Question: Assess the advantages of MNCs.
MNCs can lead to economic growth. MNCs increase a host country’s investment so AD rises. MNCs employ domestic workers so employment rises, income rises, consumption rises and AD rises. AD rises further due to the multiplier effect, so real GDP rises.
But, there is no guarantee that MNCs will lead to economic growth, not create it. MNCs could thus create instability if they keep moving from country to country. Instability creates uncertainty, and this makes it harder to plan and invest, so economic growth may be adversely affected in the long-run.
Also, MNCs could lead to knowledge and technology transfer. MNCs are the world’s most technologically advanced firms so they benefit host countries by bringing advanced technology, knowledge of production techniques and managerial techniques.
However, MNCs may not transfer technology. MNCs may not transfer much knowledge if they keep their Research and Development activities at home. Moreover, MNCs may transfer advanced technology but not the means to use that technology. Furthermore, MNCs’ technology may not be suitable for the host country. MNCs mostly use capital intensive technology but this will not benefit countries requiring labour intensive production techniques (like LDCs).
Additionally, MNCs help raise investment within the economy. MNCs invest in a host country, boosting AD and real GDP. Moreover, in the long-run MNCs’ investment helps make the economy more productive, shifts the LRAS curve rightwards, reduces inflation and increases real GDP further. This is most important for LDCs because their domestic savings may be so low that it constrains their domestic investment.
On the other hand, MNCs’ investment may lead to crowding-out. MNCs may crowd-out a host country’s domestic investment. MNCs may destroy domestic competition and repatriate profits so domestic investment falls.
Lastly, MNCs could increase tax revenue. MNCs pay corporate tax so the host government receives more tax revenue to spend on the infrastructure, health or education.
Although, MNCs may repatriate profit. MNCs may repatriate profit through transfer pricing to avoid paying taxes in a particular country. MNCs do this by producing in country A, importing from themselves in country B at a high price and exporting the output back to themselves in country B at a low price. More money is leaving country A than is coming into country A so MNCs are basically taking their profits out of country A. MNCs earn low profits in country A so they pay little taxes in that country. MNCs charge high prices in country B, earn high profits and pay a lot of taxes in country B.