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Economics – Multinational companies

a) Why have MNC’s grown so rapidly in recent decades? (8)

Multinational companies are companies which one head in one country (usually where it
was created) and has headquarters in another countries, in order to avoid transport costs and
find cheap labour, an example of a MNC is the ‘Coca-Cola’ company. In recent decades
multinationals have grown excessively rapidly due to many factors like for example
globalization, this concept is occurring now, evidence of it is all around us, globalization is
an unstoppable phenomenon yet it is something which presents opportunities to those who
are willing and prepared to take risks, such as multinational companies which are extending
to different countries and growing to the point of having Mc. Donalds almost in every
country of the world. Moreover another factor is a better international trade between
countries, this fact enables countries to have multinational companies within each country
and to let each country to gave multinational companies selling international products and
competing against domestic companies, therefore the fact that international trade is present,
as in every country there is a need for trade as for a country to be self-sufficiency is not
easy, this enables the fact of having also international companies in a country and enabling
the fact of MNC’s to grow in such a rapid way.

Furthermore another factor which causes MNC’s to grow in such a rapid way is the fact of
the existence of countries in which costs are very cheap, which brings trade creation to the
country in search of cheaper costs (trade creation is known as the fact that on joining a
trade area lower costs now become available from another member country, prices will fall
and quantity consumed will rise), such as labour in China, this is why almost every MNC
in search of the lowest cost in order to produce, they go to countries in which costs are
cheap, they don’t have to be preoccupied about transport costs (from their original country
to others) or other costs, like labour or capital. Also another factor may be changes in
political ideas, such as opening up ex-communist countries into free market economies, and
therefore also opening up for MNC’s to enter and invest in the country and bring economic
growth, which also help in the growth of MNC’s. Another factor may be growth of free
trade agreements, which will again increase the possibility of MNC’s entering even more
countries and expanding; also due to a lack of natural resources for production of countries
in possession with the original MNC, may see themselves in the position of having to trade
with other countries in order to receive these natural resources needed for production; and
finally the fact that in there has been an increase in technology compared to one decade
before, and better technology leads to better communication which may lead to an increase
of MNC’s within even more countries. In conclusion all of these factors answer the
question of why multinational companies have grow so rapidly over the past decades.

b) Do multinationals help or hinder LDC’s (12)

Multinationals are sometimes considered as harmful for an economy, although sometimes

these are considered advantageous. Firstly, the advantages MNC’s bring to a country are
several, one of them is the fact that there will be an increase in competition between
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MNC’s and domestic companies, this will lead to cheaper products due to an increase in
supply from Q1 to Q2 as shown in the diagram below, in response to this prices decreases
from P1 to P2.

A demand and supply diagram showing an increase in supply leading to a decrease in price

Also due to an increase in competition there will be an increase in diversification (more

variety of products) and better quality, also unemployment will decrease which is very
good, this will be because there will be existence of more companies (MNC’s) which will
generate jobs all over the country, although these will not consist of high wages. All of
these previous advantages will lead to an increase in the S.O.L of the country having these
MNC’s, which will create economic development, a decrease in birth rates, a decrease in
infant mortality and an increase in death rate. Another advantage will be the fact that
MNC’s will increase investment, which is an injection in the circular flow of income, this
will lead to an increase in employment which will lead to an increase in national income,
this will lead to an increase in consumption, as people will have more disposable income,
and increase in consumption or an increase in savings, these mean an increase in aggregate
demand; also the fact that savings have increased this will help cut the saving’s gap (S of
savings does not meet with the demand for investment); moreover investment also helps
LDC’s to use in a more efficient way the existing resources.

Another advantage of introducing multinational companies to a country is new techniques

and technology, which will lead to a country more competitive abroad; another advantage is
the fact that there will be economic growth and economic development present, as seen
before of an increase in S.O.L. and also an increase in investment may lead to an increase
in economic growth. Also this may lead to social projects, which will encourage social
culture and also increase S.O.L. which will lead again to economic development. As it can
be seen, the fact of introducing MNC’s to LDC’s have shown advantageous responses such
as converting these countries into developed ones, such as the case of the countries of
Taiwan or South Korea, which became developed due to multinational companies.
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Although there are also disadvantages presented when introducing these MNC’s into a
country, such as the fact of interfering against govt. policies like for example corrupting the
govt. to achieve their aims, and thus delay country’s progress and economic growth, also
the fact that these international companies are so big and thus have economies of scale,
small domestic companies cannot compete with such big MNC’s for example bodegas
cannot compete with such a big supermarket as ‘Wong’, this is why MNC’s may lead small
domestic companies into bankruptcy. Furthermore large big scale companies as
multinationals may lead to negative externalities, like pollution (air, water and sound),
which in the long-term will deteriorate S.O.L. and thus economic development will
decrease in response to this. Another disadvantage because of MNC’s is the fact that capital
flight may occur as company’s revenues may leak out the economy into the country of the
original multinational; also the fact that the products MNC’s offer are imports and are
cheap, this will lead to an increase in the demand of imports and thus may worsen the BOP
current account.

Moreover a disadvantage when talking about technology is the fact that an increase in this,
may lead to structural unemployment, which will decrease economic growth. MNC’s may
cause harm to worker’s rights, and also trade unions may lose their power and thus workers
are taken advantage of. The fact that these companies are so big, they are separately apart
from one another and almost control the market, they can make use of price discrimination
as they will put the price that they want all fort he sake of increase their abnormal profit,
without caring about consumers well-being. Finally these type of companies may build on
anti-competitive practices, which in the long-term may lead to all of the disadvantages
previously stated, which finally will lead to a decrease in economic growth which will
bring many disadvantages into the economy in which MNC’s were introduced. In
conclusion as it can be observed the introduction of MNC’s in a LDC may be advantageous
as well as harmful to an economy, although in my opinion I think MNC’s are essential for a
LDC to develop into a MDC.