Benefits that multinationals bring to overseas countriesA2 Economics and Business

Unit 3

By Mrs Hilton for revisionstation

Lesson Objectives

• To be able to discuss how multinationals have contributed to an improvement in local living standards, employment and economic growth in overseas countries

• To be able to answer past paper questions based on the topic

Starter

• From what you know – would you consider that MNEs are good for the poorer countries that they operate in?

Suggested answers to starter• Incoming multinationals bring FDI (Foreign Direct Investment• MNEs Create jobs• New investment will increase output of goods & services• Any extra output sold abroad, thus increasing exports, also

imports could be reduced• Taxes paid increases government funds enabling them to improve

their services• An efficient multinational might make high-quality products

available at lower prices than there were previously found, helping consumers

• Increased competition• Improved trade flows

Multinational Defined

• A multinational company, sometimes called a transnational corporation, is a company that owns or controls production or service facilities in more than one country.

• You may see it written as:– MNC – multinational

corporation or company– MNE – multinational enterprise– These are both the same

Great website with videos and activities

In support of MNEs

• Multinationals are a beacon of global capitalism, bringing employment, income and new technologies to poorer countries, driving up incomes and aiding development.

• In return wealthier countries (Like UK) get cheaper goods.

• Can you argue against?

BIG MNEs

• Most of the largest MNEs are US, Japan, or European

• India and China growing rapidly

• Example Tata

• Tata:

Why have they grown? - To access new markets

• Domestic market saturated, profits from expansion overseas is tempting

• Extension strategy for the product life cycle

• PMI (Phillip Morris International) and BAT have aggressive expansion in developing markets

Why have they grown? - To reduce costs

• Economies of scale• Lower unit costs• Enhanced competitive

advantage• Especially if products can be

standardised across markets• Available, cheap adaptable

labour see Global services location Index (Most attractive offshore destinations)

Off shoring video

Positive effects

Creates employment

Increases skills base

Increased standard of

living

Raises country’s profile

Improves balance of payments

Improves infrastructure

Positive effects of MNEs in other countries

Video

Positive impact

• Creates employment

• There are jobs available for local people, thus reducing numbers of unemployed and the resultant drain on local resources

• Increases skills base

• Many MNCs operate training schemes for local people to learn how to use machinery. Such skills also attract other firms to the country

• Increased standard of living

• An increase in earnings increases taxes paid within the country and gives more money to spend on services

Positive impact

• Raises country’s profile• MNCs plan their moves carefully. This is

known worldwide and the movement into a particular country is a statement about its pro-business environment and political stability.

• Improves balance of payments• Many goods made by MNCs are

exported to other nearby countries. This increases amount of money earned by the country.

• Improves infrastructure• MNCs often improve communication

links within a country, e.g. road, rail and port facilities are updated and expanded. This benefits the country.

FDI

• FDI stands for Foreign Direct Investment. Foreign direct investment is investment of foreign money into domestic structures, equipment, and investment in businesses and organisations based in the host country

• FDI creates direct, stable and long-lasting links between economies. It encourages the transfer of technology and know-how between countries, and allows the host economy to promote its products more widely in international markets.

• FDI is also an additional source of funding for investment and, under the right policy environment, it can be important for the development of the economy of the country.

Sample question 1

• Evaluate the likely impact of multinationals on the economic growth of countries such as Chile. [12]

Answer question 1• e.g Chile is a developing economy, greater development of Chile’s

Infrastructure• e.g. job creation given Foreign direct investment (FDI) e.g. Technology and

skills transfer may lead to improved domestic businesses and economic growth. Alternatively downside may be developed to show damaging effect on economic growth e.g. Competition and possible loss of production for domestic rivals, race to the bottom

• e.g. employment created may be only temporary or of menial variety, profits repatriated, limited technology and skills transfer e.g. evaluation becomes more sophisticated perhaps with short term contrasted with long term etc. Multinationals may be contrasted with one another with different outcomes for growth. Tradeoffs may be considered such as environmental damage vs. long term supplies of cheap power to aid economic growth.

Sample question 2

[15]

How marks are awarded for Q2 [15]

Level Mark awarded

1 1-2 Knowledge

2 3 Application

3 4-7 Analysis

4 8-15 Evaluation

Answer question 2

e.g. defines multinationals or identifies aspects of economic development such as living standardse.g. any specific examples illustrating the points made such as BP and the Gulf of Mexico, or Microsoft and Egypte.g. FDI, job creation, technology transfer, multiplier effects, raising productivity and wages OR negative aspects such as environmental damage etc.At this level candidates may just contrast the positive and negative effects of multinational activity, e.g. wages higher than local employers yet cause further inequality of incomes.e.g. weighs relative significance of points raised such as employment and incomes are often more important to the unemployed than some externalities

Sample question 3

[6]

Answer question 3

Knowledge 2, Application 2, Analysis 2Knowledge: up to 2 marks (one for each reason) for identifying possible reasons. e.g. government incentives, infrastructure, skills/education of workforce, part of EUApplication: up to 2 marks (one for each reason) for contextual answers such as linking the above specifically to London or Britain, e.g. familiarity with the English language, access to EU markets, time zone and access to skilled labour.Analysis: up to 2 marks (one for each reason) are for developing the reasons e.g. government incentives such as grants or tax concessions may be greater in the UK which reduce costs and can increase profitability.

Sample question 4

[6]

Answer question 4

Knowledge 2, Application 2, Analysis 2Knowledge: up to 2 marks are available for stating two reasons why a government might want to attract FDI, e.g. increased employment/reduce unemployment, increased investment from other MNCs, GDP growth etc.Application: up to 2 marks are available for relating the above to the context e.g. Croatia is getting ready for EU accession, evidence shows current negative growth and unemployment of 9.5% Analysis: up to 2 marks are available for consideration of why this might lead to growth e.g. jobs are created, extra incomes are earned which leads to multiplier effect and economic growth. If only one reason cap at 3 marks

Revision Video