Transcript Can multinational firms be controlled?

A2 Economics and Business
Can multinational firms be
controlled?
Unit 3
By Mrs Hilton for
Lesson Objectives
• To be able to discuss political legal and
economic constraints, competition policy and
pressure groups.
• To be able to answer past paper questions on
the topic
Multinationals
• A multinational corporation or company
(MNC) may also be known as a global
company or a transnational company.
• They have operations in more than one
country.
• Head office sourcing and operations and
marketing may have locations in separate
countries or in different country groups (such
as the EU)
Growth of the multinational
• Second half of the 20th century grew in size
and number
• Since 1980’s their number and size has grown
• Size and types of markets have grown – why is
this?
• Many multinationals now dominate global
markets
GDP ($bn)
Country
Malaysia
Chile
Jamaica
Zimbabwe
GDP
218,950
199,183
13,737
5,574
Rank
38
44
109
141
What is GDP?
Walmart – compare with slide 5
country GDP
• 408,214 ($bn)
• What industry are they
in?
• How does this compare
with the GDP of those 4
countries?
• What does this mean for
the relationship of the
country and the business?
Royal Dutch Shell
• 368,056 ($bn)
Exxon Mobil
• 301,300 ($bn)
BP
• 297,107 ($bn)
Saudi Aramco
• 233,300 ($bn)
Toyota Motors
• 203,678 ($bn)
MNCs
• What business are the
majority of these vast
MNCs in?
• Search for the BP oil
spill in the gulf of
Mexico in 2010
• Have they disregarded
issues such as global
warming and the
environment?
• Why are BP in trouble?
• Have they disregarded
global environmental
issues?
The Balance of Payments and MNCs 1
• MNCs import large amounts of capital in order to
pay for their new business investments; factories,
offices or whatever.
• This surplus on the capital account creates a
deficit on the current account i.e. the country is
importing more goods and services than it is
exporting.
• This lifts local standards of living until the import
of capital stops for whatever reason and then
standards fall again.
Balance of payments and MNCs 2
• If the new business is for import substitution
(ie producing locally what had been imported)
then imports fall and the current account
improves.
• If the new business is developing local raw
materials for export (e.g. oil exploration) then
the exports of raw material also improve the
current account.
Balance of payments and MNCs 3
• The MNC may need to import large amounts of
technical equipment not available locally, and this will
worsen the current account.
• If the MNC re-invests its profits then there is no effect
on the Balance of Payments, but if it repatriates its
profits, the current account worsens.
• Further, the exchange market of a small country may
not be well-developed, so the attempt by a business to
buy or to sell large amounts of foreign exchange will
send the price of that currency sharply up or down
unless things are managed very carefully
Politicians and Multinationals
• In many countries politicians face regular
elections
• The jobs investment and tax generated by inward
multinational investment can boost their
popularity and election prospects.
• If a MNE pulls out of a country it leaves a
politician with serious problems
• Politicians have little power over the MNEs if
their small country is not central to the
multinational’s activities.
Employment 1
• Generally, MNCs set up new businesses which
need new workers and so employment is
improved; jobs are created.
• However, it depends on the skills match between
the new jobs and the local employment market.
• The business may set up a factory specifically
designed to suit the local employment market,
but in the Middle East oil states, for example,
there are many factories producing for the local
consumer markets.
Employment 2
• Sometimes the jobs are too demanding for the locals,
and sometimes the jobs are too demeaning. Either
way, the result is huge numbers of expatriate workers
migrate from India, Bangladesh, the Philippines and so
on and at the same time there is large local
unemployment.
• MNCs can sometimes provide devastating competition
for local businesses which may end up closing which
creates unemployment.
• MNCs usually employ fewer workers; that is part of
their greater efficiency. The MNC may then relocate
again after a period of years.
Technology transfer
• An MNC invariably operates to a higher standard
of managerial and technical expertise than the
local economy.
• Local employees can learn about these things and
the local economy can benefit from this new
expertise.
• Even the UK can benefit, so we are not simply
talking about developing countries where
technology transfer is enormously important.
• This will depend on how willing the MNC is to
employ and train local workers.
Social responsibility 1
• Standards and regulations are another kind of business
cost, and MNCs are always looking for lower costs.
• So there is an advantage to locating in countries with few
regulations.
• Some poor countries are prey to corruption and bribery
which means their few regulations are ineffective.
• India, for example, has excellent environmental protection
laws, on paper.
• In practice, the inspectors are so badly paid it only costs a
matter of dollars to get them to look the other way. This
opens the way for a slippage of standards below the levels
considered acceptable in the MNCs home country.
Social responsibility 2
• One of the most scandalous cases was in the 1980s where
the US chemical business Union Carbide tolerated very
poor safety standards at a factory in Bhopal, India.
• The result was an explosion which released clouds of toxic
gas and killed thousands. Many more thousands are still
alive and very ill because of this.
• What was particularly irresponsible was the long years it
took to force Union Carbide to accept responsibility and
pay compensation. This whole area is a large and important
are which it is impossible to cover completely.
• It is, for example, one important reason why some western
pressure groups are so hostile to MNCs
Government control 1
• It is quite difficult for some governments to
exercise effective control over MNCs because
they are so large and powerful.
• One MNC may be the dominant force in the local
economy. Even large and wealthy countries such
as the UK can’t always control MNCs effectively.
