IB Business Management HLUnit 1.6 — Multinational CompaniesPaper 1 & 2Core idea~12 min read
Multinationals and Their Impact
A multinational is registered in one country and operates in many others. That simple definition hides an argument that runs through economics, politics and ethics: when a huge foreign company arrives in a country, is that country better off? The IB wants you to answer that with evidence rather than instinct.
📘 What you need to know
Globalisation is the growing economic integration of countries through freer movement of goods, services, people, money and technology.
An MNC is a business registered in one country with production or outlets in others.
MNCs have grown because of globalisation, deregulation, cheaper transport and far better communications.
Firms go multinational for economies of scale, lower labour costs, new markets, tax advantages, risk spreading and to avoid trade barriers.
Host countries gain jobs, investment, tax revenue, technology transfer and consumer choice.
Host countries risk low wages, poor conditions, damage to local firms, environmental harm and profits leaving the country.
Transfer pricing shifts profit to low-tax countries. It is legal tax avoidance, not evasion.
Globalisation in one paragraph
Countries have traded for thousands of years, so globalisation is not new. What changed in the last half-century is speed and scale. Container shipping made freight cheap. The internet made coordinating a factory on another continent trivial. Trade agreements removed tariffs. The result is that a firm can now design in one country, manufacture in a second and sell in a hundred more.
Feature of globalisation
What it means in practice
Foreign ownership of firms
Companies in one country are increasingly owned by investors in another
Movement of labour and technology
Skills, workers and know-how cross borders far more freely
Freer trade in goods and services
Fewer tariffs and quotas standing between producers and markets
Free flow of capital
Money can be invested or withdrawn across borders almost instantly
What globalisation does to a domestic firm: it raises competition, which forces efficiency; it allows skills to pass in both directions; it makes a local identity a possible unique selling point; and it opens the door to joint ventures with the very firms that arrived to compete.
Why a firm decides to go multinational
Cost reasons sit on one side, market reasons on the other. Deciding which side a case study firm belongs to is usually the first mark in the question.
Be careful with “lower labour costs”. Cheap labour is only an advantage if productivity holds up and transport does not eat the saving. Firms that moved production purely on the hourly wage have repeatedly moved it back once quality problems and shipping delays were counted.
What a multinational does to the host country
This is the part of the topic that carries the long-answer questions. Learn it as a balance, because the same activity often produces the benefit and the cost together.
Use this as a checklist in any Paper 2 question on MNCs. Take two items from each side and develop them properly rather than listing all ten.
Area
The benefit for the host country
The risk for the host country
Employment
New jobs, often at higher pay and with better conditions than local firms offer
Wages may still be low by global standards, and rules may go unenforced
Local businesses
Suppliers gain a large customer; local firms learn modern practices
Domestic rivals can be undercut and driven out, reducing long-term choice
Skills and technology
Training and new methods spread into the wider economy
The most senior roles may be filled by staff sent from head office
Government finances
Corporation tax, income tax from workers, and a lump sum on arrival
Tax holidays and transfer pricing can reduce the take to very little
Infrastructure
Roads, power and water are improved to serve the new operation
Improvements may serve only the MNC’s site, not the community
Environment
Modern plants can be cleaner than the older facilities they replace
Pollution and resource depletion where regulation is weak
Consumers
More choice, often lower prices and higher quality
Local products and traditions can be displaced by global brands
Transfer pricing, explained properly
A multinational is made of many separate companies in different countries, and those companies sell things to each other. Transfer pricing is the price they charge one another internally — and because the group sets that price itself, it can decide where the profit appears.
The mechanism
charge the high-tax subsidiary more → its profit falls → group tax bill falls
Suppose a group’s brand is owned by a subsidiary in a low-tax country. Every other subsidiary pays that one a large licensing fee. Profit shifts from where the sales happened to where the tax is lowest. Nothing physical moved. If it stays within the law it is tax avoidance, which is legal; deliberately misreporting would be tax evasion, which is not.
Do not moralise about this in an exam answer. State clearly that it is legal, explain the mechanism, then evaluate: the host country loses tax revenue it expected, which weakens the argument that MNCs pay their way. That is a far stronger answer than calling it cheating.
🧩 How to structure an MNC impact answer
Define MNC in one line, and say which country is the host.
Pick two benefits and explain the chain of effects, not just the label.
Pick two costs and do the same.
Bring in the government. Most costs shrink where regulation and enforcement are strong.
Separate short run from long run. Jobs arrive immediately; damage to local industry appears years later.
Judge conditionally. “Beneficial provided employment and environmental law is enforced” is a proper conclusion.
EXAM-STYLE
Explain two reasons why a manufacturer might set up production in another country. [4]
Reason 1: lower production costs
Wages and land are cheaper in some countries, so the same output costs less per unit to produce.
That either widens the margin or lets the firm undercut rivals.Reason 2: getting inside a trade barrierproduce inside the market → no import tariff to payThe firm can then price competitively against domestic producers in that market.One reason is about cost, the other about access
EXAM-STYLE
Evaluate the impact of a large MNC opening a factory in a developing economy. [10]
The factory will employ 2,000 people and has been granted five years without corporation tax.
Immediate benefit: employment
2,000 jobs raise household incomes, and that spending circulates through local shops and services.
Second benefit: skills and suppliers
Workers gain training they can carry elsewhere, and local suppliers win contracts that force them to modernise.
Cost: the tax holidayfive years with no corporation tax → the promised revenue arrives late, if at allIf the MNC relocates once the holiday ends, the country funded the investment and kept nothing.Cost: pressure on local firms
Domestic manufacturers cannot match the MNC’s costs and may close, so long-run choice narrows.
What decides the outcome
The strength of employment, environmental and tax law. Where enforcement is weak, the benefits shrink and the costs grow.
Beneficial in the short run and conditional in the long run — the deciding factor is regulation, not the MNC’s intentions
💡 Exam tip
Say which country you mean. Host country and home country experience opposite effects.
Develop a chain: jobs, then income, then local spending, then growth. One link is description; four is analysis.
Bring the government in. Regulation is the variable that decides most MNC questions.
Explain transfer pricing as legal, then evaluate the consequence. Do not call it fraud.
Avoid blanket verdicts. “MNCs exploit poor countries” is an opinion, not an evaluation.
Use real firms carefully. A short factual reference is fine; a paragraph of invented detail is not.
⚠ Common mix-up
Globalisation and multinationals are not the same thing. Globalisation is the process; MNCs are firms that thrive on it.
An exporter is not an MNC. Selling abroad is not the same as operating abroad.
Tax avoidance is legal; tax evasion is not. Getting this wrong undermines the whole paragraph.
MNCs do not always pay badly. They frequently pay more than local employers, which creates its own problems.
Host and home country are different. The home country may lose the jobs the host country gains.
Foreign investment is not automatically good. Money that arrives can also leave.
That completes Unit 1. Up next: Human Resource Planning in Unit 2, where we look at how firms work out how many people they need, and what happens when they get that number wrong.
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