MNCs and their advantages and disadvantages to host countries and home countries

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International Trade & Globalisation (IGCSE 0455 – Topic 6)

6.1 Specialisation and Free Trade

  • Specialisation: Countries concentrate on producing the goods and services in which they have a comparative advantage – i.e. the lowest opportunity cost of production.
  • Free trade: The removal of all barriers (tariffs, quotas, subsidies, import licences, technical standards) so that countries can exchange the goods and services in which they specialise.

Advantages of Free Trade

  • Higher total output and real incomes – consumers can buy cheaper imported goods and firms can sell to larger markets.
  • More efficient use of resources – each country produces where it is most productive.
  • Access to a wider variety of goods and services.
  • Economies of scale for firms that can spread fixed costs over larger output.

Limits / Disadvantages of Free Trade

  • Short‑run unemployment in industries that lose market share.
  • Domestic firms may shrink or disappear, especially in sectors where the country has no comparative advantage.
  • Unequal distribution of gains – some groups (e.g., low‑skill workers) may lose while others (e.g., consumers, high‑skill workers) gain.
  • Loss of strategic or infant industries that the government may wish to protect for future development.

6.2 Globalisation – Causes and Consequences

Key Causes of Globalisation

  • Fall in transport costs (container shipping, air freight, pipelines).
  • Fall in communication costs (internet, mobile phones, satellite).
  • Liberalisation of trade restrictions – reduction of tariffs, removal of quotas, fewer import licences.
  • Growth of multinational corporations (MNCs) that move capital, technology and management expertise across borders.
  • International institutions (WTO, IMF, World Bank) that promote open markets and provide policy advice.
  • Technological innovation (automation, digital platforms) that makes it easier to coordinate production internationally.

Consequences of Globalisation

Area Positive Effects Negative Effects
Economic Increased trade and foreign direct investment (FDI); economies of scale; greater competition driving efficiency. Greater exposure to external shocks; possible widening of income gaps between and within countries.
Social Migration of workers; diffusion of ideas, education and lifestyle choices. Cultural homogenisation; social tension if benefits are perceived as uneven.
Environmental Spread of cleaner technologies and best practice standards. Higher resource use, pollution and carbon emissions; risk of “pollution haven” where firms locate in countries with lax regulations.
Distribution of Income Potential rise in average incomes in developing countries through export earnings. Wider gaps between rich and poor countries and within societies if gains are not redistributed.
Development Opportunities for developing countries to earn foreign exchange, acquire technology and improve skills. Risk of dependence on foreign capital and loss of policy autonomy.

6.2 Trade Restrictions – Types, Purposes and Links to Elasticity

Restriction Purpose (syllabus wording) Typical Effect on Trade
Tariffs (import duties) Protect domestic producers; raise revenue for the government. Raises the price of imports; reduces quantity demanded – effect larger when import demand is price‑elastic.
Quotas (limits on quantity) Protect specific industries; limit import volumes. Directly caps imports; creates scarcity and can raise domestic prices.
Import / Export licences Control strategic goods; ensure security and safety. Restricts which firms can trade particular items; may be used to prevent dumping.
Subsidies Lower production costs for domestic firms; make them more competitive abroad. Reduces export prices or domestic prices, increasing market share.
Technical standards & health‑safety regulations Protect consumers, workers and the environment; maintain quality. Can act as a non‑tariff barrier if foreign producers cannot meet the standards.
Local‑content requirements Encourage development of domestic industry and reduce foreign exchange outflows. Mandates a minimum proportion of inputs to be sourced locally.
Anti‑dumping duties Prevent foreign firms selling below cost to drive domestic firms out of business. Imposes additional tariffs on identified dumping practices.

6.3 Multinational Companies (MNCs)

An MNC is a firm that owns or controls production facilities in more than one country. They are a major engine of globalisation because they move capital, technology, management know‑how and, sometimes, labour across borders.

Advantages of MNCs

For Host (Receiving) Countries
Benefit Explanation / Example
Foreign Direct Investment (FDI) Injection of capital for factories, infrastructure and new technologies. e.g., Toyota’s $2 bn plant in Mexico.
Employment creation Direct jobs in the MNC and indirect jobs in suppliers and service firms.
Technology transfer Introduction of advanced production techniques, management practices and R&D. e.g., Unilever’s modern dairy processing in Nigeria.
Export promotion Goods produced for overseas markets earn foreign‑exchange earnings.
Skill development Training of the local workforce raises human‑capital levels.
Infrastructure improvement MNCs often invest in roads, ports or power supplies that benefit the wider economy.
Access to global markets Local suppliers can become part of the MNC’s worldwide supply chain.
For Home (Parent) Countries
Benefit Explanation / Example
Access to new markets Domestic firms can sell abroad through subsidiaries, increasing sales volume.
Higher profits (repatriation) Profits earned overseas are sent back, raising national income. e.g., HSBC’s earnings from Asian operations.
Economies of scale Production spread over several countries lowers average costs.
Innovation spill‑over R&D carried out abroad can be transferred to the home country, boosting competitiveness.
High‑skill employment at headquarters Management, finance, marketing and research jobs remain at home.
Balance‑of‑payments benefit Repatriated profits appear as a capital inflow, improving the current account.

