MAGDA NGUYEN IB2

Date: March 01, 2011

Homework for Winter Break

Complete the following essay
(a) Why have multi-national corporations grown so rapidly in recent decades? (10)
(b) Do multi-national corporations help or hinder the less developed countries? (15)
(Total 25 marks)

a. Why have multinational corporations grown so rapidly in recent decades?

Multinational corporations are the corporations that manage production or deliver

services in more than one country. Throughout the recent decades, multinational corporations
have developed rapidly, with over 80 000 multinational corporations producing 25% of world’s
output in 2007, and 70% of world trade occurring between multinational corporations in 2010.
In today’s economy, multinational corporations are the main operators producing the largest
proportion of world’s output and gaining the largest proportion of world’s income. There are
several factors, which have had influence on MNCs development.
The first and the most important one is globalization. By definition, economic
globalization is the integration of national economies into the international economy
through trade, foreign direct investment, capital flows, migration, the spread of technology,
and military presence. Globalization has enhanced MNCs to develop to the greater and greater
extend. Thanks to the globalization, MNCs have gained opportunities to gradually expand their
sales, many of them have grown to the point where their representatives are present in almost
every country in the world, i.e. McDonald’s, Coca-Cola.
Another factor which helped MNCs grow so rapidly is the improvement in international
trade. Since the globalization, many countries start to trade more and more in order to have
greater variety of goods within each country and hence, to develop the domestic economy. Now,
more and more countries open their economies to the world and the amount of MNCs is
increasing even faster. According to the UN Statistics, in 1990, there were about 30 000 MNCs,
in 2000 there were over 60 000, and in 2007, the number has increased to over 80 000.
Moreover, in today’s statistics, it is recorded that 70% of world trade occurs between MNCs.
The third factor to have influence on the development of MNCs is the existence of low-
cost countries. Companies are likely to bring their business operations into low-cost countries
where labor cost, cost of production as well as transportation cost are much cheaper. Therefore,
MNCs tend to develop both within these low-cost countries as well as imports and exports with
many other countries. As economics growth in the low-cost countries, like China, are increasing,
MNCs also expand their scales and continues to grow rapidly.
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 MAGDA NGUYEN IB2
Date: March 01, 2011

Another factor for MNCs’ growth is the changing politics. For instance, many strategies
of communism might have great influence into how the companies can operate. Now, countries
have been fighting for the best governmental policies, therefore, more and more advantages are
there for companies, especially the multinational ones, such as tax breaks.
And the last one is the great improvement of technology. One decade ago, poor
technology didn’t allow for modern transactions. Even Internet was not as widely used as today,
and we know that Internet today is the crucial part in business operations, it has made many
economic interactions much easier and more simple and convenient.

b. Do multi-national corporations help or hinder the less developed countries?

Multinational corporations are generally beneficial in developing world’s economy.

However, they also bring some disadvantages when it comes to the less developed countries. The
rapid increase of multinational corporations brings with it advantages as well as disadvantages.
First of all, multinational corporations certainly provide employment to many people but
in the meantime, MNCs may also cause unemployment of locals. MNCs may induce their local
rivals to be more innovative and competitive. Higher competition may lead to lower prices due to
the increase in supply:

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Then MNCs may enjoy high competitive advantages over the local firms, but in this way, they
can destroy the local competition and drive away some small firms.

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Date: March 01, 2011

MNCs brings with it infrastructure development which allows for better developed
economic activities, as well as enhances the economic growth, especially with the benefits from
foreign direct investments (FDIs) and new modern technology. Moreover, MNCs provide
training for local labor with more sophisticated skills, which is a plus for the host country
because it will bring external benefits when all these new techniques can be used in all economic
sectors of the country.
On the other hand, MNCs are usually powerful and expanded companies, and knowing
that natural resources are scarce, when MNCs overuse them, they get even more scarce. And
foreign investments are very beneficial for economic growth but economies can grow even more
if the local investors were the ones to make these investments. Negative externalities such as
pollution, congestion, destruction of country’s sights or unemployment of locals, etc.. also come
together with introduction of MNCs. These negative externalities can even lead to global
warming. MNCs may also create uncertainties due to the fact that foreign firms control the
country within it by controlling a part of its industries. In additon, MNCs can even drive local
producers out of business just by sourcing their production components from abroad, and this
might harm the local competition rather than promote it. And finally, MNCs can avoid taxes by
practicing transfer pricing, which determines in large part the income and expenses, and
therefore taxable profits.