IB Business Management SLTopic 1 — Multinational CompaniesPaper 1 & 2Core idea~11 min read
Multinationals and Their Impact
A multinational is registered in one country and operates in many others. Governments compete to attract them because they bring jobs, tax and technology — and then spend years arguing with them about wages, pollution and where the profit ends up. Both halves of that sentence belong in your answer.
📘 What you need to know
Globalisation is the growing economic integration of countries, as people, goods, services, technology and finance move more freely across borders.
A multinational company (MNC) is registered in one country but has operations or outlets in several others.
MNCs have grown because of globalisation and deregulation — freer trade and shared technical and financial standards.
Firms go multinational for economies of scale, new markets, lower labour costs, tax incentives, spreading risk and to get around trade barriers.
Host countries gain jobs, tax, infrastructure, skills and choice.
They also risk low pay, environmental damage, local firms being squeezed out and profit leaving through transfer pricing.
Globalisation in one page
Globalisation is not new — countries have traded for thousands of years. What changed in the last fifty is speed. Cheap transport and instant communication have made national economies far more dependent on each other, and consumers now recognise the same brands wherever they travel.
Globalisation has driven industrialisation in developing economies and de-industrialisation in some developed ones. Both effects are fair game in an evaluation question.
What globalisation does to a domestic firm
More competition. Local firms suddenly face global brands. That pushes them to become more efficient, but some respond by cutting staff or demanding more output from the workers who remain.
Transfer of skills, in both directions. Local workers pick up techniques from an international competitor, and the global firm gains local market insight it could never have bought.
A sharper unique selling point. Many domestic firms compete by leaning on exactly what the multinational cannot claim — being local.
Collaboration. Joint ventures and strategic alliances let a local firm and a global one help each other rather than fight.
Notice that “more competition” is not automatically bad news for the domestic firm. It is bad news for the inefficient domestic firm. That distinction is worth a mark on its own.
What a multinational is, and why there are so many
Definition
MNC = registered in one country, with operations or outlets in several others
A coffee chain headquartered in one country with tens of thousands of stores across eighty others is the standard picture. Two forces created that world. Globalisation made trading across borders normal. Deregulation — freer trade rules plus shared financial and technical standards — made it practical, because a firm no longer has to redesign everything for each country it enters.
Why a firm becomes multinational
Reason
How it helps the firm
Economies of scale
Producing for a world market raises output, so the cost of each unit falls
New markets
When the home market is saturated, growth has to come from somewhere else
Lower labour costs
Production is placed where wages are lower, cutting the cost of every item made
Tax incentives
Some countries offer low corporation tax, or no tax at all for the first several years, to attract investment
Cheaper transport
Producing near the customer cuts the cost and time of shipping goods across the world
Spreading risk
A recession in one country hurts less if sales are rising in another
Avoiding trade barriers
Producing inside a protected market means the firm’s goods are no longer imports, so tariffs do not apply
Creating employment
Setting up abroad raises local incomes, which builds goodwill with the host government
Higher profit
All of the above, added together, is meant to leave more profit at the end of the year
Be careful with the profit argument. Textbooks often say profits are sent home to the parent country. Many multinationals do not bring the money home at all — it sits offshore, which is a separate argument and a common exam trap.
The impact on the host country
Governments usually want multinationals to arrive. The benefits are real and so are the complaints, which is why this makes such a good evaluation question.
Use the last line as your evaluation. The same multinational behaves very differently in a country that enforces its rules and one that does not.
Advantages for the host country
Disadvantages for the host country
Jobs are created, often at better pay and conditions than local employers offer, and workers then spend that money locally
Where employment law is weak or unenforced, workers can be exploited and paid very little
Local suppliers and service firms win work from the new operation
Better pay at the multinational can drain skilled workers away from local businesses
Investment in infrastructure — roads, transport, water, electricity — which helps the community as well as the firm
Some multinationals bring in their own workers from home rather than hiring locally
An initial lump sum plus ongoing tax revenue, which supports economic growth
Lower production costs let them undercut local firms and push them out, leaving less choice and eventually higher prices
New technology and management ideas spread to domestic firms, raising productivity
Environmental damage during and after production, sometimes in vulnerable communities
Customers get wider choice, better quality and often lower prices
Assets end up foreign owned, and the money may be moved abroad rather than reinvested locally
Transfer pricing
This is the mechanism behind the tax argument, and it is worth understanding rather than just naming.
Definition
Transfer pricing = shifting profit from where it was earned to where tax is lower
A multinational’s divisions buy and sell from each other. By setting those internal prices carefully, the group can arrange for most of its profit to appear in a low-tax country while the high-tax country’s division records barely any. It is legal tax avoidance rather than illegal evasion, but it means the host country collects far less tax than the size of the operation suggests it should.
Worked examples
WORKED EXAMPLE
Define the term multinational company. [2]
Registration, then operationsA multinational company is a business registered in one countryand the second element:that has production facilities, offices or outlets in one or more other countries.2 marksSimply “a big global company” scores nothing. The two-country structure is the definition.
WORKED EXAMPLE
Explain two reasons why a manufacturer might open a factory in another country. [4]
Reason 1 — avoiding trade barriersGoods produced inside the market are no longer imports, so the tariffs that made its exports expensive no longer apply and it can compete on price with local firms.
Reason 2 — lower labour costsWages in the host country may be a fraction of those at home, which cuts the cost of every unit and either widens the margin or funds a lower price.
4 marks
WORKED EXAMPLE
A government is offering a ten-year tax break to attract a multinational electronics manufacturer. Evaluate this decision. [10]
The case forThousands of jobs raise incomes, and that spending flows through local shops and suppliers. The firm invests in roads and power that outlast it, and local workers gain skills and technology they can use elsewhere.
The case againstA ten-year tax break means almost no tax revenue during the period the country most needs it, and transfer pricing may keep the bill low afterwards. Local electronics firms may be pushed out, and the plant could relocate the moment the break ends.
The condition that decides it
Whether the country enforces its labour and environmental law, and whether the deal ties the firm in — minimum local hiring, a stay-for-longer clause, environmental standards written into the agreement.
JudgementOffer the break, but shorten it and attach binding conditions on hiring and standardsDepends heavily on how many rival countries are bidding. A government with no competing offers has far more room to negotiate.
💡 Exam tip
Always answer from a stated point of view — the MNC, the host country, or the workers. The same fact reads differently from each.
Use the regulation argument. Whether the host benefits depends largely on the laws it enforces. It is the strongest evaluation line on this topic.
Name transfer pricing when tax comes up, and explain it in one sentence rather than just dropping the term.
Link back to economies of scale and market saturation — both explain why the firm went abroad in the first place.
Avoid caricature. Multinationals often pay better than local employers. Saying so and then adding the caveat shows balance.
⚠ Common mix-up
Globalisation is not the same as a multinational. One is a worldwide process; the other is a type of firm that the process made possible.
Exporting does not make a firm multinational. It needs operations abroad, not just customers abroad.
Tax avoidance is not tax evasion. Transfer pricing is legal; evasion is a crime. Do not use the words interchangeably.
Multinationals do not always create local jobs. Some bring workers with them, which is a fair criticism to raise.
Deregulation is not privatisation. One removes rules; the other changes who owns the firm.
Not every effect on the host is economic. Culture, working practices and the environment all change too.
Up next: Human Resource Management — Unit 1 ends here. The next unit is about the people inside the business: how firms organise, motivate and lead them.
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