MNCs in development

1. Multinational companies (MNCs) such as Toyota, Apple and Unilever organise a large share of world production and trade.
2. Each operates across a home country, where it is headquartered, and one or more host countries where it also produces.
3. They expand abroad mainly through foreign direct investment, the lasting cross-border investment covered in section 11.5.4.

Why firms become multinational

1. To reach new markets and customers, especially fast-growing ones in developing economies.
2. To lower costs by producing where labour or other inputs are cheaper, which raises profit margins.
3. To secure access to raw materials, resources or specialist skills.
4. To locate inside a trade bloc and so avoid its external tariffs.

Activities of MNCs

1. MNCs organise production along global supply chains, locating each stage where it is cheapest or most efficient.
2. They offshore and outsource production to lower-cost economies, as Apple does through assemblers such as Foxconn.
3. They transfer capital, technology and management practices between countries.
4. They may use transfer pricing to shift profits to low-tax subsidiaries and cut their overall tax bill.

Consequences of MNCs

1. MNCs can create jobs and raise incomes in the host economy, which lifts consumption and tax revenue.
2. They bring investment, technology and skills that raise productivity.
3. Local suppliers can gain business and know-how through spillover effects.
4. They can add to tax revenue and improve the host's current account through exports.
5. However, their market power can displace local firms that cannot match their scale.
6. They may pay low wages, offer poor conditions or damage the environment where regulation is weak.
7. Profits may be repatriated to the home country rather than reinvested, and transfer pricing can shrink the tax the host collects.
8. Governments may struggle to regulate large, mobile MNCs that can relocate if taxed or restricted.

Weighing the impact of MNCs

1. In favour: jobs, investment, technology, tax revenue and greater competition and choice.
2. Against: displaced local firms, low pay, profit repatriation, tax avoidance and environmental harm.
3. On balance, MNCs tend to raise host-country welfare where they create large-scale formal employment, reinvest a meaningful share of profit, pay tax and build links with local suppliers, so productivity spillovers spread beyond the firm; the net gain shrinks towards zero, or turns negative, where they operate as low-wage enclaves, repatriate most of their profit, avoid tax through transfer pricing and face weak regulation, so the outcome turns on the strength of host institutions far more than on the headline size of the investment.