Global Industries and Companies (MNCs)
Unit 4: Global Business
Global Industries and Companies (MNCs)
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A multinational corporation (MNC) owns and controls operations in more than one country; setting them up or buying them is foreign direct investment (FDI).
A multinational corporation (MNC) is a business that owns and controls operations, such as factories, offices or shops, in more than one country. Its head office is in its home country, and every other country where it runs operations is a host country for that MNC.
An operation abroad is usually set up as a subsidiary: a company owned by the MNC but registered where it operates, so it obeys that country's laws and pays its taxes.
Setting up or buying such an operation is foreign direct investment (FDI): money put into a lasting business abroad that the investor owns and runs. Buying a few shares in a foreign firm is not FDI, because it brings no control.
Korvane, a sportswear MNC with its head office in Europe, spent $120m building a shoe factory in Kestria, a lower-income country. Every impact in this topic, good or bad, starts from a decision like that one.
Real Example: Japanese carmakers own assembly plants across South-East Asia, each set up as a local company that employs local workers and buys from local suppliers.
Exam Matters: Define MNC and FDI briefly in your own words, then use the case's own figures, such as the size of the investment and the jobs it creates, instead of general points about globalisation.
An MNC creates local jobs and often pays above local wages, but the jobs may be routine, and working conditions depend on its standards and the local law.
Job creation is the most visible impact on local labour. Korvane's factory employs 4,000 people in Kestria, many of whom used to work on farms or in informal jobs with no regular pay.
Wages are often higher than local employers pay, because an MNC wants reliable, trained workers who stay. Korvane pays $300 a month against a local factory average of $240: a wage premium of 25%.
Working conditions can be better too: regular hours, safety equipment, training and sick pay, especially where the MNC applies its home standards. They can be worse where it chose the country for low costs and weak labour laws: long shifts, pressure to hit targets and little job security.
The kind of job matters. Senior engineering and management posts are sometimes filled by staff sent from the home country, leaving local workers the routine assembly work, which can disappear if the MNC later finds a cheaper location.
Real Example: Foreign-owned garment and electronics factories in South and South-East Asia usually pay more than farm work, yet many are still criticised for long hours and low pay by international standards.
Exam Matters: Compare the wage in the case with the local figure, not the home country's: what matters to a worker in the host country is what the other jobs open to them pay.
An MNC can help local businesses by buying from them and bringing customers, or harm them by taking their skilled staff and their customers.
An MNC's arrival affects local businesses in opposite ways, and a case usually shows both.
Suppliers can gain. Korvane's factory buys $18m a year of materials, packaging, transport and catering from firms in Kestria. Those firms grow and hire, and meeting the MNC's standards for quality and delivery makes them better at selling to others too.
Nearby shops and services can gain from the wages the MNC's workers spend: food stalls, transport, housing and banks near the site see more customers.
Rivals can lose. A local firm making the same product now competes with a global brand that has lower costs from scale and more to spend on advertising. It may also lose its best workers to the MNC's higher pay. When local firms are squeezed out of a market they used to serve, this is called crowding out.
Which effect is larger depends on how much the MNC buys locally rather than importing, and on whether local firms supply it or compete with it.
Real Example: Where a foreign carmaker builds a plant, local makers of seats, wiring and parts often grow around it, while small local brands of the same product struggle to match its prices.
Exam Matters: Split the local firms in the case into suppliers and rivals before you judge; the same MNC can help one group and harm the other.
An MNC can bring roads, power, schools and clinics to the area around it, but also pollution, congestion and competition for land and water.
The local community is everyone living near the operation, not just the people who work there.
Gains often include new or better roads, power and water supplies built to serve the site, and schools, clinics or training centres the MNC funds to attract staff and win local support. More work nearby can also keep young people from leaving the area.
Costs fall on the local environment and on daily life: smoke and dust from the site, waste water in rivers, heavy lorries on village roads, and land or water taken that farmers used. Rents can rise when many new workers arrive.
Residents near Korvane's factory have gained a paved road and a clinic, but they complain about dye in the river and smoke from the boilers. Whether they are better off overall depends on the MNC's own standards and on how firmly the local authority enforces its rules.
Real Example: Mining companies working in remote regions often build roads, clinics and schools for nearby villages, and are often in dispute with the same villages over polluted water and lost land.
Exam Matters: Name the part of the community affected and how, such as farmers losing water or families gaining a clinic, rather than calling the MNC simply good or bad for the area.
FDI flowing into a country adds to what it can produce, and so to economic growth; flows that slow down or leave work the other way.
Economic growth is a rise in the value of the goods and services a country produces. An MNC adds to it directly, through what its own operation produces, and indirectly, through the firms its spending keeps busy.
FDI flows are the money MNCs invest in a country (inflows) or take out of it (outflows) over a period. An inflow builds new capacity: factories, mines, hotels, offices. Where local savings are too small to fund such projects, FDI can be the largest source of new investment.
