the advantages and disadvantages that a multinational might bring to a country

6.1 External Influences – International

Learning objective

Analyse the advantages and disadvantages that a multinational enterprise (MNE) can bring to a host country, and evaluate how international trade agreements, technological change, government policy and cultural‑environmental factors shape these impacts.

Key definitions

• Multinational enterprise (MNE): a firm that owns or controls production or service facilities in two or more countries.
• Host country: the country in which the MNE establishes operations outside its home market.
• Foreign direct investment (FDI): investment made by a firm or individual in one country into business interests located in another country.
• Global value chain (GVC): the sequence of activities – from design and input sourcing to production, marketing and after‑sales service – that adds value to a product or service across borders.
• Trade agreement: a legally binding arrangement between two or more countries that governs the terms of trade (e.g., free‑trade agreements, customs unions, WTO rules).
• Glocalisation: the adaptation of a global product or service to suit local cultural preferences.
• Environmental, Social and Governance (ESG) audit: an independent assessment of a firm’s performance against recognised sustainability standards.

1. How MNEs link the host country to the international trading system

• Integration into GVCs
  • Host‑country firms become suppliers or subcontractors to the MNE, giving them access to foreign markets and to higher‑value activities (design, R&D).
  • Exports often shift from primary commodities to intermediate or finished goods, diversifying the country’s export basket.
• Import‑export structure
  • Raw materials and intermediate inputs are imported for the MNE’s production processes, increasing the host country’s import bill but raising the quality of imported technology.
  • Finished products are exported, generating foreign‑exchange earnings and improving the current‑account balance.
• Trade‑linkage effects
  • Lower transport and transaction costs (thanks to the MNE’s logistics network) make the host country a more attractive hub for regional trade.
  • Exposure to international standards (e.g., ISO, CE marking) raises the overall quality of domestic trade flows.

2. Advantages of MNEs to the host country

1. Employment creation
   • Direct jobs in factories, R&D centres, sales offices.
   • Indirect jobs through local suppliers, logistics, services (multiplier effect).
   • Reduces the unemployment rate and associated social costs.
2. Technology transfer & productivity gains
   • Introduction of advanced production techniques, automation, AI‑driven quality control.
   • Spill‑over via supplier relationships, joint‑venture R&D, on‑the‑job training.
   • Boosts total factor productivity and GDP per capita.
3. Capital inflows (FDI)
   • Financing for new plants, infrastructure, skill‑development programmes.
   • Often accompanied by training, management know‑how and access to international finance markets.
   • Raises the gross capital formation component of national accounts.
4. Export promotion & diversification
   • Products manufactured for overseas markets increase foreign‑exchange earnings.
   • Shifts the export structure towards higher‑value manufactured goods.
   • Improves the current‑account balance and overall balance of payments.
5. Human‑capital development
   • Formal training, apprenticeships, exposure to international workplace standards.
   • Raises the skill level of the local labour force, supporting long‑term growth.
6. Increased competition and innovation
   • Domestic firms are pressured to improve efficiency, product quality and innovation.
   • Can lead to lower consumer prices and a wider range of goods and services.
7. Digital & ICT diffusion
   • MNEs introduce e‑commerce platforms, cloud computing, digital payment systems and data‑analytics tools.
   • Accelerates the host country’s participation in digital trade and reduces transaction costs.
8. Social & entrepreneurial spill‑overs
   • Local entrepreneurs may spin‑off new firms to supply niche components or services.
   • Increased household incomes can stimulate demand‑driven start‑ups.

3. Disadvantages of MNEs to the host country

1. Profit repatriation
   • Earnings are often transferred to the parent company, limiting retained capital.
   • Reduces net FDI inflow and can worsen the current‑account balance.
2. Market dominance & crowding‑out
   • Large MNEs may out‑compete local firms, creating monopolistic or oligopolistic structures.
   • Indigenous entrepreneurship can be suppressed, raising concerns about long‑term industrial sovereignty.
3. Environmental impact & sustainability risks
   • Exploitation of lax regulations can lead to higher emissions, water‑use and waste.
   • Without robust ESG audits, environmental damage may offset gains from technology transfer.
4. Dependence on foreign capital
   • Over‑reliance on FDI makes the economy vulnerable to external shocks, policy changes or sudden capital flight.
   • Mitigation: diversify investment sources, strengthen domestic savings and develop local industries.
5. Cultural influence & glocalisation tensions
   • Foreign branding and corporate culture can erode local traditions and consumer preferences.
   • Positive side: glocalisation can preserve relevance while introducing new ideas.
6. Labour exploitation risks
   • In some cases, wages and working conditions may fall below domestic standards.
   • Raises concerns about workers’ rights, income inequality and social equity.
7. Tax‑base erosion & profit‑shifting
   • Use of intra‑company loans, intellectual‑property licensing and transfer pricing can reduce taxable profits.
   • Requires strong tax‑administration and anti‑avoidance legislation.

