A2 Economics and BusinessCan multinational firms be controlled?

Unit 3

By Mrs Hilton for revisionstation

Lesson Objectives

• To be able to answer past paper questions on the topic

Multinationals

• A multinational corporation or company (MNC) may also be known as a global company or a transnational company.

• They have operations in more than one country.

• Head office sourcing and operations and marketing may have locations in separate countries or in different country groups (such as the EU)

Growth of the multinational

• Second half of the 20th century grew in size and number

• Since 1980’s their number and size has grown • Size and types of markets have grown – why is

this?• Many multinationals now dominate global

markets

GDP ($bn) please write these down

Country GDP RankMalaysia 218,950 38Chile 199,183 44Jamaica 13,737 109Zimbabwe 5,574 141

What is GDP?

Walmart

• 408,214 ($bn)

• What industry are they in?

• How does this compare with the GDP of those 4 countries?

• What does this mean for the relationship of the country and the business?

Royal Dutch Shell

• 368,056 ($bn)

Exxon Mobil

• 301,300 ($bn)

BP

• 297,107 ($bn)

Saudi Aramco

• 233,300 ($bn)

Toyota Motors

• 203,678 ($bn)

MNCs

• What business are the majority of these vast MNCs in?

• Have they disregarded issues such as global warming and the environment?

• Search for the BP oil spill in the gulf of Mexico in 2010

• Why are BP in trouble?• Have they disregarded

global environmental issues?

The Balance of Payments and MNCs 1

• MNCs import large amounts of capital in order to pay for their new business investments; factories, offices or whatever.

• This surplus on the capital account creates a deficit on the current account i.e. the country is importing more goods and services than it is exporting.

• This lifts local standards of living until the import of capital stops for whatever reason and then standards fall again.

Balance of payments and MNCs 2

• If the new business is for import substitution (ie producing locally what had been imported) then imports fall and the current account improves.

• If the new business is developing local raw materials for export (e.g. oil exploration) then the exports of raw material also improve the current account.

Balance of payments and MNCs 3

• The MNC may need to import large amounts of technical equipment not available locally, and this will worsen the current account.

• If the MNC re-invests its profits then there is no effect on the Balance of Payments, but if it repatriates its profits, the current account worsens.

• Further, the exchange market of a small country may not be well-developed, so the attempt by a business to buy or to sell large amounts of foreign exchange will send the price of that currency sharply up or down unless things are managed very carefully

Politicians and Multinationals

• In many countries politicians face regular elections• The jobs investment and tax generated by inward

multinational investment can boost their popularity and election prospects.

• If a MNE pulls out of a country it leaves a politician with serious problems

• Politicians have little power over the MNEs if their small country is not central to the multinational’s activities.

Employment 1

• Generally, MNCs set up new businesses which need new workers and so employment is improved; jobs are created.

• However, it depends on the skills match between the new jobs and the local employment market.

• The business may set up a factory specifically designed to suit the local employment market, but in the Middle East oil states, for example, there are many factories producing for the local consumer markets.

Employment 2

• Sometimes the jobs are too demanding for the locals, and sometimes the jobs are too demeaning. Either way, the result is huge numbers of expatriate workers migrate from India, Bangladesh, the Philippines and so on and at the same time there is large local unemployment.

• MNCs can sometimes provide devastating competition for local businesses which may end up closing which creates unemployment.

• MNCs usually employ fewer workers; that is part of their greater efficiency. The MNC may then relocate again after a period of years.

Technology transfer

• An MNC invariably operates to a higher standard of managerial and technical expertise than the local economy.

• Local employees can learn about these things and the local economy can benefit from this new expertise.

• Even the UK can benefit, so we are not simply talking about developing countries where technology transfer is enormously important.

• This will depend on how willing the MNC is to employ and train local workers.

Social responsibility 1

• Standards and regulations are another kind of business cost, and MNCs are always looking for lower costs.

• So there is an advantage to locating in countries with few regulations.

• Some poor countries are prey to corruption and bribery which means their few regulations are ineffective.

• India, for example, has excellent environmental protection laws, on paper.

• In practice, the inspectors are so badly paid it only costs a matter of dollars to get them to look the other way. This opens the way for a slippage of standards below the levels considered acceptable in the MNCs home country.

Social responsibility 2

• One of the most scandalous cases was in the 1980s where the US chemical business Union Carbide tolerated very poor safety standards at a factory in Bhopal, India.

• The result was an explosion which released clouds of toxic gas and killed thousands. Many more thousands are still alive and very ill because of this.

• What was particularly irresponsible was the long years it took to force Union Carbide to accept responsibility and pay compensation. This whole area is a large and important are which it is impossible to cover completely.

• It is, for example, one important reason why some western pressure groups are so hostile to MNCs

Government control 1

• It is quite difficult for some governments to exercise effective control over MNCs because they are so large and powerful.