Korvane's $120m was an inflow to Kestria. It created a factory producing $200m of shoes a year that did not exist before, and that output counts directly in Kestria's growth.
The growth is not guaranteed to last. FDI goes where costs are low and rules are stable, so it can slow or reverse if wages rise, a neighbour offers better terms or the government changes the rules. A country that relies on a few MNCs relies on their decisions.
Real Example: Countries that attract electronics and car plants often see factory output rise within a few years, and can lose that growth when production moves to a cheaper neighbour.
Exam Matters: Link the FDI in the case to what it builds and what that adds to output, then ask how secure the flow is: what would make the MNC invest more, or leave?
An MNC affects a host country's balance of payments through the money it brings in and sends out: FDI and exports in, imports and profits out.
The balance of payments records all the money flowing into and out of a country from trade and investment. An MNC creates flows in both directions, and its impact is the balance between them.
Korvane exports $200m of shoes a year from Kestria, imports $80m of components and sends $30m of profit home. Together these yearly flows bring in a net $90m, on top of the $120m it invested once.
Repatriated profit is a real cost to the host, but it does not by itself show that the host loses overall. Over the life of a profitable factory the profit sent home will usually add up to more than the original investment, while the host keeps the wages, the local purchases, the taxes and the factory itself.
The balance is weaker when an MNC imports most of what it uses, sells mainly to the host's own buyers rather than abroad, or sends all of its profit home.
Real Example: Export-processing zones in many lower-income countries are built so that foreign-owned factories earn foreign currency by selling abroad, which helps the country pay for its own imports.
Exam Matters: Add up what comes in and what goes out using the case's figures before judging, and say which flow could change: more local buying, or more profit sent home.
MNCs bring technology and skills that can spread to local firms, and ways of running a business, known as business culture, that can spread too.
Technology and skills transfer happens when an MNC brings machines, methods and know-how the host country lacked, and they spread beyond the MNC. Workers trained on modern equipment move to local firms or start their own; suppliers learn quality methods to meet the MNC's standards; local managers copy what works.
In Kestria, supervisors trained by Korvane in quality control have left to run local workshops, taking the methods with them.
Transfer is limited when the MNC keeps research and design at home, brings its own engineers, or guards its technology closely. The host then gets the jobs but not the know-how.
Business culture is the shared way firms in a country are run: how decisions are made, how staff are managed and promoted, and what counts as acceptable practice. MNCs can change it, bringing merit-based promotion, written contracts, safety rules and anti-bribery policies that local firms adopt. They can also bring long-hours working and aggressive sales targets, or clash with local customs such as family-run management.
Real Example: Across East Asia, local suppliers to foreign car and electronics makers adopted methods such as just-in-time delivery and quality circles, and some later became exporters themselves.
Exam Matters: For technology and culture, show the route by which the change reaches local firms, such as a worker who moves or a supplier who adapts, and what could block it.
MNCs can give host-country consumers more choice, better quality and lower prices, but can also push out local products and later use their market power.
The impact on consumers here means consumers in the host country, not in the MNC's home market.
Gains: more choice, as global brands appear beside local ones; better quality and safety; and lower prices where the MNC's scale cuts costs or its arrival forces local rivals to compete harder. Goods that were imported and expensive may be made locally and sold for less.
Risks: if the MNC drives local rivals out, consumers may later face fewer choices and higher prices from one dominant firm. Local products and tastes can disappear. And much of what an export factory makes is never offered to local consumers at all.
Most of Korvane's shoes are exported, so Kestria's consumers gain little from them directly. Its effect on them comes mainly through the wages it pays, which let its workers buy more.
Real Example: When foreign supermarket chains enter a country, shoppers often gain lower prices and a wider range, while small family grocers nearby lose trade.
Exam Matters: Check whether the MNC in the case sells to local buyers or exports; if it exports, its effect on local consumers is mostly indirect, through incomes.
An MNC pays tax in each country on the profit it reports there; transfer pricing can move that profit, and the tax on it, to a low-tax country.
Tax revenues from an MNC include tax on its profits, income tax paid by its workers, and taxes on its sales and imports. In many lower-income countries a large MNC is one of the biggest taxpayers.
But an MNC can influence where its profit is reported. Transfer pricing is how it sets the prices its own companies charge each other, for example when a factory sells to the group's trading company. Because both sides have the same owner, the price can be set to leave the profit where tax is lowest.
Korvane's factory makes a pair of shoes for $20. Unrelated firms trade similar pairs at $30, the arm's length price. Instead the factory sells to Korvane Trading, based in Vessia, for $22. Kestria taxes profit at 25% but sees only $2 of profit a pair; the other $8 is reported in Vessia, taxed at 5%. On 5,000,000 pairs a year, Kestria collects $2.5m instead of $12.5m.
