Notes on 1.6 Multinational companies (MNCs)
Learning objectives
Define multinational company (MNC), host country, home country and foreign direct investment.
Explain the main drivers of globalisation.
Explain the reasons why businesses become multinational companies.
Analyse the positive effects of MNCs on host countries.
Analyse the negative effects of MNCs on host countries, including profit repatriation and transfer pricing.
Explain how host governments attract multinational companies and control their behaviour.
Evaluate the impact of a multinational company on a host country from the points of view of different stakeholders.
Introduction
A multinational company is a business that owns and runs operations in more than one country. Multinational companies make many of the cars, phones, medicines and foods sold around the world, and the decision of one large company to build a factory can change the economy of a region. Governments compete to attract them, while critics argue that they take more from poor countries than they give.
Multinational companies raise questions about all four key concepts. They spread new products and production methods (creativity) and drive economic change in the countries where they invest. Their treatment of workers, communities and tax authorities raises questions of ethics, and their use of land, water and energy affects environmental sustainability.
What a multinational company is
Many businesses sell abroad. A business that makes its products in one country and ships them to customers in others is an exporter, not a multinational company. A business becomes a multinational company (MNC) when it owns and controls productive operations, such as factories, offices, mines or shops, in at least one country other than the one where it is based.
Two terms describe the countries involved. The country where the MNC has its headquarters and is legally registered is its home country. Each country where it operates is a host country. Samsung Electronics, for example, has its home country in South Korea and is one of the largest foreign investors in Vietnam, its host country for smartphone production.
The relationship between home and host is at the centre of the debate about multinational companies, because they often have different interests. A home country wants the MNC to keep jobs, profits and research at home; a host country wants it to bring capital, jobs and technology and to leave as much of the value it creates as possible in the host economy.
Foreign direct investment
A business becomes multinational through foreign direct investment (FDI). It may build a new factory or office from nothing (a “greenfield” investment), buy an existing company in the host country (an acquisition), or form a joint venture with a local partner. In each case the investor gains a lasting interest in, and control over, the foreign operation.
FDI differs from buying a few shares in a foreign company through the stock market. That kind of investment, called portfolio investment, gives the investor a financial return but no control over how the business is run. FDI gives control, which is why it brings managers, methods and technology into the host country as well as money.
The figure shows the main flows between an MNC’s home country and a host country. Capital, technology and management skills flow into the host; profits, royalties and interest flow back to the parent company and its shareholders. Wages, purchases from local suppliers and taxes paid in the host stay in the host economy.
Globalisation
Multinational companies have grown in number and size because the world economy has become more connected. This process is called globalisation. It means that countries trade more with each other, capital moves more freely across borders, and people, ideas and technology spread faster than before.
The chart shows the rise of trade in goods and services, measured as exports plus imports as a percentage of world GDP. Trade grew faster than world output for most of the period from 1970 to 2008, which means that a growing share of what the world produced was sold across borders. The sharp fall in 2009 reflects the global financial crisis, and the drop in 2020 the COVID-19 pandemic.
The drivers of globalisation
Technology and communication
The internet, mobile phones, video calls and cloud software allow managers to run operations on several continents from one headquarters. Designs can be sent to a factory overseas in seconds, and production can be monitored in real time. This makes it far easier for a business to control operations in other countries.
Transport
Containerisation, larger ships and cheaper air freight have greatly reduced the cost and time of moving goods. A standard shipping container can move from a factory in Asia to a warehouse in Europe without its contents being unloaded and reloaded. Low transport costs allow MNCs to make components in one country, assemble them in another and sell the product worldwide.
Trade liberalisation
Governments have reduced the barriers to trade, such as tariffs (taxes on imports) and quotas (limits on the quantity of imports), through agreements at the World Trade Organization (WTO) and regional trade agreements such as the European Union single market and ASEAN. Trade liberalisation makes it cheaper to move components and finished products between an MNC’s operations in different countries.
Freer movement of capital
Most countries now allow foreign businesses to invest, own companies and move profits out, which they did not allow in the past. Many countries, including China from the late 1970s, India from 1991 and Vietnam from the late 1980s, opened their economies to foreign investment to speed up their development.
