Business Studies – 6.2.2 Multinational companies (MNCs) | e-Consult
6.2.2 Multinational companies (MNCs) (1 questions)
The establishment of an MNC in a developing country has a direct and significant impact on the country's balance of payments. The balance of payments is a record of all economic transactions between a country and the rest of the world. MNCs influence both the current account and the capital account.
Inflows of Money:
- Foreign Direct Investment (FDI): The initial investment by the MNC represents a large inflow of capital. This is recorded in the capital account.
- Profits Remitted Back Home: MNCs generate profits in the host country. A portion of these profits are typically remitted back to the MNC's home country, contributing to capital outflows but also representing a flow of money *into* the host country initially.
- Royalties and Fees: If the MNC owns intellectual property (patents, trademarks), the host country may receive royalties or fees for its use. This is another inflow recorded in the capital account.
- Export Earnings: As the MNC exports goods and services from the host country, it earns foreign currency, which increases the inflow of foreign exchange and improves the current account.
Outflows of Money:
- Remittances to Home Country: Employees of the MNC may send remittances (money) back to their home countries, representing an outflow of capital.
- Imports of Goods and Services: The MNC will likely import goods and services from its home country (e.g., equipment, components). This increases the outflow of foreign exchange and impacts the current account.
- Repatriation of Profits: While profits are initially a flow *into* the country, the eventual repatriation of profits to the MNC's home country represents a significant outflow.
Overall Impact:
The net impact on the balance of payments depends on the relative size of these inflows and outflows. If export earnings and FDI are substantial, the balance of payments will likely improve. However, if remittances and imports are significant, the balance of payments could worsen. The host country's ability to attract and retain MNCs is crucial for maximizing the positive impact on its balance of payments.