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Discuss whether or not MNCs improve the economic performance of the host countries in which they operate.

Quick Answer:

Why they might:
• may bring in new technology and methods of
production, increasing economic growth
• may create new jobs, may reduce unemployment
• may add to exports, reducing a current account
deficit / increasing a current account surplus
• may create more competition / have greater
efficiency, lowering inflation
• may increase tax revenue, enabling the
government to spend more on e.g. education and
Why they might not:
• may drive out domestic producers, leaving the
country’s output unchanged
• may employ workers from their home country
• may import capital equipment and raw materials
from their home countries
• may deplete non-renewable resources, reducing
sustainable economic growth
• may provide only low-skilled, low-paid jobs to
• send profits back to home country
• may cause external costs e.g. pollution

Firm that undertakes foreign direct investment because it operates in more than one
country is referred to as a multinational corporation (MNC). Multinational corporations
run business operations in both the home country and in other (host) countries. There
are various reasons why MNCs expand in other countries. They offer possibilities of increasing
sales, revenues and profits. It allows them to bypass trade barriers by setting their operations
in the host country. It allows them to use locally produced raw materials and further their
activities in natural resource extraction. Therefore, MNCs can contribute significantly to
a country’s economy. In countries with BOP instability, MNCs can bring in the necessary
foreign exchange reserves that are a credit in the BOP account. Similarly, if activities
of MNCs lead to an increase in exports, the current account deficit can be reduced. They
also bring with them technical and managerial expertise, new production technologies,
which can be learned and adopted by the local labour and local businesses. This involves
improvement in physical as well human capital and is one of the important advantages. ol foreign direct investment for host countries. Similarly, the inflows of FDI funds into
a country can supplement insufficient domestic savings, increasing the amount of investment and aggregate demand. This will increase employment and economic growth in the
country. MNCs also contribute towards tax revenue for the host government that can be
spent on development projects on health, education and infrastructure, measures that
increase the productive potential and lead to economic growth in the long run. When MNCs
buy locally produced goods and services as inputs into their production, they promote the
development ol local industries and also increase domestic employment.
On the contrary MNCs can also have negative economic effects on the host countries.
MNCs often pursue activities that cause serious environmental degradation and leads to
external costs. Their activities have been known to cause environmental damage and are
responsible lor the production of the bulk of industrial pollutants. As a consequence the
host country would not be able to pursue sustainable economic development. The very
large size of many MNCs gives them economic and political power that they can use to
influence host governments to pursue policies that are in their own interests but against
economic development. Similarly, they can also act as monopolies and force local competing
firms to go out of business and may prevent new local firms to establish themselves. It
is also the case that MNCs usually import large capital intensive machinery. They may
also bnng in their own workers and managers and employ local workers only in low skilled
jobs. This would actually lead to an increase in unemployment in the country as well as
limiting learning opportunities for the local labour force.

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