Page 334 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 6 External influences on business activity

Economic factors ■ There should be little or no restrictions on foreign investments, so that the foreign company
that is going to start operations will have fewer regulations to deal with and will be able to
establish itself easily.
■ Tax incentives and stable currencies of the host country will aid the MNCs financially and help
increase overall profits.
Social and political factors ■ Security and safety in the host country must be considered so that the physical assets of the
MNC as well as its employees are safe.
■ Productivity of the workforce is very important if the MNC wants to deliver goods on time and
be profitable.
■ Skilled workers need to be available and lower paid than in other locations to help firms
perform efficiently, as well as keep their labour costs low.

■ Political stability and legal controls are required. A change in government may change the
legal framework or change policies that may affect the business (for example, the corporation

tax rate or the minimum wage rate may be changed).
Infrastructure ■ Good infrastructure, such as roads, transportation, and communication, can help firms
operate more eff iciently.
■ Reliable power supply, with as little downtime as possible, is a key resource needed for
businesses to operate.
Operational factors ■ They must be close to the source of material, resources and sales outlets. This will reduce the
firms’ transportation costs.
■ Cost of factory lease, space and land use must be considered. The lower the cost, the more
profit the MNCs will make.
■ A reliable supply of raw material at a reasonable price is important. This will ensure timely
production of goods at reasonable prices.

Table 26.2 Factors required for a positive environment in a host country
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ACTIVITY 26.3

Asale Banda is a director of a large public limited company and is responsible for its international operations. The company
wants to expand and start its operations in other countries. Asale thinks that it should set up operations in emerging
countries like Turkey and Mexico, as it would face less competition there. However, she also recognises that there is
opposition to globalisation in some emerging nations.
1 What economic factors should Asale consider before selecting the country in which to set up operations?
2 Why is it important to consider the infrastructure of a country before setting up operations there?
3 What other factors should be considered?
4 Why might some emerging nations oppose globalisation?

Benefits to a business of becoming a multinational
Corporation tax: see

Chapter 24, page 305. Most businesses benefit from expanding their operations in foreign countries. Th e
benefi ts include:
Minimum wage: see
Chapter 8, page 120. ■ Easier access to raw materials – by setting up operations where the raw
materials are easily found, the business can reduce its transportation time and
costs and may even be able to avoid any trade barriers. These advantages will
help the business lower its production costs and improve reliability of supply.
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■ Lower cost of labour – if there is a plentiful supply of labour in the host country
The coming of a MNC has both
then it is likely to be available cheaply.
positive and negative eff ects on a
country. ■ Economies of scale – by selling in many countries, businesses can benefit from
economies of large-scale production. This makes them very competitive.