activities of MNCs

Relationship between Countries at Different Levels of Development – Activities of Multinational Corporations (MNCs)

1. What is a Multinational Corporation?

• An MNC is a firm that owns or controls production facilities and other assets in two or more countries.
• Typically has a headquarters (home country) in a developed economy and subsidiaries, joint‑ventures or branches (host countries) in developing economies.
• Examples: Toyota (Japan‑USA‑Mexico), Unilever (UK‑Netherlands‑India), Nestlé (Switzerland‑Brazil‑Nigeria).

2. Why Do MNCs Expand into Developing Countries?

1. Market‑seeking – access to fast‑growing consumer markets (e.g., smartphones in India).
2. Resource‑seeking – natural resources, cheaper labour, favourable factor endowments (e.g., copper mining in Chile).
3. Efficiency‑seeking – lower production costs through economies of scale and scope (e.g., garment factories in Bangladesh).
4. Strategic‑seeking – positioning against rivals, diversifying risk, entering export‑processing zones.

3. Main Activities of MNCs in Host Countries

• Foreign Direct Investment (FDI) – greenfield projects, acquisition of existing firms, joint ventures.
• Export‑oriented production – factories that produce mainly for overseas markets (e.g., electronics in Vietnam).
• Technology transfer – licensing, R&D partnerships, training of local staff, diffusion of managerial practices.
• Supply‑chain integration – sourcing raw materials and intermediate goods locally, creating backward linkages.
• Corporate Social Responsibility (CSR) – community development, education programmes, environmental management.

4. The Five Links that Bind Developed and Developing Economies (Cambridge syllabus 11.5)

The Cambridge A‑Level syllabus identifies five inter‑related links:

1. International aid
2. Trade
3. Investment (FDI)
4. Technology transfer
5. Multinational firms & globalisation

These links interact – for example, aid can improve infrastructure that attracts FDI; FDI can generate export earnings that affect the terms of trade; technology transfer raises human‑capital, which in turn makes a country a more attractive market for MNCs.

4.1 International Aid

• Forms: Official Development Assistance (ODA), bilateral loans, multilateral grants, remittances, NGOs, humanitarian aid.
• Reasons: Poverty reduction, political stability, emergency relief, promotion of trade & investment.
• Effects:
  • Improves health and education → raises human capital.
  • Finances infrastructure (roads, ports) that later supports MNC operations.
  • Risk of “aid dependency” if not paired with capacity‑building.
• Importance for MNCs: Better infrastructure and a healthier workforce increase the attractiveness of a host country for foreign investors.

4.2 Trade

• Terms of trade (ToT): The ratio of export prices to import prices (ToT = P_exports/P_imports). A rise means a country can import more for a given amount of exports.
• Export‑processing zones (EPZs) – special areas with tax breaks, relaxed regulations and ready‑made infrastructure to attract export‑oriented MNCs.
• Trade policies – tariffs, quotas, and regional trade agreements influence MNC location decisions.
  • NAFTA/USMCA encouraged US firms to set up plants in Mexico to avoid tariffs.
  • EU‑UK trade arrangements affect where European MNCs locate production post‑Brexit.

4.3 Investment (FDI)

• Definition: A lasting interest (≥10 % ownership) in an enterprise in another country.
• Types: Greenfield, brownfield (acquisition), joint venture, strategic alliance.
• Balance‑of‑Payments (BoP) impact:
  • FDI inflows are recorded as a credit in the financial account.
  • Export‑oriented production generates export earnings – a credit in the current account.
  • Profit repatriation appears as a debit in the current account, reducing the overall BoP surplus.
• Profit repatriation – when an MNC sends profits back to its home country:
  • Reduces domestic capital accumulation in the host country.
  • Is recorded as a debit in the host’s current account, lowering GNI (since GNI = GDP + net primary income from abroad).
  • Can be offset by higher wages, tax revenues, or technology spill‑overs.

4.4 Technology Transfer

• Mechanisms: licensing agreements, joint‑R&D projects, training programmes, managerial know‑how, diffusion of production techniques.
• Importance: Improves productivity, raises skill levels, and contributes to higher Human Development Index (HDI) scores.

4.5 Multinational Firms & Globalisation

• Role: Vehicles for global value chains, linking production, design, marketing and finance across borders.
• Benefits: Access to larger markets, economies of scale, diffusion of innovation.
• Drawbacks: Potential crowding‑out of domestic firms, environmental degradation, “race‑to‑the‑bottom” regulatory competition.

5. Development Indicators (Cambridge requirements)

6. Characteristics of Economies at Different Development Levels

7. Impacts on Host (Developing) Countries

8. Impacts on Home (Developed) Countries

• Higher returns on overseas investment → increased shareholder wealth.
• Access to cheaper inputs and intermediate goods, boosting competitiveness of domestic exporters.
• Export of advanced technology and managerial expertise.
• Potential loss of low‑skill manufacturing jobs at home (off‑shoring).
• Strengthening of the home country’s balance of payments through profit inflows and service exports.

9. Policy Considerations for Host Governments

1. FDI incentives tied to technology transfer – require a minimum local‑content or training component in any investment agreement.
2. Environmental and labour standards – enforce regulations to avoid a “pollution haven” and protect workers’ rights.
3. Promotion of joint ventures – encourage partnerships that give domestic firms access to capital and know‑how.
4. Fiscal tools – taxes, royalties, or profit‑sharing schemes to capture a portion of MNC earnings.
5. Institutional strengthening – transparent contract negotiation, dispute‑resolution mechanisms, and anti‑corruption bodies.
6. Linkage policies – support development of local supplier networks (e.g., procurement policies that give preference to domestic firms).

10. Suggested Diagram

11. Key Take‑aways

• MNCs are a central conduit linking developed and developing economies through investment, trade, and technology.
• Their activities can stimulate growth, create jobs, and raise living standards, but may also generate inequality, environmental harm, and dependence on foreign capital.
• Understanding the balance of benefits and costs, and applying appropriate host‑country policies, is essential for evaluating the overall impact of MNCs on global development.
• In the Cambridge A‑Level syllabus, MNCs must be studied alongside aid, trade, investment, technology transfer and broader globalisation to grasp the full picture of international economic relationships.