The advantages of MNCs
Economic Growth and Employment
The essence of a MNC is that they bring inward investment to countries that are not their home base. If they choose to expand by building production facilities they will be bringing in inward investment into the country. This investment is likely to provide a boost, not only to the local economy but also the national economy.
Building a new plant requires resources - land, labour and capital. Labour has to be found to help construct the plant and all the equipment that goes into it and some firm somewhere will be hired to build the machinery and equipment, provide the bricks, steel, cement, glass etc. That go into the building. If it is announced that Company X from Germany are to build a new distribution centre in the UK at a cost of 10 million, this effectively means that a whole host of firms will be getting additional work to the value of 10 million.
Let us assume that a firm manufactures and supplies cable for electrical work. To this firm, the contract to supply the cabling for the new plant might be worth 350,000. If the plant was not built then the firm would not generate that order and not receive that work. For workers in the cabling plant, the order helps to maintain the flow of orders and can keep them in employment.
It can also be expected that the additional income will find its way through the local economy. If additional people are hired, they will receive an income which they spend. For existing workers, increased orders might equate to job security and they too might feel more confident in spending on new items - furniture, house extension, new white goods, holidays and so on. Inward investment therefore can act as a trigger to generating wealth in the local economy. If a MNC is attracted to an area then this might also lead to other smaller firms in the supply chain deciding to locate in those areas. Other firms providing services to these firms are then attracted to the area and so on.
Honda located a factory in Swindon, Wiltshire, a town known for its railway industry. Now the town is synonymous with car manufacturing. The Honda plant was an investment of over 1.3 billion. It is one of 120 Honda manufacturing facilities in 29 different countries. Copyright: Niels Laan, from stock.xchng.
This type of wealth generation has been witnessed in many UK regions. The siting of the car manufacturing plants in Sunderland, Swindon and Derby has done much to help those regions experience a boost to the local economy. In the case of Sunderland and Derby, the investment has partly helped to offset the decline in other industries that caused unemployment. For less developed countries, inward investment can again act as a catalyst for other forms of investment. The effects of the investment might be less dramatic but nevertheless, it can be something that is seen as essential for helping a country escape from poverty.
Skills, production techniques and improvements in the quality of human capital
It can be argued that MNCs bring with them new ideas and new techniques that can help to improve the quality of production and help boost the quality of human capital in the host country. Many will not only look to employ local labour but also provide them with training and new skills to help them improve productivity and efficiency.
In Sunderland, one of Europe's most productive car manufacturing plants, the workers have had to get used to different ways of working and different expectations than many might have been used to if working for other British firms. In some cases this can prove a challenge but in others it can lead to improvements in motivation and productivity. The skills that workers build up can then be passed on to other workers and this improves the supply of skilled labour in the area. This makes the area even more attractive to new industry as it helps to reduce the costs of training and skilling of workers.
Availability of quality goods and services in the host country:
In some cases, production in a host country may be primarily aimed at the export market. However, in other cases, the inward investment might have been made to gain access to the host country market to circumvent trade barriers. In the case of many Japanese car manufacturers the investment made into UK production has enabled them to get a foothold in the EU and to avoid tariff barriers. The UK has had access to high quality vehicles at cheaper prices and the competition this has created has also led to improvements in working practices, prices and quality in other related industries.
The location of businesses in different countries might mean the availability of high quality and relatively cheap products being available to the home market. Copyright: Jannes, from stock.xchng.
For the host country, there is a likelihood that the MNC will have to be subject to the tax regime in that country. As a result, many MNCs pay large sums in taxes to the host government. In less developed countries the problem might be that there is a large amount of corruption and bad governance and as a result MNCs might not contribute the tax revenue they could and even if they do it might not find its way through to the government itself.
Improvements in Infrastructure
In addition to the investment in a country in production or distribution facilities, a company might also invest in additional infrastructure facilities like road, rail, port and communications facilities. This can provide benefits for the whole country.
The Costs of Multinationals
The costs can be summarised in the points below - for the most part, the costs are closely linked to the benefits but it will depend on the extent of the benefits that might arise as a result of the activity of the MNC.
' Employment might not be as extensive as hoped - many jobs might go to skilled workers from other countries rather than to domestic workers.
' There might be a limit in the effect on the local economy - it will depend on how big the investment into the local economy actually is.
' Some MNCs may be 'footloose'; this means that they might locate in a country to gain the tax or grant advantages but then move away when these run out. As a result there might not be a long term benefit to the country.
' How many new jobs are created depends on the type of investment. Investment into capital intensive production facilities might not bring as many jobs to an area as hoped.
' The size and power of multinationals can be used, it is argued, to exploit weak or corrupt governments to get better deals for the MNC. Mittal, for example, a major steel producer, negotiated a $900 million deal to secure rights to mine iron ore in Liberia. The government that negotiated the deal was not elected. When a new, elected government came to power, they re-negotiated the deal and took the investment to well over $1 billion.
' Pollution and environmental damage. Some countries may have less rigorous regulatory authorities that monitor the environmental impact of MNC activities. This can cause long term problems. In India, Coca-Cola has been accused of using up water supplies in its bottling plant in Kerala in Southern India and also of dumping waste products onto land and claiming it was useful as fertiliser when it appeared to have no such beneficial properties.
Production can cause problems - in any country - but in some countries the rules may be less rigorously enforced. Copyright: Sean Carpenter, from stock.xchng.
' De-merit goods. Some companies might be producing goods that are not beneficial. Examples might include tobacco products and baby milk - mentioned earlier.
' Repatriation of profits. Profits might go back to the headquarters of the MNC rather than staying in the host country - the benefits, therefore, might not be as great.