Impact of MNCs on the local economy - 4.4.1

Multinational Corporation (MNC) - is a business that is based or registered in one country but has outlets/affiliates or does business in other countries.  Such companies have offices and/or factories in different countries (typically emerging economies or undeveloped countries due to cost savings) and usually have a centralised head office (typically in western markets e.g. UK and US) where they coordinate global management.

Characteristics of a MNC include;

• Dominant players in the market
• Complex structures, multi-site and multi-product
• Grown through organic and inorganic growth
• Heavy investment in R&D
• Globally recognised brands

Globalisation is one of the major reasons for the growth in MNCs. A number of businesses in order to grow and develop have had to take on a global or internationak perspective, MNCs have also caused further globalisation.

MNCs impact the local economy in the following ways;

1. Local labour, wages, working conditions and job creation
2. Local businesses 
3. Local community and environment 

Local labour, wages, working conditions and job creation

• Create jobs with better opportunities e.g. training, shared expertise, full-time work, promotions. This has a significant effect on the local economy which ultimately benefits the economy through more taxes being paid and more public services being funded.
• Pushes wages up improving the overall standard of living in that country.
• Helps skills develop in the country which improves MNC's productivity but in the long term helps the country's skills too. This will help employability for local workforce as well.
• Better working conditions as businesses look to maintain their own reputation and do not wish to be known as exploitative.

However, potential disadvantages of MNC's on local labour, wages, working conditions and job creation;

• Creats wage inflation for local businesses, potentially causing local businesses to not be able to afford their staff anymore in an attempt to keep up which could affect the economy if local businesses start to fail.
• May look to exploit cheap workers
• Brings in own managers only offering low skilled jobs to workers, causing skills transfer to not be as effective.
• Working conditions may be poor. Above average may still be seen as very poor and have a negative impact on the MNC brand and ultimately sales.
• Lack of union representation or trade unions can become more powerful demanding higher pay or better working conditions. This may be good for the workers and the economy but may cause the MNC to not see the country as an attractive place for production anymore, which would significantly affect the countries economy if the MNC leaves to go elsewhere. 

Local businesses

• Provide support services e.g. building of factories, cleaning, raw material/components. MNCs add to the host country GDP through their spending, for example with local suppliers and through capital investment.
• Improved infrastructure
• Higher spending power from local community due to increased wages and therefore disposable income, increasing demand for other businesses e.g. shops 
• May create joint ventures with local business and MNC allowing the business access to new skills and more efficient methods of production. 
• Skills transfer may occur where MNC workers pass on the knowledge and methods of production they have learnt to local businesses allowing them to become more competitive. 
• Increased competition may cause local businesses to become more innovative and efficient and may uncover local and international markets that a domestic business can use for growth. 

 However, potential disadvantages of MNC's on local businesses include;

• Increase costs especially in wages in order to keep up with the MNC's higher wages. 
• Loss of talented workers due to the attraction of the MNC towards skilled workers and therefore not able to ensure survival.
• Loss of sales from substitute products 
• Those who do not have a job at the MNC may become resentful which could cause unrest in the community

 Local community and environment 

• Higher employment, less poverty, lower crime
• Improved infrastructure e.g. hospitals and roads
• Improved education
• Increased funds for local governments from the payment of taxes
• Projects to improve environmental standards

 However, potential disadvantages of MNC's on the local community and environment include;

• Environmental disasters
• Loss of traditions and cultures. MNCs may be accused of imposing their culture on the host country, perhaps at the expense of the richness of local culture. MNCs might reduce cultural diversity around the world as they continue to expand, particularly into less developed or developing countries.
• Damage to traditional industries e.g. land for farmers
• Some industries will naturally carry a level of risk to the environment and community such as oil and gas. 
• Profits earned by MNCs may be remitted back to the MNC's base country rather than reinvested in the host economy, therefore not benefitting the local economy or improving the environment.