💼 Jobs
An MNC factory or call centre employs local people. Other local firms also gain jobs, for example firms that supply parts or sell food to the workers. Unemployment may fall.
Globalisation and Trade Restrictions » Multinational Companies
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 6.2.3
- What a multinational company is and what host and home countries are
- The advantages and disadvantages of MNCs to host countries
- The advantages and disadvantages of MNCs to home countries
- How to give a balanced answer about MNCs in the exam
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Unlock This CourseMNCs, host countries and home countries
Think of a global brand of trainers or fizzy drink. You can buy it almost anywhere, and it may be made in factories in several different countries. The firm behind it is a multinational company.
In Globalisation: Causes and Effects you met the multinational company (MNC): a firm with operations in more than one country. Their movement abroad is one cause of globalisation. This lesson looks at what they mean for the countries involved.
Key terms:
- Home country: the country where an MNC has its headquarters (where it is based).
- Host country: a country where an MNC sets up a factory, shop or office but is not based.
The same country can be both. A car firm based in Country A is a home country firm there, and it is a guest in Country B where it builds a factory. For each MNC, you must always ask: which country am I talking about?
Advantages of MNCs to host countries
🏭 Investment
The MNC spends money on buildings, machines and roads. This adds to the host country's capital and can raise its output and economic growth.
🎓 Skills
Workers are trained and learn new methods and technology. When they leave, they can use these skills in local firms or start their own business.
💰 Tax revenue
The MNC pays taxes, and its workers pay income tax. The government can spend this on schools, hospitals and roads.
Exports: if the MNC sells its goods abroad, the host country's exports rise. This brings in money from other countries.
Disadvantages of MNCs to host countries
- Profits sent home. Much of the profit goes back to the owners in the home country instead of staying to be spent in the host country. The host country keeps only the wages, tax and spending on local goods.
- Local firms squeezed. MNCs are often large and can produce at low cost. Small local firms may not be able to compete, so they lose sales or close, and their workers lose their jobs.
- Environmental concerns. Factories may cause pollution, use up resources or damage land. Some MNCs may choose a host country because its environmental rules are weaker.
- Labour concerns. Wages may be low, hours long or working conditions poor, especially where laws to protect workers are weak.
Worked example
Zelmora is a host country. Orbitex, a made-up MNC from Brandovia, opens a phone factory there.
Gains for Zelmora: 2,000 local people get jobs (1). Workers learn how to assemble electronics, which are skills they can use elsewhere (1). Orbitex and its workers pay tax, so the government has more revenue (1).
Losses for Zelmora: most of Orbitex's profit is sent to Brandovia (1). A small local phone repair firm cannot match Orbitex's low prices and may close (1).
Conclusion: the gains may be bigger than the losses if the factory creates many jobs and the host country keeps a fair share of the tax.
Advantages of MNCs to home countries
- Profits. Profits earned abroad are sent back to the home country. This raises the incomes of owners and shareholders, who spend more, and the government collects tax on them.
- Growth. The firm gets bigger, sells in more markets and may earn more export income, which can add to the home country's economic growth.
Disadvantages of MNCs to home countries
- Lost jobs. If the MNC moves production abroad, workers at home may lose their jobs. These jobs are often in manufacturing.
- Lost investment. Money spent on new factories abroad is not spent at home. The home economy gets less new capital and growth may be slower.
Common mistakes
- Mixing up host and home countries. Jobs created in the country where the factory is built are a gain for the host, not the home country.
- Writing "MNCs are good" or "MNCs are bad". Most effects have two sides, and who gains depends on the country and the MNC.
- Listing a point without explaining it. "Jobs" is not enough. Say that people get jobs, so they earn incomes, so they can spend more.
- Saying that all the profit leaves the host country. Some profit is usually kept, and the MNC still pays wages and tax there.
Exam-style question
Haldria is a middle-income country. Norvex Motors, a car firm based in Tarvania, has opened a large factory in Haldria. It employs 5,000 local workers. Most of its profits are sent to Tarvania. Some local car repair firms have closed.
(a) Define multinational company. [2 marks]
(b) Explain two advantages to Haldria of Norvex Motors opening a factory there. [4 marks]
(c) Analyse how Tarvania might be affected by Norvex Motors moving production to Haldria. [6 marks]
Model answer
(a) A multinational company is a firm (1) that has operations in more than one country (1).
(b) One advantage is jobs (1). The 5,000 workers earn incomes, so they can spend more and living standards may rise (1). Another advantage is tax revenue (1). Norvex and its workers pay taxes, so the government of Haldria can spend more on schools and roads (1).
(c) Tarvania may gain because profits earned in Haldria are sent back (1). This raises the incomes of owners and shareholders, and the government collects tax on them (1). However, production moving abroad may mean car workers in Tarvania lose their jobs (1). They earn less and spend less, so other firms in Tarvania lose sales (1). Money spent on the Haldria factory is not spent in Tarvania, so there is less investment at home (1). Overall, Tarvania gains in profits but may lose jobs and investment, so the effect depends on how many jobs are lost (1).
Exam tip
For part (c), name the country the question asks about and stay with it. Marks go for effects on Tarvania, not on Haldria.