This is tax avoidance, which is legal unless the prices break the host's rules. Many governments now check an MNC's internal prices against what unrelated firms would pay, and tax the difference.
Real Example: Tax authorities in many countries now have specialist teams whose job is to check the prices MNCs charge between their own subsidiaries.
Exam Matters: Work out the profit reported in each country at the internal price and at the arm's length price; the gap, times the host's tax rate, is the tax the host loses.
Many MNC decisions help one group of stakeholders at another's expense; business ethics is about how the firm weighs those conflicts, not only about obeying the law.
International business ethics asks whether an MNC's decisions are morally right, not only legal and profitable. The hardest cases are stakeholder conflicts: one decision that helps one group and harms another.
An MNC has more stakeholders, spread across more countries, than a domestic firm: owners at home, workers and suppliers in several host countries, local communities, consumers worldwide and governments on every side.
Suppose Korvane considers moving its clothing orders from well-run suppliers to cheaper ones that pay less and cut corners on safety. Its shareholders see the saving as extra profit. Workers at the cheaper suppliers face lower pay and more danger. Consumers pay less but may be buying goods made in ways they would object to. The host government sees jobs move from one region to another.
No option suits everyone, so a judgement has to say whose interest should come first and why: for example, that a short-term saving is not worth a risk to workers' lives, or to the brand once the conditions become known.
Real Example: Plans to close a factory in one country and reopen in a cheaper one regularly set owners, who gain from lower costs, against workers and towns that lose their jobs.
Exam Matters: Pick the two stakeholders whose interests clash most in the case, show the clash with its evidence, and say which interest should win and on what grounds.
Environmental ethics asks what an MNC releases into the air, water and land, and whether its use of resources can continue without harming the future.
Emissions are gases and particles released into the air: carbon dioxide from burning fuel, smoke from boilers and furnaces, fumes from vehicles. Waste disposal is what happens to everything left over, such as waste water, chemicals, packaging and scrap. Disposed of cheaply, waste ends up in rivers, in landfill or burned in the open.
An MNC may be tempted to follow the host country's rules where they are weaker than at home, because cleaner equipment and treatment plants cost money. That saves cost but moves the harm onto local people and, with greenhouse gases, onto everyone.
Residents near Korvane's factory report dye in the river and smoke from the boilers. Cleaner boilers and a water-treatment plant would cost $6m.
Sustainability means meeting today's needs without harming the ability of future generations to meet theirs. For an MNC it means using water, energy, timber and land at a rate that can continue, cutting waste and emissions over time, and designing products that last or can be recycled.
Real Example: Many large manufacturers now publish yearly figures for their carbon emissions, water use and waste, and set targets to reduce them, partly because investors and customers ask for them.
Exam Matters: Weigh the cost of cleaner methods against the harm avoided and the damage to the brand if the pollution becomes public, using any figures the case gives.
An MNC is judged on conditions at the suppliers that make its goods, not only in its own factories: pay, safety, exploitation and child labour.
Many MNCs own few of the factories that make their products. They buy through supply chains of independent suppliers, often in low-wage countries, who buy from others in turn.
Pay and working conditions: suppliers pushed to cut prices may pay below a living wage, demand unpaid overtime, or skip safety measures such as fire exits and sound buildings.
Exploitation of labour goes further: forced overtime, wages held back, identity papers kept by the employer, workers not free to leave. Child labour is work by children that harms their health or schooling. It is most common in the lower tiers of a supply chain, in small workshops and farms far from any inspector.
Korvane buys clothing from 40 supplier factories in Kestria. An inspection found children working at 3 of them.
An MNC can lower these risks through the prices it pays and the checks it makes: visits without warning, wage and hours records, proof of age, and private interviews with workers. None of it works if it then demands prices that only exploitation can meet.
Real Example: Factory fires and building collapses in garment-producing countries have killed workers making clothes for international brands, and led many brands to publish their supplier lists and fund independent safety inspections.
Exam Matters: Separate the MNC's own workplaces from its suppliers', then say what the MNC controls through its orders, prices and inspections, and what it cannot.
Marketing ethics covers what an MNC says on its labels and how it promotes: misleading claims and marketing that exploits or offends are both unethical.
Misleading product labelling gives buyers a false impression of what they are buying: health claims the product cannot support, "natural" or "eco" on products that are neither, or details that leave out what buyers would want to know. Claiming environmental benefits a product does not have is known as greenwashing.
Korvane sells a range labelled "eco" in which 10% of the material is recycled. Nothing on the label is false, but a buyer could reasonably assume far more.
Inappropriate marketing activities are promotions that are unethical even when every claim is true: advertising unhealthy food or costly goods to children, pushing a product where it is harmful or unaffordable, using images that exploit or offend, or paying for endorsements buyers do not know are paid.