Growing markets
Rising incomes in Asia, Latin America and Africa have created hundreds of millions of new middle-class consumers. Multinational companies invest in these countries to sell to their growing markets, as well as to produce for export.
Globalisation can also slow or go into reverse. Since 2018, the USA and China have raised tariffs on large parts of their trade with each other, and many governments now screen foreign investment in sensitive industries such as semiconductors. Some MNCs are moving production closer to home or spreading it across more countries to reduce the risk of depending on one location.
Why businesses become multinational companies
Businesses invest abroad for several reasons, which can be grouped into finding new markets, lowering costs, getting around barriers and securing resources. A single investment often serves more than one of these motives.
New markets and growth
A business whose home market is saturated can grow by selling in other countries. Producing locally, rather than exporting, brings it closer to customers, lets it adapt products to local tastes and reduces transport costs and delivery times. Large-scale production for several countries also brings economies of scale.
Lower costs of production
Wages, land, energy and other costs differ widely between countries. A labour-intensive process such as clothing or electronics assembly costs much less in a country where wages are low. Lower costs raise profit margins or allow lower prices, which gives the MNC a competitive advantage over businesses that produce only in high-cost countries.
Avoiding trade barriers
When a country restricts imports, a foreign business can keep selling there by producing inside the country. In 1981 Japan agreed to limit its car exports to the USA to 1.68 million cars a year. Japanese car makers responded by building assembly plants in the USA, including Honda’s plant in Marysville, Ohio, which opened in 1982, and by forming joint ventures with US car makers. Cars made in the USA did not count against the limit.
Sources: Berry, Levinson and Pakes, “Voluntary export restraints on automobiles”, American Economic Review, 1999; Honda of America Manufacturing.
Moving production inside a protected market in this way is often called “tariff jumping”. It explains much of the FDI in large markets that protect their industries.
Access to resources
Some resources exist only in certain places. Mining and oil companies must operate where the minerals and oil are found, and food and drinks companies invest close to the farms that grow their raw materials. MNCs also invest abroad to gain access to skilled workers, research centres and clusters of specialist suppliers.
Lower taxes and government incentives
Corporate tax rates and government support differ between countries. An MNC may locate operations, or record profits, in countries with low taxes. Host governments also offer investment incentives such as tax holidays, grants and cheap land to attract MNCs.
Spreading risk
Operating in several countries spreads the risks of a recession, a natural disaster, a change in exchange rates or political problems in any one country. If one market weakens, others may still grow.
Positive effects of MNCs on host countries
Governments compete to attract multinational companies because they can bring large benefits to the host economy. The effects are strongest when the MNC invests for the long term and builds links with local businesses.
Investment and jobs
FDI adds to the host country’s capital: new factories, machinery and offices that the country might not be able to finance itself. Each investment creates jobs, directly in the MNC’s operations and indirectly in the businesses that supply it and in the shops and services where its workers spend their wages. MNCs often pay higher wages than local firms, because they are more productive and need to attract good workers.
Skills and technology transfer
MNCs bring new technology, production methods and management practices. Local employees learn these skills through training and on the job, and some later move to local firms or start their own businesses as entrepreneurs. Local suppliers improve their quality and methods to meet the MNC’s standards. This technology transfer can raise productivity across the whole economy.
Some governments make technology transfer a condition of entry. From 1994, China allowed foreign car makers to produce cars only through joint ventures in which a Chinese partner owned at least 50%, partly so that Chinese firms could learn from them and close the technology gap. The limits were removed for electric vehicles in 2018, for commercial vehicles in 2020 and for all passenger cars in 2022.
Sources: China National Development and Reform Commission announcements, 2018–2022, reported by Reuters and Caixin.
Tax revenue
MNCs pay corporate taxes on their profits, and their employees pay income tax. Governments can use this revenue for schools, hospitals and infrastructure. In countries with a small formal economy, a few large MNCs can provide a large share of tax revenue.
More choice and lower prices for consumers
MNCs bring new products, brands and services, often of higher quality or at lower prices than local alternatives. Competition from MNCs can also push local firms to improve their own products and efficiency.
Infrastructure
MNCs, or governments trying to attract them, invest in roads, ports, power supplies and telecommunications. These improvements benefit other businesses and households as well.
