MNC and FDI

reasons of emergance

economies of scale

In some industries, firms that exploit economies of scale can reduce costs. MNCs will be in a better position to exploit economics of scale because they are so large.

access to natural resources/cheap materials

Many large companies are happy to invest overseas because they need to buy huge quantities of resources. A significant proportion of FDI is targeted at the mining industry. Many african states have attracted FDI because they have large reserves for valuable resources.

lower transport and communication costs

Developments in transport and communications have helped to drive the growth in MNC/FDI activity. Transportation costs have come down and the speed with which goods can be delivered has gone up. This makes distribution in overseas markets much more attractive. Air travel is now relatively cheap with the number of destinations growing.

access to customers in different regions

One of the main reasons why MNCs have developed successfully is because they can sell far more goods and services in global markets that they can in domestic markets. Companies can make considerably more profit selling to the 7000 million people worldwide than they can selling to perhaps 50 million people at home. For example, SONY generated more than 70% of its revenue outside of Japan.

advantages

job creation

One of the main benefits of FDI is the employment created when MNCs arrive and establish factories, warehouses, shops and other business facilities. When MNCs set up operations overseas, income in those countries rises. Local suppliers are also likely to get work when a multinational arrives.

investment in infrastructure

Countries with poor infrastructure often struggle to attract FDI. If a country has inadequate road networks, ports, railway networks, bridges, power distribution, airports, telecommunications, industrial parks and other facilities, it is more difficult to do business in that country. Consequently, owing to the attractiveness of MNCs/FDI, governments are more likely to invest in infrastructure in order to attract the attention of investors. If this investment is forthcoming, everyone will benefit.

developing skills

MNCs provide training and work experience for workers when they locate operations in foreign countries. Also, when governments in less developed countries often spend more on education to help attract MNCs. This happened in India, where the government invested heavily in IT education and training. The arrival of MNCs may also encourage local people to set up business.

developing capital

The arrival of MNCs will help to boost the stock of capital in host countries. One reason is because when a business sets up a new facility, such as a factory, it is likely to install up-to-date technology. For example, BMW, the giant German Car producer, is currently building a new plant in Mexico. The arrival of MNCs might also encourage local suppliers and other businesses to invest in new capital projects. This will help them win orders to supply the MNC, for example.

contributing to taxes

The profits made by MNCs are taxed by the host nation. This increases tax revenue for the government that can be used to improve government services. For example, in Mumbai, the income tax department claimed that it had collected Rs23000 crone from foreign companies in 2016. However, it also said that there was at least another Rs8000 crone outstanding. If MNCs/FDI did not operate businesses in such countries, this valuable source of revenue would not exist.

disadvantages

tax avoicance

Tax avoidance, particularly by powerful MNCs have attracted the attention of the world's media in recent years. Also, political leaders, particularly in the USA and EU have accused MNCs such as Apple and Google, of failing to pay their fair share. However, the MNCs have frequently responded to these accusations by saying that they pay their taxes and have done nothing wrong.

environmental damage

many environmentalists are suspicious of MNCs because they may cause environmental damage. Once reason is because MNCs are heavily involved in the extraction industries such as coal, oil and gold mining. Mining is often destructive. A few years ago, according to a report by the United Nations, the cost of pollution and other damage to the natural environment caused by the world's biggest companies would wipe out one-third of their profits if they were held financially accountable.

moving profits abroad

The profits made by MNCs abroad are often subject to repatriation. This means that profits are returned to the country where the MNC is based. As a result, the host country loses out. This suggests that MNCs bring more benefits to developed countries than less developed countries.