4.4 - Global industries and companies (MNCs)

Question 1

What is foreign direct investment (FDI)?

Answer 1

A substantial and long lasting investment made by a business or government into another country. Investment by foreign firms which results in more than 10% share of ownership of domestic firms. e.g. Nissan, a Japanese firm, building a car factory in the UK.

• Inward FDI occurs when a foreign business invests in the local economy
• Outward FDI occurs when a domestic business expands its operations to a foreign country

Question 2

Explain transfer pricing?

Answer 2

• An accounting practice that represents the price that one division in a company charges another division for goods and services provided.
• Payments between subsidiaries, affiliates, or commonly controlled companies that are part of the same larger enterprise.
• Transfer pricing can lead to tax savings for corporations, though tax authorities may contest their claims.
• Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.

Question 3

Balence of payments

Answer 3

Spec - Impact of MNCs on the national economy:
* Summarises all transactions between residents of a nation and non-residents during a period. It includes the value of trade flows, investment incomes and other financial transactions across national borders.
* The method countries use to monitor all international monetary transactions in a specific period.
* How much money is going in (credit) and out (debit) of a country.
* Investment by MNCs has positive affect on host contries BOP - e.g. FDI from setting up factory, and thenthe selling of goods abroard.
* However, MNCs repratriating profits to base country and importing supplies into host country will worsen balence of payments.
* Balence of payments should balence in theory, although coutries usualy have a deficit/ surplus

Question 4

Describe political influence in the context of controlling MNCs

Answer 4

Political influence is the way in which government policies, laws, and beliefs can be used to affect the action of a multinational (Edexcel Mark Scheme Definition)

• State owned enterprises can be tightly controlled
• Tariffs, quotas, regulations and local content requirements can protect domestic businesses from large MNCs. Also tax breaks, subsidies
• Ownership restrictions (e.g. US Government stopping China firm taking over US oil form)
• Politicians lobby to influence MNCs

Question 5

Describe legal control in the context of controlling MNCs

Answer 5

• Regulation
• Competition law - competition and markets authority (UK), Competition Commision (EU), Fedral Trade Commision (US) - prevent abuse of market power, present colussion agianst producer or consumer
• Taxation policy - Corporation tax on profits (UK: 25%, Ireland: 12.5%, US: 21%). Tax avoidence is legal, tax avasion is illegal

Question 6

Describe Pressure groups in the context of controlling MNCs

Answer 6

• Naming and shaming:
• Direct action: e.g. protesting, boycotting, strikes
• Lobbying: e.g. Confederation of British Industry, Amnesty International