Exports
Many MNCs produce in the host country for export. Their exports earn foreign currency and help the host country’s balance of payments, and they connect the host economy to global supply chains.
Links with local suppliers
When an MNC buys components and services from local businesses, its spending supports local firms, which in turn hire workers and buy from their own suppliers. These links spread the benefits of the investment far beyond the MNC’s own factory gates. The more an MNC buys locally, the larger this effect.
Positive effect | Who benefits | How |
|---|---|---|
Investment and jobs | Workers, local communities | New capital creates direct and indirect jobs, often at higher wages |
Skills and technology transfer | Workers, local firms | Training, new methods, higher standards for suppliers |
Tax revenue | Government, citizens | Corporate and income taxes fund public services |
Choice for consumers | Consumers | New products, higher quality, competition lowers prices |
Infrastructure | Businesses, households | Roads, ports, power and telecoms |
Exports | The economy as a whole | Foreign currency earnings; entry into global supply chains |
Local supplier links | Local businesses | Orders for local firms spread spending through the economy |
Negative effects of MNCs on host countries
The same investment can also bring costs to the host country. Critics argue that the benefits of MNCs are often smaller than they first appear and that the costs fall on local businesses, workers and the environment.
Competition with local businesses
MNCs have economies of scale, well-known brands and large marketing budgets. Local firms may be unable to compete and may close, so the jobs created by the MNC are partly offset by jobs lost elsewhere. When MNCs dominate a market, they may later raise prices.
Profit repatriation
Much of the profit that an MNC earns in a host country is sent back to the parent company and its shareholders, most of whom live in the home country or elsewhere. This profit repatriation means the profit is not reinvested in the host economy.
Transfer pricing and tax avoidance
The subsidiaries of an MNC in different countries buy goods, services and rights from each other, such as components, brand licences and management services. The prices they charge each other are called transfer pricing. By setting these prices high or low, an MNC can record more of its profit in countries with low tax rates and less in countries with high tax rates.
Tax laws require transfer prices to be set at “arm’s length”, the price that independent businesses would agree, but this is hard to check for things like brand licences, which have no market price. Using transfer prices and other legal arrangements to reduce tax is tax avoidance. It is legal, unlike tax evasion, but it reduces the tax revenue of host countries, which are often poorer than the countries where profits end up.
Governments have responded with international rules. In October 2021, more than 130 countries agreed through the OECD to a global minimum corporate tax rate of 15% for the largest multinational companies, which many countries, including the UK and many EU members, began to apply from 2024. In January 2026 the participating countries agreed that US-headquartered companies would instead remain subject to US minimum tax rules, which shows how hard it is to agree global tax rules.
Sources: OECD/G20 Inclusive Framework statements, October 2021 and January 2026.
Exploitation of labour and the environment
Some MNCs, or the suppliers they use, locate in countries where wages are low, labour laws are weak or poorly enforced, and environmental rules are loose. Workers may face long hours, unsafe conditions and low pay, and factories or mines may pollute air, water and land. Because the MNC can move elsewhere, host governments may be reluctant to enforce stricter rules.
Indonesia’s nickel industry shows the environmental side of this trade-off. To attract processing investment, Indonesia banned exports of nickel ore from January 2020, so that foreign companies, many of them Chinese, built smelters inside the country, in industrial parks such as Morowali in Sulawesi. The policy created tens of thousands of jobs, but by 2024 nickel mining and processing had also been linked to large-scale forest clearing and pollution around the mines and smelters.
Sources: Government of Indonesia, mineral export regulations, 2019; The Jakarta Post, 2019–2020; Associated Press, 2024.
Cultural homogenisation
Global brands of food, clothing, music and film spread similar products and tastes across many countries. Critics argue that this cultural homogenisation weakens local cultures, traditions and businesses. Others point out that MNCs often adapt their products to local tastes and that consumers choose global brands freely.
Political influence
Very large MNCs have more revenue than the national income of some small countries. They can use their size to lobby governments for lower taxes, weaker regulation or subsidies, and to threaten to move if they do not get them. Campaigns by pressure groups, the media and consumers in home countries are one check on this power. Where government institutions are weak, this influence can lead to corruption.
