Causes of changes in globalisation: movement of multinational companies (MNCs)

International Trade and Globalisation (Cambridge IGCSE 0455 – Section 6)

Learning Objectives

• Explain specialisation, comparative advantage (lower opportunity cost) and free‑trade.
• Define globalisation and describe the main drivers of change.
• Analyse why multinational companies (MNCs) move across borders and how this influences globalisation.
• Evaluate the benefits and challenges of globalisation for both host and home countries.
• Describe foreign‑exchange rates, the current‑account of the balance of payments and the main trade‑restriction instruments.

Key Terminology

Term	Cambridge definition
Specialisation	The concentration of production on a limited range of goods or services to achieve greater efficiency.
Comparative advantage	The ability of a country to produce a good at a lower opportunity cost than another country.
Free‑trade	Trade between countries without tariffs, quotas or other restrictions.
Globalisation	The increasing integration of world economies through the movement of goods, services, capital, people and ideas.
Multinational company (MNC)	An enterprise that owns or controls production facilities in more than one country, usually with a single corporate headquarters.
Foreign direct investment (FDI)	Investment made by a firm or individual in one country into business interests in another country, typically by acquiring a lasting interest (≥10 % ownership).
Push factors	Conditions in the home country that encourage a firm to leave.
Pull factors	Conditions in a host country that attract a firm.
Foreign‑exchange rate	The price of one currency expressed in terms of another currency.
Current account	The part of the balance of payments that records trade in goods and services, primary income and secondary income.

6.1 Specialisation & Free‑trade

Why countries specialise

• Resource endowments – differences in land, labour, capital and technology.
• Comparative advantage – each country produces the goods for which it has the lowest opportunity cost.
• Economies of scale – larger output reduces average costs.

Advantages of free‑trade

• Greater variety of goods for consumers.
• Lower prices through competition and lower production costs.
• Stimulates innovation and efficiency.
• Opens new export markets for domestic producers.

Disadvantages / Risks of free‑trade

• Domestic industries that are not internationally competitive may shrink or disappear.
• Job losses in sectors that cannot compete on price or quality.
• Increased exposure to external economic shocks (e.g., a sudden fall in demand in a major market).
• Potential “race to the bottom” in labour and environmental standards.

6.2 Globalisation & Trade‑restriction Policies

Definition (syllabus)

Globalisation is the increasing integration of world economies through the movement of goods, services, capital, people and ideas.

Trade‑restriction instruments (required by the syllabus)

Instrument	Purpose / Typical Use
Tariff	Tax on imported goods – protects domestic producers or raises revenue.
Quota	Limit on the quantity of a good that can be imported – protects domestic industry.
Subsidy	Financial aid to domestic producers – makes them more competitive internationally.
Embargo / sanction	Prohibition of trade with a particular country for political reasons.
Voluntary export restraint (VER)	Self‑imposed limit by exporting country, usually under pressure from the importer.

Major causes of recent changes in globalisation

Cause	Explanation & Example
Falling transport costs	Containerisation, larger cargo ships and cheaper air freight lower the cost of moving goods – e.g., “just‑in‑time” supply chains in the automotive sector.
Falling communication & ICT costs	Internet, satellite links and cloud computing enable instant coordination of production across continents.
Movement of multinational companies (MNCs)	MNCs locate production, R&D and marketing where it is most profitable – see detailed section below.
Changes in trade‑restriction policies	Free‑trade agreements (EU‑Japan EPA), regional blocs (ASEAN, USMCA) and recent protectionist moves (US‑China tariffs, Brexit customs border).

Consequences of globalisation (syllabus)

• Trade – higher volume of imports and exports; greater market access for producers.
• Competition – more rivals, pressure on prices and quality.
• Environment – increased resource use and pollution, but also diffusion of greener technologies.
• Migration – movement of labour for better wages; remittances flow to home countries.
• Income distribution – can widen gaps between skilled and unskilled workers, yet may raise overall living standards.
• Development – FDI can bring capital, technology and jobs to developing economies, though benefits are not always evenly spread.

