Chapter 26, Business and The International Economy
Learning Objective: To understand the problems of hosting MNCs in your country
It's not hard to think of the many benefits MNCs can bring to a host country:
Employment Opportunities;
Increased Competition: higher quality products, lower prices, and more options;
Increased Country's Reputation;
Knowledge-Sharing;
Investments in Infrastructure;
Increased Government Tax Income;
Improved Balance of Payments.
It is important for us to consider, however, that MNCs can also bring a variety of drawbacks to their host countries.
Let's look into how this comes to happen:
- Increased Competition:
While competition can be beneficial for lower prices and higher quality, MNCs can lead smaller/local businesses to bankruptcy and/or limit their growth.
- Exploitation of Local Labor:
It not uncommon to see large MNCs paying very low salaries to local unskilled workforce while hiring specialized labor from abroad.
- Harm to Local Environment:
The main reason MNCs relocate to developing countries is for cutting costs. Producing as quickly and cheaply as possible with no regards for the environment.
- Exploitation of Natural Resources:
MNCs are in for money. They oftentimes move to countries where they have access to cheap resources.
It can lead host countries to experience scarcity of once abundant natural resources.
MNCs have a lower sense of responsibility when operating in host countries. The environment, resources, and the health and safety of workers become secondary for some multinational businesses.
- Corporate Influence Over Host Governments:
Governments are sometimes influenced by businesses: they are led to making decisions that would benefit the business in expense of society.
- Negative Social Impact:
Culture, food, lifestyle, among other social elements can fade away through the activity of MNCs.
In summary, MNCs can bring both positive and negative impacts to host countries. It all depends on how the investment is handled and the intentions of the MNC. Governments should be aiming to rip the benefits and minimize the negative impacts of MNCs to leverage economic growth.
Businesses themselves enjoy of several advantages for becoming an MNC:
- Cost Advantage:
MNCs are able to lower operations costs by:
- Having access to cheaper raw materials (bulk buying);
- Lower transportation costs as they are present in different locations/countries;
- Avoiding tariffs and quotas;
- Lower labor costs.
- Economies of Scale:
MNCs have larger operations increasing volume of production and decreasing unit costs.
- Access to Larger Markets:
Ability to increase sales volume as well as to spread risks among different markets/countries (e.g. pandemics, natural disasters, etc.).
- Ability to Charge Premium:
MNCs develop internationally recognized brands. Such brands bring a feeling of higher value to customers who are willing to pay more for their products.
Complete Activity 26.2 (p. 331)
The success of MNCs, however, is not guaranteed. There are a number of threats businesses need to be considerate of:
- Shortage of Specialized Labor:
Such problem can slow down MNCs growth and lead to an increase in costs:
- Expensive foreign labor;
- Process inefficiencies.
- Lack of Market Knowledge:
Expanding internationally require the understanding of local customers. The lack of it may represent failure.
- Language Barriers:
Several mistakes and inefficiencies might be experienced due to language issues between managers and workers.
- Cultural Differences:
Businesses need to be sensitive and adapt to cultural differences in the host country. Lack of cultural-sensitivity is one of the main reasons MNCs fail overseas.
Different Local Regulations:
Each country may have different regulations regarding products, sales tactics, etc., making it harder for MNCs to cope and succeed.
Hostile Business/Competitive Environment:
Host countries may have a very competitive environment making it hard for MNCs to succeed locally.
Little to no brand awareness of some MNCs in the host country may jeopardize success and require high investments in marketing.
- Bad Publicity Created by Pressure Groups:
In some industries more than others MNCs may face strong action action from pressure groups which can cause bad publicity internationally.
- Currency Fluctuations:
Such fluctuations can impact MNCs' profits:
- Price of supplies can fluctuate;
- Sales revenues are impacted.
- Political Instability:
Political instability can cause delays and create inefficiencies in business processes.
They can help due to:
- Corruption;
- Slow decision-making;
- Incompetence.
To-Do-List:
Case Study - Mexico's Manufacturing Boom (p. 335)
Chapter 26, Business and The International Economy
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