• One MNC may be the dominant force in the local economy. Even large and wealthy countries such as the UK can’t always control MNCs effectively.

• They have a wide repertoire of tricks to minimise government control, especially taxes.

Government control 2

• One favourite trick (technically illegal) is transfer pricing. • MNCs often buy and sell between different national

offices of the same business, because each is a separate profit centre. For example, the Paris office makes the product, and the Berlin office sells it.

• So the Paris office has to sell to the Berlin office. There is then the question of at what price the sale takes place.

• Officially, the selling price must be the market price on the day, but some markets don’t have prices every day, and governments have a difficulty in proving what is going on.

Government control 3

• If, for example, German company taxes are higher than French company taxes, then the Berlin office will pay too much for the product and make a loss.

• The Paris office makes a very large profit and pays tax on this profit at the lower rate.

• When different governments have completely different tax systems, with thousands of detailed rules of how tax is paid, and deductions for this, and allowances for that, the opportunities for MNCs to employ a few clever tax accountants and ‘cook the books’ are enormous.

Pressure groups

• Pressure groups formed by concerned individuals to attempt to change behaviour of MNC

• Lobby the government to demand change

• Protest march• Publicity stunts to draw attention

to the problems• Consumer boycott• Set up campaigns to change public

opinion

McLibel trial – example of pressure groups action

• The McLibel Trial is the infamous British court case between McDonald's and a former postman & a gardener from London (Helen Steel and Dave Morris). It ran for two and a half years and became the longest ever English trial. The defendants were denied legal aid and their right to a jury, so the whole trial was heard by a single Judge, Mr Justice Bell.

• The verdict was devastating for McDonald's. The judge ruled that they 'exploit children' with their advertising, produce 'misleading' advertising, are 'culpably responsible' for cruelty to animals, are 'antipathetic' to unionisation and pay their workers low wages. But Helen and Dave failed to prove all the points and so the Judge ruled that they HAD libelled McDonald's and should pay £60,000 damages to the company.

• The legal controversy continued. The McLibel 2 took the British Government to the European Court of Human Rights to defend the public's right to criticise multinationals, claiming UK libel laws are oppressive and unfair that they were denied a fair trial. The court ruled in favour of Helen and Dave: the case had breached their their rights to freedom of expression and a fair trial.

http://news.bbc.co.uk/1/hi/uk/4266209.stm

http://www.mcspotlight.org/case/

Sample question 1

• Analyse why there might be a conflict between ethical behaviour and profitability in the cigarette industry. [6]

Answer question 1

• Knowledge: up to 2 marks are available for understanding the meaning of ethical behaviour and profitability.

• Application: up to 2 marks are available for contextual answers such as relating the nature of a company’s trading activities to some degree of externalities (evidence in stimulus material).

• Analysis: up to 2 marks are for developing the nature of the conflict, e.g. attempting to correct the effects of the externalities may increase costs and have adverse effects upon profitability and competitiveness

Sample question 2

• Evaluate whether the Indian Government should encourage further foreign investment into the country. [15]

Basic pointers on how to answer question 2

• e.g. India is a growing economy and likely to attract foreign investment, government has a role in encouraging this or not.

• e.g. Analysis of the impact could be positive or negative. There is evidence in the stimulus of the threat to some Indian businesses that foreign firms may pose; structural change is perhaps, inevitable. There may be closures and negative effects on existing businesses who may struggle to cope with the incoming foreign businesses. Unemployment may rise and in some areas traditional ways of life may be threatened.

• On the other hand there may be many positive effects, incoming businesses will create jobs, training and technology transfer may happen, the Indian government may gain from tax revenues. The partners in joint ventures or the franchisees may well benefit from an increasing number of foreign firms entering the market.

Answer Q 2 continued

• e.g The Indian Government will need to balance the benefits of further foreign investment with the potential drawbacks. Evaluation may take the form of contrasting the fortunes of differing stakeholder groups and commenting upon the likelihood of such effects.

• e.g. There should be a balanced conclusion as to whether the Indian Government should encourage further foreign investment or not. Much will depend upon the pace and/or magnitude of India’s growth and the distribution of any resulting extra wealth. The short term situation may well be different to the long term.

Sample question 3

• Assess the extent to which the activities of a multinational, such as Enel, can be controlled by pressure groups. [9]

Answer question 3• define a pressure group/multinational/identify a control

e.g. consumer boycott• e.g. legal challenge to the dam in Chile or another

example (such as the McLibel case) to show a connection between a pressure group and a multinational

• e.g. organising a campaign to turn public opinion and how this may affect sales and thus alter behaviour of the multinational, use of protests/courts and legal challenges to halt the project e.g. protests may have little

• effect on sales (Primark), powerful multinationals like Coca-Cola can finance legal challenges to overturn rulings, governments may ignore pressure groups because of economic benefits