4. Technological change and its role in international trade

• Automation & AI – lower unit labour costs, enable high‑value manufacturing in lower‑cost locations.
• E‑commerce & digital platforms – give local SMEs access to global markets via the MNE’s online marketplaces.
• Cloud services & data analytics – reduce IT capital expenditure for host‑country firms and improve supply‑chain visibility.
• Reduced transaction costs – digital payment systems, blockchain‑based trade documentation speed up cross‑border trade.
• Innovation ecosystems – MNE R&D centres often collaborate with local universities, fostering knowledge clusters.

5. Influence of international trade agreements

6. Government policy – the “policy‑space” balance

Host‑country governments must attract FDI while preserving economic sovereignty. The mix of “carrot” and “stick” policies is crucial.

7. Linking advantages/disadvantages to macro‑economic indicators

Formula box

8. Environmental sustainability and ESG audits

• Mandatory ESG reporting – many trade agreements now require annual sustainability disclosures (e.g., EU‑US Trade and Technology Council).
• Carbon‑border adjustments – taxes on imported goods based on their embedded emissions can affect MNE cost structures.
• Third‑party audits – independent verification (e.g., ISO 14001, GRI) helps host governments monitor compliance and protect public health.

9. Case study – Automotive MNE in Country X (2018‑2023)

In 2018 a European automotive MNE opened a new plant in Country X, a lower‑middle‑income economy.

• Employment: 12,000 direct jobs; multiplier of 2.5 → ~30,000 indirect jobs.
• Supply‑chain integration: Local component firms saw sales rise 25 %; many upgraded to ISO / TS standards.
• Export performance: Vehicle exports grew by US$450 million, improving the current‑account balance.
• Technology transfer: Introduction of robotics and AI‑driven quality‑control systems; 1,800 staff trained in advanced manufacturing.
• Environmental impact: Carbon emissions from the plant increased by 15 % (≈ 30,000 t CO₂/yr). An ESG audit in 2022 required installation of a waste‑heat recovery system, reducing emissions by 4 % in 2023.
• Market dynamics: Three domestic car manufacturers exited the market, citing inability to match the MNE’s economies of scale.
• Profit repatriation: Estimated US$120 million sent to the MNE’s home country annually.
• Fiscal contribution: Despite tax holidays (5 years), the plant contributed US$45 million in corporate tax after the holiday period.

Macro illustration (2023)

• Gross FDI inflow: US$800 million
• Profit repatriation: US$120 million
• Net FDI inflow: US$680 million (using the formula above)
• Unemployment rate fell from 9.2 % to 7.4 %.
• Current‑account surplus widened by US$380 million.
• HHI in the automotive sector rose from 0.12 to 0.27, indicating increased concentration.

10. Summary

Multinationals can act as catalysts for economic development—creating jobs, bringing capital, transferring technology, expanding exports and accelerating digitalisation. At the same time they can generate profit outflows, dominate markets, increase environmental pressures, erode the tax base and influence cultural norms. The net effect depends on:

• The strength of the host‑country’s policy‑space (incentives vs. regulation).
• The depth of integration into global value chains and the terms of relevant trade agreements.
• The robustness of ESG and competition oversight.
• The ability of domestic firms to capture spill‑overs and diversify their own export bases.

11. Potential exam questions

1. Explain how foreign direct investment by a multinational can lead to technology transfer in the host country.
2. Discuss two advantages and two disadvantages of multinationals operating in a developing economy, referring to macro‑economic indicators.
3. Evaluate the impact of profit repatriation on the host country’s balance of payments, using the Net FDI inflow formula.
4. Using the automotive case study, assess whether the overall impact on Country X is positive or negative, citing at least three macro‑economic indicators.
5. Analyse how a free‑trade agreement could amplify both the benefits and the risks of multinational presence in a host country.
6. Assess the role of ESG audits in mitigating the environmental disadvantages of MNEs.

12. Suggested diagram