Disadvantages of MNCs

For Host Countries
  • Profit repatriation – A large share of earnings is sent back to the home country, limiting domestic wealth accumulation.
  • Market dominance – MNCs can out‑compete local firms, leading to monopolies or oligopolies and reducing competition.
  • Environmental degradation – Firms may locate in countries with lax regulations, causing pollution or resource depletion (a “pollution haven”).
  • Labour exploitation – Jobs may be low‑paid, insecure and offered with limited advancement.
  • Dependence on foreign capital – Sudden withdrawal of an MNC can cause an economic shock.
  • Cultural impact – Local traditions may be eroded by global brands, raising concerns about cultural sustainability.
For Home Countries
  • Job losses at home – Production moves abroad, reducing manufacturing employment.
  • Balance‑of‑payments outflows – Large outward FDI can create a capital outflow that widens the current‑account deficit.
  • Loss of domestic control – Strategic sectors may become dominated by foreign subsidiaries, reducing national sovereignty.
  • Economic inequality – High profits accrue to shareholders and senior managers, widening income gaps.
  • Technology leakage – Sensitive technology may be transferred to foreign plants, potentially weakening the home country’s competitive edge.
  • Monopoly power abroad – When an MNC becomes dominant in a host market, it can limit competition and lead to higher prices for consumers.

Linking MNC Impacts to Trade Restrictions

  • Tariffs on imported inputs – Protect domestic suppliers from being displaced by cheaper foreign components.
  • Quotas or caps on foreign investment – Prevent excessive foreign control of key sectors (e.g., telecommunications, defence).
  • Environmental and health‑safety standards – Ensure MNCs meet the same rules as domestic firms, promoting sustainable development.
  • Local‑content requirements – Force MNCs to source a proportion of inputs locally, fostering domestic industry and reducing foreign‑exchange outflows.
  • Anti‑monopoly / competition law – Stop MNCs from abusing market power and protect consumer welfare.
  • Export subsidies for local firms – Help domestic producers compete with MNC‑owned exporters.

6.4 Foreign‑Exchange Rates

  • Definition: The price of one currency expressed in terms of another (e.g., £1 = $1.30).
  • Why currencies are bought and sold:
    • To pay for imports and receive payment for exports.
    • To invest abroad (FDI, portfolio investment) or repatriate profits.
    • For tourism, travel and remittances.
    • Speculative trading – investors try to profit from expected changes in rates.
  • How exchange rates are determined:
    • Floating (market‑determined) rates – Set by supply and demand in the foreign‑exchange market. Influenced by interest‑rate differentials, inflation, economic growth, political stability and expectations of future movements.
    • Fixed (pegged) rates – Government or central bank commits to keep the domestic currency at a set level against another currency or a basket of currencies, intervening by buying/selling reserves.
  • Consequences of exchange‑rate movements:
    • Appreciation** (domestic currency becomes stronger):
      • Imports become cheaper → lower inflationary pressure.
      • Exports become more expensive → possible fall in export earnings.
      • Foreign‑investment outflows may increase as assets become relatively cheaper for foreigners.
    • Depreciation** (domestic currency becomes weaker):
      • Exports become cheaper → can boost export earnings and improve the current account.
      • Imports become more expensive → higher cost of living and possible inflation.
      • Foreign‑investment inflows may rise as assets become cheaper for overseas investors.

6.5 Current‑Account of the Balance of Payments

Structure of the Current Account

  • Trade balance (goods + services) – Exports minus imports.
  • Net primary income – Earnings from abroad (profits, dividends, interest) minus similar payments to foreign investors.
  • Net secondary income (current transfers) – Remittances, foreign aid, gifts – money received minus money sent.

Calculating a Deficit or Surplus

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

  • Surplus: Total inflows > total outflows – the country is a net lender to the world.
  • Deficit: Total outflows > total inflows – the country is a net borrower and must finance the gap with capital inflows (foreign investment, loans).

Causes & Consequences of Deficits/Surpluses

Situation Typical Causes Possible Consequences
Current‑account surplus Strong export sector; high commodity prices; large remittance inflows; low domestic consumption. Accumulation of foreign reserves; appreciation pressure on the currency; may invite protectionist pressure from trading partners.
Current‑account deficit High import demand; weak export competitiveness; large profit outflows from MNCs; low remittances. Need for financing via foreign investment or borrowing; possible depreciation of the currency; risk of external debt buildup.

Policy Tools to Influence the Current Account

  • Exchange‑rate policy – Depreciation can improve export competitiveness; appreciation can curb a large deficit.
  • Trade‑restriction measures – Tariffs, quotas or local‑content rules can reduce import volumes.
  • Export promotion – Subsidies, tax incentives, improved infrastructure for exporters.
  • Fiscal and monetary policy – Adjusting interest rates or government spending to influence domestic demand for imports.

Key Points to Remember

  • Specialisation based on comparative advantage and free trade raise total output, but short‑run unemployment and unequal gain distribution are important limits.
  • Globalisation is driven by lower transport/communication costs, trade liberalisation, MNC expansion and international institutions.
  • MNCs bring FDI, jobs, technology, export earnings and skill development to host countries, yet can cause profit repatriation, market dominance, environmental harm and cultural change.
  • Home countries gain market access, profits and economies of scale, but may lose manufacturing jobs, face capital outflows and reduced control over strategic sectors.
  • Trade‑restriction tools (tariffs, quotas, licences, subsidies, standards, local‑content rules, anti‑dumping duties) are used to balance the advantages and disadvantages of MNC activity and to protect domestic objectives.
  • Foreign‑exchange rates determine the relative price of currencies; appreciation benefits importers, depreciation benefits exporters.
  • The current account records trade in goods and services, primary income and secondary transfers; surpluses and deficits reflect a country’s net lending or borrowing position and are influenced by exchange‑rate, trade and fiscal policies.
Suggested diagram: Two‑box flow chart showing (i) benefits flowing from home to host country (FDI, technology, jobs, export earnings) and (ii) costs flowing back (profit repatriation, market dominance, environmental impact, home‑country job losses). Arrows can be labelled with examples such as “Toyota plant – $2 bn FDI” or “HSBC profits – £ bn repatriated”.

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