6.3 Foreign‑exchange Rates

Definition

The price of one currency expressed in terms of another currency (e.g., £1 = 1.25 US$).

Why currencies are bought and sold

• Importers need foreign currency to pay for goods.
• Exporters receive foreign currency when they sell abroad.
• Foreign‑direct investment and portfolio investment require currency conversion.
• Tourists, students and aid agencies exchange money for travel or study.
• Speculators buy or sell to profit from expected exchange‑rate movements.

Exchange‑rate regimes (Cambridge terminology)

• Fixed (or pegged) rate – government or central bank maintains a set rate against another currency or a basket.
• Floating rate – market forces of supply and demand determine the rate.
• Managed float (or dirty float) – primarily market‑determined but the central bank intervenes occasionally.

Key determinants of exchange rates

• Relative inflation rates – higher inflation erodes purchasing power and weakens the currency.
• Relative interest rates – higher rates attract foreign capital, strengthening the currency.
• Economic performance – strong growth raises demand for a country’s exports and its currency.
• Political stability and confidence – uncertainty can lead to capital outflows.
• Speculation and market expectations.

Effects of exchange‑rate movements

• Depreciation makes imports more expensive, exports cheaper – can improve the trade balance but raises domestic inflation.
• Appreciation makes imports cheaper, exports more expensive – may reduce the trade surplus or increase a deficit.
• Influences foreign‑exchange earnings, profit repatriation and the current‑account balance.

6.4 Current Account of the Balance of Payments

Definition

The current account records a country’s transactions in goods, services, primary income (investment income) and secondary income (transfers such as remittances).

Components

Component	What it includes
Trade in goods	Exports and imports of physical products.
Trade in services	Tourism, transport, financial services, royalties, licensing.
Primary income	Investment income – dividends, interest, profits earned abroad.
Secondary income	Unrequited transfers – remittances, foreign aid, gifts.

Calculating the current‑account balance

Current‑account = (Exports − Imports of goods) + (Exports − Imports of services) + Net primary income + Net secondary income.

Causes & consequences of surpluses and deficits

• Surplus – usually reflects strong export performance, high foreign‑investment returns or large remittance inflows; can lead to currency appreciation and increased foreign‑exchange reserves.
• Deficit – may result from high import demand, low export competitiveness or large outflows of investment income; can cause currency depreciation, increased borrowing and pressure on foreign‑exchange reserves.

Policy tools to influence the current account

• Exchange‑rate policy (devaluation to boost exports, appreciation to curb imports).
• Import tariffs or quotas to reduce import volume.
• Export subsidies or tax incentives to encourage export growth.
• Fiscal measures – e.g., reducing public spending to lower domestic demand for imports.

Movement of Multinational Companies (MNCs)

What is an MNC?

• Owns or controls production facilities in two or more countries.
• Strategic decisions are made at a single headquarters; subsidiaries adapt to local markets.
• Examples: Toyota, Unilever, Apple, Nestlé, Samsung.

Four main motives for MNC relocation (aligned with syllabus wording)

1. Market‑seeking – to gain access to new consumer markets, especially fast‑growing middle classes in Asia, Africa and Latin America, and to diversify the sales base.
2. Resource‑seeking – to obtain cheaper or more abundant raw materials, energy, agricultural products or labour (e.g., electronics assembly in Vietnam, software development in India).
3. Efficiency‑seeking – to exploit economies of scale and scope by locating different stages of production where transport, input and labour costs are lowest.
4. Strategic‑seeking – to acquire technology, patents, brand reputation or distribution networks and to spread political/economic risk across several jurisdictions.

