MULTINATIONAL COMPANIES (MNCs) AND FOREIGN DIRECT INVESTMENT
WHAT ARE MULTINATIONAL COMPANIES?
MNCs firms are very large and powerful. They sell goods and services into global markets and have production
plants and other operating facilities all over the world. MNCs play a large and growing role in the world economy.
They contribute about 10 per cent to world GDP and about two-thirds to global exports. Examples, include
McDonald's, Toyota, British Petroleum, Microsoft and Coca-Cola.
Some of the key features of MNCs include:
• huge assets {land, buildings, plant, machinery and money, for example) and revenue: MNCs are extremely well-
resourced and can often afford to take on large-scale contracts and projects that many other firms could not cope
with
• highly qualified and experienced professional executives and managers: MNCs can afford to hire the very best
people from anywhere in the world
• powerful advertising and marketing capability: they can invest huge amounts of money in impressive advertising
campaigns to outcompete smaller rivals
• highly advanced and up-to-date technology: MNCs can afford to keep right up-to-date with technological
developments so that they always have the most efficient factories, machinery and equipment, which can help to
lower costs
• highly influential both economically and politically: they can be very powerful and even influence government
decision making
• very efficient since they can exploit huge economies of scale: because MNCs are so large, they have the ability
to reduce their costs significantly - they can buy huge quantities of raw materials more cheaply, for example.
WHAT IS FOREIGN DIRECT INVESTMENT (FDI)? FDI, or inward investment, occurs when a company
makes an investment in a foreign country.
Reasons for emergence of FDI / MNCs or Advantages of being a multinationals:
1. ECONOMIES OF SCALE
In some industries, firms that exploit economies of scale can reduce costs. MNCs will be in a better position to
exploit economies of scale because they are so large. Firms that sell to global markets will produce more than
those who just sell to domestic markets. They can therefore lower costs. Such firms are so powerful they can
place a lot of pressure on suppliers to lower their prices. One of the main reasons why MNCs have emerged is
because as companies get bigger and bigger, their costs get lower and lower – provided they avoid diseconomies
of scale.
2. Foreign investments
Multinationals engage in Foreign direct investment. This helps create capital flows to poorer/developing
economies. It also creates jobs. Although wages may be low by the standards of the developed world – they are
better jobs than alternatives and gradually help to raise wages in the developing world.
3. ACCESS TO NATURAL RESOURCES/CHEAP MATERIALS
Many large companies are happy to invest overseas because they need to buy huge quantities of resources. They
have the opportunity to buy the cheapest raw materials in the global market and produce in low wage economies
which further reduce their costs.
4. 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. This means that managers and other staff can travel around the world more easily to discuss
and organise business activity. Recent advances in communications technology have been particularly rapid.
People can transmit a wide range of different information, such as text, drawings, video clips, photographs and
financial documents, instantly using electronic devices.
5.
6.
ADVANTAGES OF MNCS /FDI /GLOBALIZATION TO HOST COUNTRIES / DEVELOPING
NATIONS:
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,
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 businesses. MNCs may have provided the skills and motivation needed for
enterprise.
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.
DISADVANTAGES OF MNCS /FDI /GLOBALIZATION TO HOST COUNTRIES / DEVELOPING
NATIONS:
repatriation (of profit) where a multinational returns the profits from an overseas venture to the country where
it is based, typically from a developing country to a developed country (not often the other way around).
