Page 336 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 6 External influences on business activity

■ Improves the country’s reputation – the fact that a foreign company has decided
to invest in the host country shows that it has a positive regulatory and economic
environment. This may encourage other MNCs to set up there.
■ Increases employment opportunities – the local workforce will be employed to
work in the MNCs. Governments of host countries provide incentives to MNCs to
set up in areas with high unemployment and a plentiful supply of labour.
■ Generates income in the form of tax – the income generated by the MNC will be
taxable in the host country, leading to income for the government to spend on
important services such as health care and education.
■ Improves infrastructure – the MNC may have to invest in transportation and
communication networks. This may benefit everyone in the host country.
■ Knowledge-sharing – new technology and techniques that are being used by the
MNC will be shared with local employees. Local companies could learn from them
and improve.
■ Improves the balance of payments – imports may reduce as the MNC may be able
to provide the products that were previously imported. Exports will increase as the
MNC has global presence and will export its goods.

Drawbacks of a multinational to the host country
Multinationals also pose many drawbacks to the host country.

■ Undue influence on the government – the investment made by MNCs can be

huge, greatly affecting the economic conditions of the host country. In exchange for
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this, MNCs may try to influence government policies that affect them. This may not
be good for the host country in the long term.
■ Increased competition – since multinationals are large and are experts in their

area of operation, they are cost-efficient and can provide better quality goods at

lower prices. Local companies that provide the same goods may suffer in such a
case.
■ Environmental damage – MNCs aim to produce goods as quickly and as cheaply
as possible, and in doing so may ignore their impact on the environment.
■ Exploitation of labour – if the host country has high unemployment, then MNCs
may pay low skilled workers low wages and hire experts from abroad for high
skilled jobs.
■ Repatriation of profit – many MNCs repatriate (send back) the profits that they
earn to their home country, leaving the host country with very little financial
benefit.
■ Exploitation of natural resources – sometimes MNCs set up their operations in
EXPLORE! host countries so that they can have easier and cheaper access to their natural
resources. In the long term this may lead to scarcity of that natural resource in the
Make a list of multinational
host country.
companies that have started
operations in your country. What ■ Negative social impact – the marketing done by MNCs can greatly aff ect the
products or services do they lifestyle, food habits and culture of the host communities. This may mean that
provide? How do you think that traditional products and practices disappear.
local customers have benefited
■ Less sense of social responsibility – as the MNCs are mainly driven by profit, there
by their presence? What
is always uncertainty about their operations in the host country. For example, they
have been the drawbacks or
advantages for your country? may not pay much attention to health and safety if the laws of the host country are
not very strict.