Over the years, and especially since the 1980s, world trade has grown tremendously. The huge discrepancies between pay, working standards and taxation in More Economically Developed Countries (MEDCs)¹ and Less Economically Developed Countries (LEDCs)² have created opportunities for companies to trade worldwide at low cost and high profit.

What is a Multinational Corporation?

Multinational corporations³ (MNCs) are very large companies that operate in several different countries. Research and Development (R&D) is usually located in an MEDC whereas Production is completed in an LEDC, although some factories are in MEDCs.

The world's biggest MNCs each have an annual income higher than that of many countries and have huge amounts of economic and political power. They are able to invest in research involving high-tech equipment and modern, efficient production, yet still trade at competitive prices.

Why do MNCs Happen?

Within the last 20 years, the employment structure of MEDCs, such as those in the UK, has changed dramatically. Britain had been dominated by a large manufacturing base (1971: 40% of total employment) and a significant tertiary sector⁴ (1971: 51%). Production was only 3%. By 1991, however, the tertiary sector had grown to 72%, while manufacturing had declined to only 26%.

This happened because of several factors:

• The cost of labour in Britain has risen dramatically
• It is cheaper to import goods, rather than produce them in the UK
• Technology means that machines are replacing humans and less factories are needed
• Export taxation has increased

By branching out to other countries, MNCs have several advantages, including access to a wider market and lower labour costs. By making products in certain areas of the world (eg the EU), foreign companies do not have to pay import tariffs. By going global, companies can exploit cheap labour sources around the world (compare British labour costs of $8 per hour with $0.25 per hour in Vietnam).

Many LEDCs encourage MNCs by applying few restrictions to them, because they bring important capital investment to the country. The lack of restrictions means that MNCs get cheap labour, cheap land and very few rules on working environments, wages and other production costs.

Is Having an MNC Good for a Country?

As with most things, there are advantages and disadvantages to having a company producing in an LEDC. These factors depend on the level of development within the host country and the policies of the corporation. Because LEDC governments are usually desperate to encourage MNCs, they will often overlook environmental or social standards in an effort to reduce overheads for the MNC. Some effects of these policies include:

Environmental Impacts

• Rivers may become polluted if waste is not disposed of properly, due to negligence or lack of amenities
• Water shortages may develop as supplies are used for industrial needs
• Industrial plants may be built in areas of environmental importance
• Development of mineral wealth and new energy sources may take place
• Acid rain, ozone depletion and global warming are often unconsidered by the host country

Social Impacts

• Improvements to travel links (roads, airports, rail, etc)
• Women may be encouraged to work, taking them from the family home
• People and industry may be located extremely close together
• Local labour receives a guaranteed income
• Local labour can be bought cheaply and given fewer benefits (eg no need for pensions)
• The skills of workers are upgraded
• Health care and education may be provided for workers and their families
• 'Westernisation' of the local culture may take place

Economic Impacts

• Higher wages may be paid
• The host country may be offering a tax incentive to encourage industry
• Corporations provide expensive machinery and introduce modern technology
• Inward investment as foreign currency is brought to the country
• Money flows out of the country as profits are exported
• Decision making is controlled from other countries, who have little awareness of the workers' needs
• The economic base of the host country is widened
• Highly paid positions are usually taken by foreign people rather than local employees
• Products are for export rather than the domestic market
• The MNC can pull out of the country at any time, leaving a dependent host country with a sudden gap in its economy

As the above suggests, there are many advantages to having an MNC in a country, however the negative effects are serious and need to be given careful consideration. Whatever happens, MNCs get much more out of having production lines in other countries than the host countries do themselves, even if both countries are MEDCs.

Case Studies of MNCs

When talking about MNCs within exams or discussion, it is important to have to hand examples of companies and to know what they do. We have seen above some of the largest global corporations of the 1990s. Now we'll look at some specific companies and the ways in which they operate in a global economy.