Push and Pull Factors in MNC Location Decisions

Push Factors (Home Country)	Pull Factors (Host Country)
High labour costs	Lower wage rates
Saturated domestic market	Rapidly expanding consumer base
Stringent regulations / high taxes	Favourable investment climate (tax holidays, free‑trade zones)
Political or economic instability	Stable political environment and rule of law
Limited natural resources	Abundant raw materials or specialised inputs
High transport costs to overseas markets	Strategic location near major shipping routes or ports

Impact of MNC movement on globalisation

• Increases foreign direct investment (FDI), creating capital flows that link economies.
• Facilitates technology transfer, managerial expertise and diffusion of best practices.
• Creates global supply chains, lowering the relative cost of trade and enabling “just‑in‑time” production.
• Promotes convergence of standards, product designs and consumer preferences.

Benefits for Host Countries

• Job creation, often in higher‑skill or higher‑pay sectors.
• Skill development and training of the local workforce.
• Higher tax revenues, foreign‑exchange earnings and improvement in the balance of payments.
• Infrastructure development (roads, ports, telecom) driven by corporate investment.
• Access to advanced technology, research & development and managerial know‑how.

Challenges for Host Countries

• Profit repatriation can limit long‑term domestic gains.
• Potential crowding‑out of local firms and reduced market share for domestic SMEs.
• Environmental degradation or labour exploitation if regulations are weak.
• Economic dependence on decisions made abroad; sudden plant closures can cause shock.
• Pressure on local cultures and consumer habits (standardisation vs. localisation).

Benefits and Risks for Home Countries (headquarters)

• Access to foreign markets increases revenue and spreads risk.
• Returns from overseas profits can boost national income and tax receipts.
• Loss of domestic jobs when production is off‑shored.
• Potential erosion of domestic industrial capability.

Recent Trends in MNC Activity (2020‑2024)

Year	Global FDI Inflows (US$ bn)	Top Destination Regions
2020	1,020	Asia, Europe
2021	1,150	Asia, North America
2022	1,340	Asia, Africa
2023	1,470	Asia, Latin America
2024 (est.)	1,560	Asia, Europe

Suggested Diagrams for Exam Answers

1. Decision‑making flow chart for an MNC – Push factors → PESTEL analysis of host country → Pull factors → Choice of entry mode (export, licensing, joint venture, wholly‑owned subsidiary) → Outcomes (FDI, technology transfer, profit).
2. Comparative‑advantage diagram – Two‑country, two‑good model showing lower opportunity cost and gains from trade.
3. Global supply‑chain map – Example: a smartphone with arrows indicating where components (chips, screens, batteries) are produced and where final assembly occurs.
4. Foreign‑exchange‑rate regime table – Fixed, floating, managed float with key features and examples.
5. Current‑account balance illustration – Show exports, imports, primary and secondary income flows.

Evaluation Checklist (AO2 + AO3)

• Balance short‑term gains (jobs, tax revenue, technology transfer) against long‑term risks (profit repatriation, crowding‑out, environmental impact).
• Consider the role of government policy: incentives (tax holidays, free‑trade zones) versus regulation (labour standards, environmental safeguards) and the impact of changing trade‑restriction regimes.
• Analyse distributional effects: who benefits (skilled workers, urban areas) and who may be disadvantaged (unskilled workers, rural communities).
• Assess environmental implications: diffusion of green technology versus potential pollution.
• Use concrete, up‑to‑date examples (Apple iPhone supply chain, Toyota plant in the UK, Chinese investment in African mining) to support arguments.

Key Points to Remember

1. Specialisation is driven by comparative advantage (lower opportunity cost) and resource endowments; free‑trade brings lower prices and choice but can threaten domestic industries.
2. Globalisation is propelled by falling transport and ICT costs, the expansion of MNCs, and changes in trade‑restriction policies.
3. MNCs relocate for market‑seeking, resource‑seeking, efficiency‑seeking and strategic‑seeking reasons; push‑pull factors explain the specific country choices.
4. The spread of MNCs deepens economic integration, creates capital flows and technology transfer, yet also raises environmental, social and distributional challenges that require careful government management.
5. When answering exam questions, always weigh benefits against drawbacks, refer to the relevant syllabus terminology, and support points with real‑world data or examples.