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Effect of Low Unemployment on Multinational Companies

Singapore is usually ranked as one of the best countries in which to do business. It is an open economy engaging in free trade. It has a history of strong entrepreneurship, low unemployment, low average costs and relatively low tax rates. Its example may encourage other countries to remove trade restrictions.

Discuss whether low unemployment in a country will encourage multinational companies (MNCs) to set up there. [8]

Category:

Unemployment

[CIE O level November 2017]

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Answer


Step 1 : Define ‘the level of unemployment’ and ‘multinational company’ in the introduction.

A multinational company (MNC) is a business that has operations in more than one country. The level of employment can influence the decision of an MNC to set up in a country. Low unemployment in a country may or may not encourage an MNC to set up there.


Step 2 : Explain why low unemployment in a country will encourage multinational companies (MNCs) to set up there.

MNCs might be encouraged to set up in a country with low unemployment for several reasons:

➤ 2.1 Low unemployment may indicate a strong economy

Low unemployment means that there will be economic growth and a high level of demand in the country. When people have money to spend, they support businesses such as MNCs. Consumer spending impacts the majority of economic growth. During a strong economic cycle, low unemployment essentially feeds itself. Businesses such as MNCs will benefit as consumers have money to spend. MNCs may expect to be able to sell a large amount in the country and make a higher profit. Low unemployment signals that companies have confidence in marketplace demand in the near future.

➤ 2.2 MNCs may benefit from a lower cost of production

The government may be able to increase spending on education in order to improve the quality of workers as low unemployment means a higher tax revenue will be earned. Workers with higher skills will be able to work faster and with less wastage. The government may also spend on infrastructure, for example, railway systems which will reduce transport time. This may lower MNCs’ costs of production


Step 3 : Explain why low unemployment in a country will discourage multinational companies (MNCs) to set up there.

Low unemployment may not always be an advantage to MNCs for several reasons.

➤ 3.1 It might be difficult to find workers in a country with low unemployment.

It can make filling a position take longer, as there are fewer applicants for a given role when fewer people are job searching in general. It may mean it takes longer to find the applicant who meets all of the requirements for the job.

➤ 3.2 Employees may be less dedicated to the company.

Employees are less likely to stay when problems arise, even if those problems may be shortlived. If the unemployment level is low enough that they feel they can get a new job quickly. This may mean higher turnover rates. It may also mean employees are more likely to give less notice when leaving, as they may feel pressure to start the new job quickly.

➤ 3.3 The MNCs costs may increase.

There may also be a shortage of skilled workers. There may be a trade union with more bargaining power in countries with low unemployment. MNCs may have to pay high wages which would increase costs and lower profits. Low unemployment may create demand-pull inflation and cost-push inflation. This may make it relatively expensive to produce in the country


Step 4 : Conclude


To conclude, large MNCs are likely to set up in countries with low unemployment in order to remain closer to consumers and benefit from higher-skilled workers. This is why most large companies are located in such countries. However, some MNCs which require a large number of unskilled workers and low wage rates will prefer to set up in countries with high unemployment. In the mining industry for example.

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