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Multinationals and foreign direct investment
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Multinational companies have spread around the world through foreign direct investment. They bring benefits and drawbacks to host countries.
Definitions
A multinational company (MNC) is a company that has its headquarters in one country and operations (such as factories or offices) in other countries.
Foreign direct investment (FDI) is investment by a firm from one country into business operations in another country, such as building a factory.
Foreign direct investment (FDI) is investment by a firm from one country into business operations in another country, such as building a factory.
Why MNCs and FDI grow
To gain economies of scale by producing for many markets.
To access natural resources and cheaper materials or labour.
Lower transport and communication costs make it easier.
To be closer to customers in a region and avoid tariffs.
To access natural resources and cheaper materials or labour.
Lower transport and communication costs make it easier.
To be closer to customers in a region and avoid tariffs.
Advantages and disadvantages for host countries
Advantages: job creation, investment in infrastructure, skill development for local workers, new capital and technology, tax revenue.
Disadvantages: tax avoidance (moving profits to low-tax countries), environmental damage, profits sent abroad to the home country, and local firms may struggle to compete.
Disadvantages: tax avoidance (moving profits to low-tax countries), environmental damage, profits sent abroad to the home country, and local firms may struggle to compete.
A car maker from Japan builds a factory in Mexico. What is this an example of?
- Investment by a firm in one country into operations in another.
Answer: Foreign direct investment by a multinational
An MNC operates in more than one country. FDI is investment in business operations abroad. MNCs grow for economies of scale, resources, lower costs and access to customers. Hosts gain jobs, skills and taxes but may suffer tax avoidance, pollution and profit outflows.
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