killed thousands. Many more thousands are still alive and very ill because of this. What was particularly irresponsible was the long years it took to force Union Carbide to accept responsibility and pay compensation. This whole area is a large and important are which it is impossible to cover completely. It is, for example, one important reason why some western pressure groups are so hostile to MNCs
Government control
It is quite difficult for some governments to exercise effective control over MNCs because they are so large and powerful. One MNC may be the dominant force in the local economy. Even large and wealthy countries such as the UK can’t always control MNCs effectively. They have a wide repertoire of tricks to minimise government control, especially taxes.
One favourite trick (technically illegal) is transfer pricing. MNCs often buy and sell between different national offices of the same business, because each is a separate profit centre. For example, the Paris office makes the product, and the Berlin office sells it. So the Paris office has to sell to the Berlin office. There is then the question of at what price the sale takes place. Officially, the selling price must be the market price on the day, but some markets don’t have prices every day, and governments have a difficulty in proving what is going on.
If, for example, German company taxes are higher than French company taxes, then the Berlin office will pay too much for the product and make a loss. The Paris office makes a very large profit and pays tax on this profit at the lower rate. When different governments have completely different tax systems, with thousands of detailed rules of how tax is paid, and deductions for this, and allowances for that, the opportunities for MNCs to employ a few clever tax accountants and ‘cook the books’ are enormous.
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