• They have a wide repertoire of tricks to minimise
government control, especially taxes.
Government control 2
• One favourite trick (technically illegal) is transfer
pricing.
• MNCs often buy and sell between different national
offices of the same business, because each is a
separate profit centre. For example, the Paris office
makes the product, and the Berlin office sells it.
• So the Paris office has to sell to the Berlin office. There
is then the question of at what price the sale takes
place.
• Officially, the selling price must be the market price on
the day, but some markets don’t have prices every day,
and governments have a difficulty in proving what is
going on.
Government control 3
• If, for example, German company taxes are higher than
French company taxes, then the Berlin office will pay
too much for the product and make a loss.
• The Paris office makes a very large profit and pays tax
on this profit at the lower rate.
• When different governments have completely different
tax systems, with thousands of detailed rules of how
tax is paid, and deductions for this, and allowances for
that, the opportunities for MNCs to employ a few
clever tax accountants and ‘cook the books’ are
enormous.
Pressure groups
• Pressure groups formed by
concerned individuals to
attempt to change behaviour of
MNC
• Lobby the government to
demand change
• Protest march
• Publicity stunts to draw
attention to the problems
• Consumer boycott
• Set up campaigns to change
public opinion
McLibel trial – example of
pressure groups action
•
•
•
The McLibel Trial is the infamous British court case
between McDonald's and a former postman & a
gardener from London (Helen Steel and Dave Morris). It
ran for two and a half years and became the longest
ever English trial. The defendants were denied legal aid
and their right to a jury, so the whole trial was heard by
a single Judge, Mr Justice Bell.
The verdict was devastating for McDonald's. The judge
ruled that they 'exploit children' with their advertising,
produce 'misleading' advertising, are 'culpably
responsible' for cruelty to animals, are 'antipathetic' to
unionisation and pay their workers low wages. But
Helen and Dave failed to prove all the points and so the
Judge ruled that they HAD libelled McDonald's and
should pay £60,000 damages to the company.
The legal controversy continued. The McLibel 2 took the
British Government to the European Court of Human
Rights to defend the public's right to criticise
multinationals, claiming UK libel laws are oppressive
and unfair that they were denied a fair trial. The court
ruled in favour of Helen and Dave: the case had
breached their their rights to freedom of expression and
a fair trial.
http://news.bbc.co.uk/1
/hi/uk/4266209.stm
http://www.mcspotlight.
org/case/
Sample question 1
• Analyse why there might be a conflict
between ethical behaviour and profitability in
the cigarette industry. [6]
Answer question 1
• Knowledge: up to 2 marks are available for
understanding the meaning of ethical behaviour and
profitability.
• Application: up to 2 marks are available for contextual
answers such as relating the nature of a company’s
trading activities to some degree of externalities
(evidence in stimulus material).
• Analysis: up to 2 marks are for developing the nature
of the conflict, e.g. attempting to correct the effects of
the externalities may increase costs and have adverse
effects upon profitability and competitiveness
Sample question 2
• Evaluate whether the Indian Government
should encourage further foreign investment
into the country. [15]
How marks are awarded for Q2 [15]
Level
Mark awarded
1
1-2
Knowledge
2
3
Application
3
4-7
Analysis
4
8-15
Evaluation
Basic pointers on how to answer
question 2
• e.g. India is a growing economy and likely to attract foreign
investment, government has a role in encouraging this or not.
• e.g. Analysis of the impact could be positive or negative. There is
evidence in the stimulus of the threat to some Indian businesses
that foreign firms may pose; structural change is perhaps,
inevitable. There may be closures and negative effects on existing
businesses who may struggle to cope with the incoming foreign
businesses. Unemployment may rise and in some areas traditional
ways of life may be threatened.
• On the other hand there may be many positive effects, incoming
businesses will create jobs, training and technology transfer may
happen, the Indian government may gain from tax revenues. The
partners in joint ventures or the franchisees may well benefit from
an increasing number of foreign firms entering the market.
Answer Q 2 continued
• e.g The Indian Government will need to balance the
benefits of further foreign investment with the
potential drawbacks. Evaluation may take the form of
contrasting the fortunes of differing stakeholder groups
and commenting upon the likelihood of such effects.
• e.g. There should be a balanced conclusion as to
whether the Indian Government should encourage
further foreign investment or not. Much will depend
upon the pace and/or magnitude of India’s growth and
the distribution of any resulting extra wealth. The short
term situation may well be different to the long term.
Sample question 3
• Assess the extent to which the activities of a
multinational, such as Enel, can be controlled
by pressure groups. [9]
How marks are awarded for Q3 [9]
Level
Mark awarded
1
1
Knowledge
2
2-3
Application
3
4-5
Analysis
4
6-9
Evaluation
Answer question 3
• define a pressure group/multinational/identify a
control e.g. consumer boycott
• e.g. legal challenge to the dam in Chile or another
example (such as the McLibel case) to show a
connection between a pressure group and a
multinational
• e.g. organising a campaign to turn public opinion and
how this may affect sales and thus alter behaviour of
the multinational, use of protests/courts and legal
challenges to halt the project e.g. protests may have
little
• effect on sales (Primark), powerful multinationals like
Coca-Cola can finance legal challenges to overturn
rulings, governments may ignore pressure groups
because of economic benefits
Revision Video