MNCs face a particular risk, because a label or advert accepted in one country can be judged misleading or offensive in another, and a complaint in one market can be seen in all of them.
Real Example: Regulators in several countries have made firms withdraw "green" and "natural" claims they could not support, and some now publish guidance on what such words must mean.
Exam Matters: Say who is misled or harmed and how, such as a buyer paying extra for a green claim or a child targeted by an advert, and what it could cost the brand.
Large MNCs are hard to control because of their size, their ability to move, and their political influence over the governments meant to regulate them.
Controlling MNCs means making them act in the interests of the countries and people they affect, not only their owners. Several factors decide how far that is possible, starting with the power of the MNC itself.
That power comes from size, since the largest MNCs have yearly sales greater than the national income of many countries; from mobility, since an MNC can move production, profit or jobs elsewhere; and from how much a host government relies on its jobs, exports and tax.
Political influence is how an MNC uses that power over governments: lobbying ministers and officials, offering or withholding investment, and negotiating special terms, such as years of reduced tax, before it arrives. A government competing with its neighbours for FDI may weaken its own rules to win it.
When Korvane says its second factory, costing $80m with 2,500 jobs, will go to whichever country offers better terms, it is using this influence.
Real Example: Governments competing for large factories often offer years of reduced tax, cheap land and relaxed rules, and the MNC chooses between the offers.
Exam Matters: Before judging how well an MNC can be controlled, weigh its power in the case: how much the host relies on it, and how easily it could leave.
Legal control uses laws in the host country, laws in the home country and agreements between countries; each is limited by enforcement and by the MNC's ability to move.
Legal control is the use of law to limit what an MNC may do. It works at three levels.
Each level has limits. A host country may lack inspectors; a home country's courts may struggle to gather evidence abroad; an agreement binds only the countries that sign and enforce it. Where one country's rules are strict, an MNC can move to one where they are not, which is why cooperation between countries matters.
Real Example: Several countries now require large companies to report what they do to find and stop forced labour in their supply chains, wherever the suppliers are.
Exam Matters: Name the level of law in the case, host, home or international, and the reason it might fail here: weak enforcement, evidence abroad, or an MNC able to move.
Buyers, campaign groups and social media can change an MNC's behaviour faster than law, by threatening the sales and reputation it depends on.
Consumer pressure works through what people buy. Boycotts, switching to rival brands and demanding ethical products all hit sales, and an MNC with a valuable brand has most to lose.
Pressure groups are organisations that campaign on an issue, such as workers' rights, the environment or health. They investigate MNCs, publish reports, organise protests, lobby governments for new laws, and sometimes work with firms to raise standards.
Social media speeds all of this up. A photo from inside a supplier can reach millions of buyers in days without a newspaper or a government involved, campaigns can be organised cheaply across many countries at once, and an MNC's replies are judged in public.
When footage from one of Korvane's suppliers spread online, the brand faced calls for a boycott in several of its biggest markets.
The limits: many buyers say they care but still buy on price; attention moves on quickly; and firms that sell to other businesses rather than to the public have little brand to protect.
Real Example: Campaigns spread on social media have led clothing, food and electronics brands to publish lists of their suppliers and to drop suppliers found using child or forced labour.
Exam Matters: Say which of the three the case shows and how it reaches the MNC's sales or reputation; then ask how long the pressure is likely to last.
Self-regulation is an MNC or its industry setting and checking its own standards; it can go further than the law, but it relies on the firm choosing to enforce it.
Self-regulation means an MNC, or its whole industry, sets its own rules of behaviour and checks they are followed, without waiting for the law to require it.
Common forms are a code of conduct suppliers must sign, covering pay, hours, safety and child labour; regular audits of suppliers; industry-wide standards and labels that members agree to meet; and published reports on the firm's social and environmental record.
It has real advantages. It can apply the same standards in every country, including where local law is weak, and it can move faster than governments. Firms that do it well protect their brands and can charge more for products buyers trust.
Its weakness is that the firm writes, checks and reports on its own rules. Audits can be announced in advance, codes can be ignored when they cost money, and reports can dwell on good news. Korvane's supplier code already banned child labour, yet children were found at 3 of its suppliers.
Self-regulation is most believable when someone independent checks it, such as an outside auditor or a pressure group, and when breaking it has consequences.
Real Example: Industry groups in sectors such as clothing, coffee and timber run certification schemes whose labels tell buyers that independent auditors have checked the standards behind a product.
Exam Matters: Judge self-regulation by who checks it and what happens when it is broken, using the case's evidence, rather than by what the code says.
A multinational corporation (MNC) owns and controls operations in more than one country; setting them up or buying them is foreign direct investment (FDI).
An MNC creates local jobs and often pays above local wages, but the jobs may be routine, and working conditions depend on its standards and the local law.