0264 · 6.2.2Multinational companies (MNCs)

What multinational companies are

0:00A shoe company opens a factory overseas, and local residents gain jobs. Customers gain another supplier, while existing manufacturers face a powerful competitor. The same expansion can benefit the business and create mixed effects for the country receiving it. By the end, you will understand why businesses expand internationally and how their decisions affect the countries involved. A multinational company, or M N C, is a business with factories, production or service operations in more than one country.

0:26Its home country is where its headquarters are based, while a host country is where it sets up operations abroad. These two labels help us separate the company’s interests from the effects on its overseas locations. The defining feature is operations across national borders. A manufacturer becomes multinational when it operates factories in different countries. Service businesses qualify too, such as a bank operating branches overseas. Exporting means selling goods or services to another country, while multinational status depends on where the business operates.

0:56Revenue is the income a business receives from selling goods or services, while profit is total revenue minus total costs.

Why businesses expand overseas

1:03International expansion can help a company increase sales, reduce costs or protect itself against weaker demand in one location. Each advantage needs a clear explanation of how it improves the business’s position. The main business advantages are proximity to markets, lower costs, access to raw materials, avoiding trade barriers, more sales, spreading risk and government incentives. Their importance depends on the product and the location. A heavy product makes transport costs especially important.

1:29A business using large amounts of natural resources may prioritise access to suitable supplies. Hartwell Footwear makes shoes and opens a factory abroad, close to its overseas customers. Shorter delivery journeys can reduce transport costs and improve delivery speed. Local managers can also learn about preferred sizes and styles through direct contact with buyers. Shoes that better match customer needs attract more purchases, so sales revenue rises. Lower operating costs provide another reason to expand overseas.

1:58A location with cheaper labour or land can reduce the cost of making each pair of shoes. The company must also consider employees’ skills and the reliability of production. Lower wages offer the strongest saving when employees can produce the required quantity and standard. Raw materials are basic inputs a business turns into products. Establishing operations near suitable supplies can reduce delivery costs and make access more reliable. For Hartwell Footwear, proximity to leather suppliers could reduce delays in receiving materials.

2:26A dependable supply helps the company keep its factory operating and fulfil customer orders. An import tariff is a tax on imported goods, while an import quota is a limit on the quantity of a product that can be imported. A business may avoid these trade barriers by making its products inside the destination country. Shoes manufactured there are sold locally without crossing that country’s border as finished imports. They pay no tariff and fall outside any quota, so they can be cheaper to supply than shoes produced abroad.

2:54An overseas operation can also give the business access to additional customers. Saltmarsh Lodges provides holiday accommodation and opens properties in another country. Travellers visiting that destination can now book directly with the business. If these bookings add sales beyond its existing locations, the company earns more revenue. Spreading operations across countries can reduce dependence on a single market. Poor demand in one destination may coincide with stronger bookings elsewhere.

3:20Income from the stronger location can help offset the weaker performance. This protection is greatest when the countries experience different changes in demand. Government incentives are financial or other benefits offered to encourage business activity. A host government might offer a grant towards premises or a temporary tax reduction. These incentives reduce the company’s establishment costs or the amount it pays in tax. International expansion becomes more attractive when the expected benefits exceed the costs of operating overseas.

Benefits for host countries

3:49For the host country, possible advantages include jobs, exports, increased consumer choice, investment, tax revenue and new skills and technology. These effects reach different groups. Employees earn wages, customers get more options, and the government may receive funds for services. The scale of each benefit depends on how the overseas operation works. Opening a factory creates jobs when the company recruits local employees. Their wages provide income that can be spent with businesses in the surrounding area.

4:17Local suppliers may also need additional employees if the factory orders their materials or services. The country can therefore gain employment both inside the multinational and elsewhere. Exports increase when the overseas factory sells some of its output to customers in other countries. Those orders bring sales income into the host country. A company producing entirely for local customers instead improves domestic supply. The export benefit depends specifically on products or services being sold abroad.

4:46Consumers gain increased choice when the multinational introduces products or services that were previously unavailable locally. A new accommodation provider could offer different facilities or locations. Existing providers may respond by improving their own offers. Customers then have more options when selecting the service that best meets their needs. Investment is spending on assets such as buildings and machinery to support business activity. An overseas company may finance a factory, equipment and connections to electricity supplies.

