Multinations 3.2

Question 1

what is a multinational company?

Answer 1

any company that has productive activities or delivers services to more than one country but had a definate home base (headquarters)

Question 2

what are reasons to become a multinational?

Answer 2

• a reduction in trade barriers, due to the influence in bilateral trade agreements faciliating easier movement of goods between countries and has made it cheaper to sell in other countries and import from abroad.
• to avoid monopoly legislation in their home country as it may restrict the growth of their company in its home.
• the influence of global media has enabled world-wide awareness of more products and harmonised consumer demand therefore more international consumers would purchase from a multinational company
• they can avoid tax through transfer pricing by moving their profits around the globe

Question 3

why locate in a particular country?

Answer 3

• raw materials and resources can be more easily available and cheaper in countrys in which they are harvested
• to avoid protectionist policies as they can avoid tariffs or quotas which that country may impose
• locating in emerging markets are becoming more prosperous and have consumers who want to buy global branded goods e.g china or india

Question 4

benefits of becoming a multinational for a home country?

Answer 4

• less demand for unskilled workers leading to more individulas seeking education to ensure they can be employed and as a result have a greater income
• the capital account of the homes countrys balance of payments would benefit due to the inward flow of foreign earnings and more demand for exports from the home country like e.g capital equiptment
• profits made from the multinational can be recipricated and sent back to the home country

Question 5

costs of becoming a multinational for the home country?

Answer 5

• the home government can lose control of multinationals as they grow in size and power e.g a large multinational may demand incentives and tax subsidies from a government, with the threat of relocation if the government does not give in to the demands.
• the current account suffers if the objective of FDI is to serve the home market from a low-cost production location as the profit will be made abroad and not in the home country.
• The low cost of unskilled labour in other countries can cause unemployment in the home country. The wage rate for unskilled workers in many advanced countries has decreased significantly over the years because of competition from other countries.

Question 6

benefits for the host country?

Answer 6

• multinationals may improve roads, rail networks and communications facilities if they are not adequate for their needs which can benefit whole communities
• new MNCs results in a greater choice of goods and services within the host country. The establishment of the new business will also increase competition and may start a price war as the market vies for the attention of consumers.

Question 7

costs of the host country?

Answer 7

• many multinationals have set up in countries with less stringent safety laws than their home country, allowing them to cut the costs of production. These poor safety procedures have caused accidents, e.g. the BP oil spillage in the
  Gulf of Mexico in 2011. Other multinationals have been accused of operating unethically.
• Multinationals have been criticized for adjusting transfer costs between their subsidiaries so that profits are declared in those countries with lower tax regimes.

Question 8

describe factors which may attract foreign firms to locate in Scotland

Answer 8

• availability of natural resources e.g oil, forests
• access to scottish consumers
• english speaking population
• they have an EU membership which eliminates trade barriers as trading blocs facilitate trade amongst members by reducing tariffs whereas non members have increased tariffs and restrictions
• political stability allows firms to plan ahead