Footloose MNCs
An MNC that can move its operations easily between countries is described as footloose. Assembly plants that use simple equipment and unskilled labour are easy to move when costs rise or incentives end elsewhere, leaving workers and suppliers without income. Ford announced in September 2021 that it would stop making cars in India, citing continuing losses; it later sold its plant in Sanand, Gujarat, to Tata Motors.
Sources: Ford Motor Company and Reuters, September 2021; Tata Motors and Reuters, August 2022.
Host, MNC and home country perspectives
Stakeholders in the host country, the MNC itself and the home country judge the same investment in different ways. Analysing an MNC means considering all three.
Perspective | Main interests | Possible gains | Possible losses |
|---|---|---|---|
Host country | Jobs, growth, tax revenue, skills, a clean environment | Investment, jobs, technology transfer, exports, tax revenue | Local firms forced out, profit repatriation, tax avoidance, pollution, dependence on one investor |
The MNC | Profit, growth, lower costs, access to markets and resources | Lower costs, new markets, economies of scale, spread of risk | Political and exchange-rate risk, reputational damage from poor practices, cultural misunderstandings |
Home country | Jobs, tax, research and headquarters functions at home | Repatriated profits and dividends, a stronger global company, high-skill headquarters jobs | Manufacturing jobs moved abroad (offshoring), lower tax revenue if profits are recorded elsewhere |
Within the host country, the effects also differ between groups. Workers hired by the MNC may gain, while workers at local competitors lose their jobs. Consumers may gain lower prices, while communities near a factory bear its pollution. The government gains tax revenue but may have given away much of it in incentives. An analysis of an MNC’s impact therefore needs to say who gains and who loses.
How host governments attract and control MNCs
Host governments try to obtain the benefits of MNCs while limiting their costs. They use incentives to attract investment and rules to shape how MNCs behave once they arrive.
Attracting MNCs
Tax incentives, such as low corporate tax rates or tax holidays for the first years of an investment. Ireland’s low rate of corporation tax has attracted the European headquarters of many US technology and pharmaceutical companies.
Grants and subsidies towards the cost of a factory, training or research.
Special economic zones and industrial parks with ready-built infrastructure, simpler customs procedures and lower taxes.
Infrastructure such as ports, roads, power and broadband.
Trade agreements that let MNCs export from the host country to large markets at low tariffs.
A stable political and legal system, with protection of property and contracts.
Controlling MNCs
Local content requirements, which oblige an MNC to buy or produce a minimum share of its inputs in the host country.
Ownership rules, such as requiring a joint venture with a local partner (as China did for car makers until 2022).
Rules on exports of raw materials, such as Indonesia’s ban on exporting nickel ore, so that processing happens locally.
Labour and environmental laws, minimum wages and health and safety rules, with inspections to enforce them.
Tax rules on transfer pricing and the global minimum tax.
Screening of foreign investment in sensitive industries such as defence, telecommunications or energy.
Evaluation: incentives and controls
Incentives can attract investment that a country would not otherwise get, but they have costs. Tax holidays reduce the revenue that the investment was meant to bring, and countries that compete with ever larger incentives may engage in a “race to the bottom” that benefits MNCs more than host countries. Incentives are most effective when they are tied to conditions, such as training local workers or buying from local suppliers.
Controls protect the host country but can discourage investment. If local content rules or ownership limits are too strict, MNCs may invest in a neighbouring country instead. Countries with large markets, such as China or India, can impose stronger conditions than small countries, because MNCs want access to their customers. The best balance depends on how attractive the host country is to investors and how well its government can enforce its rules.
Evaluation: the impact of MNCs on host countries
Whether a multinational company benefits a host country depends on several factors. The figure groups two of the most important into a simple framework: how the MNC behaves and how strong the host country’s institutions are.
The MNC’s behaviour. An MNC that trains local workers, buys from local suppliers, reinvests profits and follows high labour and environmental standards brings much more than one that imports its components, employs few local managers and repatriates all its profit.
The sector. Manufacturing and services that create many jobs and supplier links usually bring more benefit than mining or oil extraction, which employ few people and may damage the environment.
