1.10 Flashcards
The importance and growth of
multinational companies
How have multinationals developed?
● Economies of scale
● Marketing
● Technical and financial superiority
Economies of Scale
● Many companies have developed into multinationals because larger
companies enjoy lower costs, this is because they can exploit
economies of scale.
● Multinationals are powerful and can put pressure on suppliers to lower
their prices.
● Multinationals have access to cheap global resources - such as labour,
capital and commodities, or raw materials that can be bought and sold.
Marketing
● Some firms have become multinationals by relying on effective marketing.
Good examples of this are McDonald’s and Starbucks.
● Some low-tech firms develop a successful brand at home and then exploit
it globally.
● Companies that face fierce competition, but protect their brands with
patents and use heavy advertising and innovative marketing can attract
customers globally.
Technical and financial superiority
● Most multinationals have developed advanced technologies and built a
huge bank of knowledge.
● Most multinationals can afford to employ the most talented people
available.
● Most multinationals have the resources to take risks and diversify. As a
result, they can explore business ventures that small firms cannot.
Benefits to a business of becoming a multinational
● Larger customer base
● Lower costs
● Higher profile
● Avoiding trade barriers
● Lower taxes
Larger customer base
● Multinationals have access to a much wider market than companies that
focus entirely on domestic markets.
● They can boost their sales by selling globally.
● This helps to increase profits and win market share from competitors.
Lower costs
● Multinationals can exploit economies of scale and enjoy lower costs.
● They can buy resources and borrow money at cheaper rates, for example.
● Many multinationals reduce transport costs by setting up factories in new
countries so that the distance from the production site to the market is
reduced.
Higher profile
● Large companies that have strong brand names are recognisable and may
become household names. This encourages existing companies and
attracts new ones.
● For example, big multinationals like Google, Coca-Cola, McDonald’s,
Microsoft and Apple are known to many people (or nearly everyone) in
the world.
Avoiding trade barriers
● Multinationals can bypass trade barriers by establishing operations in
countries that have barriers in place.
● Once inside a foreign country, a multinational will be subject to the same
trading rules and regulations as domestic producers.
Lower taxes
● Multinationals can reduce the amount of tax they pay on their profits by
basing their head offices in countries where taxes are lower.
● Some of the lowest rates of corporation tax are to be found in Ireland,
Cyprus, Lichtenstein and Gibraltar - where rates are all 12.5 or lower.
Benefits of multinationals to a country/economy
● Increase in income and employment
● Increase in tax revenue
● Increase in exports
● Transfer of technology
● Improvement in the quality of human capital
● Enterprise development