Mars Incorporated

• Mars produces a huge and varied amount of goods every year, including snack food (Galaxy, Bounty, Maltesers, Mars, Twix), petcare (Pedigree, Whiskas, Kitekat, Pal, Trill), meals (Uncle Ben's, Dolmio, Yeomans), plant care (Seramis) and electronic payment systems for vending and other machines (MEI)

• Mars is still privately owned by the Mars family; this is quite rare now

• The company headquarters is in the USA, but there are more than eighty locations in over 30 different countries

• Annual turnover is over $9 billion

• Sells 56% of its products in Europe

• Employs over 26,000 people worldwide

• Mars is active in Canada, USA, Brazil, Ireland, UK, Norway, Sweden, Finland, Germany, Switzerland, Hungary, Greece, Italy, Spain, Portugal, France, Belgium, Netherlands, Saudi Arabia, China, Japan, Australia, Malaysia and New Zealand

Fiat SpA

• Italy-based

• Primary industry interest is cars

• Second-largest car group in Europe (after Volkswagen)

• Largest privately owned company in Italy

• Annual turnover of over $48 billion

• Other interests include chemicals, bioengineering and insurance services

The table shows the distribution of Fiat's car plants in Europe. Fiat also has plants in China, USA, Africa, Australia and South America.

Fiat's move into Brazil (and thus the rest of South America) provides a typical example of an MNC expanding into an LEDC.

• The strong military government at the time of setting up reduced the risk of strikes

• Fiat would have a guaranteed market in Brazil and could supply other countries within South America

• There is a large pool of low-paid workers. They earn $7 per hour compared to around $20 per hour in the UK

• The state of Minas Gerais offered Fiat $135 million in grants and aid

• No strikes in the 14 years following the factory's opening

• In the 1990s the Brazilian government decided to expand its car industry to provide long-term employment

• Increase in demand for cars in South America led to an increase in production:

  1976: 130,000 cars (10,000 workers)

  1980: 255,000 cars

  1990: 1million cars

  1992: 1.1million cars

  1996: 1.8million cars

  2003: 2.2million cars

MNCs and the World

Globalisation is not just an economic operation. It has an impact on politics, society, culture and the environment. At the political level, for example, nation-states are now unable to control the global economy. It is estimated that the 100 largest MNCs now own $1.7 trillion of assets in their foreign branches. This means that they have a huge overseas impact, and the scale of these activities is completely beyond the power of any individual country.

Because so much of a country's economy depends on international trading, it is now nearly impossible to place economic sanctions on a country without other countries suffering hugely.

A good example of the problem caused by inter-related economies is the 1998 economic crisis in South Korea. Leading global banks lost confidence in South Korea's ability to repay loans and demanded all their money back at once, almost collapsing the country's whole economy. Because South Korea was the world's 12th-largest economy, the world's richest countries organised a $55 billion rescue package. Even so, the UK suffered as major Korean companies slowed or cancelled investments in Wales and the North East.

Many company employees in LEDCs are quickly catching up to their MEDC counterparts in terms of education and skills. This means that they are beginning to demand higher wages, better working conditions and benefits. While this is good for the host country in terms of raising the country's standards, it does mean that MNCs may become disinclined to stay and may relocate to a less-developed country.

The questions that arise most often in discussions about MNCs are those related to their ethical and moral obligations. Should MNCs be forced to hold the same standards in LEDCs as they would in their own countries? Currently companies must only adhere to the standards of their host country, which may be deliberately reduced in order to lure corporations. However, if customers find out about poor working standards and decide to complain, companies can face major repercussions such as possible boycotts by customers.

A prime example of this was the company, Gap, in the 1990s. They hired workers through a contractor and were unaware that the workers were actually children working in dangerous environments and for very poor wages. Once the British public found out, Gap's sales fell drastically until they altered their production policies. They now adhere to better trading standards and have no problems.

Some Key Acronyms

• MNC: Multinational Corporation
• MEDC: More Economically Developed Country
• LEDC: Less Economically Developed Country
• NIC: Newly Industrialised Country
• FDI: Foreign Direct Investment

Further Reading

• Beyond McDonald's
• International Labour Organisation
• MNC Myths and Facts
• MNCs in the Third World: Predators or Allies?
• FDI and the Multinational Corporation: New Theories and Evidence
• MNCs and Human Rights (PDF file)