5:13This creates facilities that support production in the host country. Where the company also finances improved access roads, nearby businesses may benefit from easier transport. Tax revenue is the income a government receives through taxation. A multinational may pay taxes on its local activities, while its employees pay applicable taxes on their earnings. The government can use this income to help finance public services. Tax incentives can reduce the immediate benefit, especially during the early years of the operation.

5:42New skills and technology can improve local capabilities. Employees may learn how to operate specialised machinery or manage complex production processes. Some later use these skills in other businesses in the host country. This benefit is stronger when the multinational provides substantial training and opportunities to progress.

Costs for host countries

6:00Possible disadvantages include increased competition, environmental damage, exploitation of natural resources, repatriation of profits, low-skilled jobs and sudden departure. A country can experience benefits alongside these costs. New jobs may arrive while some existing businesses lose customers. Understanding the overall effect requires examining what happens to each affected group. Local businesses may struggle against a multinational with substantial finance and established production methods. If customers switch to its products, domestic rivals lose sales.

6:30Some may close when their revenue can no longer cover total costs. Their employees then lose their jobs, so the overall employment benefit of the new operation is smaller. Environmental damage can arise if a factory releases untreated waste or harmful emissions. Polluted water can harm nearby residents and businesses that depend on a clean supply. The host country may also face clean-up costs. Effective pollution controls reduce this danger, so the company’s methods and enforcement of regulations matter.

6:58Natural resources are materials found in nature that businesses use. Exploitation occurs when extraction or use depletes supplies excessively or damages their surroundings. A multinational drawing excessive amounts of water could reduce the supply available to nearby farms. The company gains an input, while the host country bears damage to resources needed by others. Repatriation of profits means an M N C sends the profit from its overseas operation back to its home country, instead of reinvesting it locally.

7:26That money leaves the host economy. Fewer funds then remain for local expansion and additional jobs. The host country still receives benefits such as wages, purchases from suppliers and applicable taxes. The nature of the jobs also matters. Repetitive tasks may offer limited training, while senior positions remain based overseas. Local employees receive wages but gain fewer opportunities to develop valuable skills. A company that trains residents for technical and management roles offers a stronger long-term employment benefit.

7:55A multinational may relocate if another country offers lower costs or more attractive incentives. A sudden departure leaves its local employees without those jobs. Suppliers that depended heavily on its orders also lose business. The host country is particularly exposed when one overseas company dominates employment in the surrounding area.

Assessing host-country effects

8:13Dalecroft Engineering makes car parts and opens a factory in a host country. It recruits local employees and sells some output abroad. Existing domestic manufacturers serve the same customers, and nearby farms depend on a limited water supply. The company plans to draw water from that supply during production. Recruitment gives local employees paid work, so their households gain income to spend in the area. Some of the factory’s output goes to customers abroad.

8:38Those sales count as exports for the host country, because products made there are sold to other countries. Export orders bring extra income into the host economy. Domestic manufacturers face additional competition and may lose customers to Dalecroft Engineering. If their sales become insufficient to cover costs, closures cause job losses. Heavy water use could also reduce the supply available to nearby farms and damage their ability to produce crops.

9:02This worked example shows why a simple label such as beneficial is insufficient. Employment and export gains are supported by the case details. The size of the overall benefit depends on local job losses and pressure on water supplies. Evidence about recruitment, competitors and resource use helps us judge the host country’s position. Keep three distinctions clear when answering questions. Multinational status comes from factories, production or service operations in more than one country.

9:29Business advantages concern the company, while host-country effects concern residents, domestic firms, customers and government. Repatriation concerns the destination of profit after the overseas activity has generated it. Paper One Short Answer and Data Response and Paper Two Case Study both use stimulus material. An exam-style question could ask you to explain one advantage and one disadvantage for the host country. Explain means set out purposes or reasons, say why and how, supported with relevant evidence.

9:58Use the information about Dalecroft Engineering to connect each point to its effect. One advantage is increased employment, because Dalecroft Engineering recruits local employees for its car-parts factory. Their wages raise household income in the host country. However, the factory draws on the limited local water supply, so it puts pressure on natural resources. With less water available, nearby farms may grow fewer crops and lose income. To sum up, a multinational company is a business with factories, production or service operations in more than one country.

10:27Operating abroad brings it closer to customers, lowers costs and secures raw materials. It can also avoid trade barriers, gain incentives, win more sales and spread risk. Host countries can gain jobs, exports, choice, investment, taxes and skills. Competition, environmental damage, exploitation of natural resources and repatriation of profits mean those benefits come with costs.