The host country’s institutions. Governments that enforce laws, collect taxes and invest the revenue in education and infrastructure gain far more from FDI than governments with weak institutions or corruption.
The host country’s stage of development. A country with a skilled workforce and capable local firms can absorb new technology quickly; a country without them may gain only low-skill assembly jobs.
Time. Benefits such as skills, supplier networks and local firms that learn from the MNC take years to build. A footloose MNC that leaves after a few years brings fewer lasting gains.
Multinational companies are neither simply good nor simply bad for host countries. Many economies that have grown quickly, including South Korea, China and Vietnam, used foreign investment as part of their development, but they also set conditions, built local skills and encouraged local firms. The net effect of an MNC is likely to be positive when it invests for the long term and builds links with the local economy, and when the host government is strong enough to share in the gains and limit the costs.
YouTubeCase study: Samsung Electronics in Vietnam
Samsung Electronics, the South Korean electronics company, began making mobile phones in Bac Ninh province, near Hanoi, at the end of the 2000s and later opened a second large phone complex in Thai Nguyen province. It added display, consumer electronics and research operations, including a research and development centre in Hanoi inaugurated in December 2022. By 2023 Samsung was one of the largest foreign investors in Vietnam, and its factories there produced a large share of its global output of smartphones.
Several of the motives for becoming a multinational company explain the choice of Vietnam. Labour costs were lower than in China and South Korea, and the government offered industrial parks and incentives to large foreign investors. Vietnam’s membership of the World Trade Organization, which it joined in January 2007, and its trade agreements gave access to export markets at low tariffs. The chart shows that FDI into Vietnam rose sharply after 2007 and has continued to grow.
The table brings together the figures that Samsung and the Vietnamese government have published. They show the scale of Samsung’s impact on its host country.
Indicator | Value | Year |
|---|---|---|
Cumulative investment in Vietnam | about US$20 billion | July 2023 |
Employees in Vietnam | about 100,000 | 2023 |
Revenue of Samsung’s four Vietnamese factories | nearly US$71 billion (about 30% of the group’s global revenue) | 2022 |
Export value | about US$55 billion, about 16% of Vietnam’s total exports | 2023 |
Vietnamese first- and second-tier suppliers | 25 → 257 | 2014 → 2022 |
Additional investment by Samsung Display in Bac Ninh | US$1.8 billion | announced 2024 |
Sources: Vietnam Government News (baochinhphu.vn), January 2024; Voice of Vietnam, January 2025 (statement by the General Director of Samsung Vietnam); Tuoi Tre News, February 2023; The Investor, January 2025.
Benefits for Vietnam
The positive effects are large. About 100,000 jobs, mostly for young workers in factory work, were created directly, with more in supporting businesses. Samsung’s exports of about US$55 billion in 2023 made it one of the largest exporters in the country and helped Vietnam become a major exporter of electronics. The number of Vietnamese companies in Samsung’s first and second tiers of suppliers rose roughly tenfold between 2014 and 2022, and the Hanoi research centre, which Samsung has said it wants to make its largest in Southeast Asia, moves part of its work beyond assembly.
Limits and risks
The figures also show the limits of the benefits. Export value is not the same as value added in Vietnam: a smartphone assembled in Bac Ninh contains many components made in other countries, so the share of each export dollar that stays in Vietnam is smaller than the export figure suggests. The 257 local suppliers are a small part of a global supply chain that reaches many countries. The profits of Samsung’s Vietnamese subsidiaries belong to the parent company in South Korea, which can repatriate them.
A host country that relies on one company for about a sixth of its exports is also exposed to that company’s decisions. A fall in global smartphone demand, or a decision by Samsung to move some production to India or elsewhere, would affect Vietnam’s exports, jobs and suppliers. Vietnam’s government has responded by seeking to deepen local supplier links and to attract research and higher-value production, such as the Hanoi centre and the new display investment.
The case supports the view that the effect of an MNC depends on its behaviour and on host-country policy. Samsung has brought capital, jobs, exports and some technology transfer, and has gradually moved towards higher-value activities. The evidence has limits: most of the figures come from Samsung or the Vietnamese government, which both have reasons to present the investment positively, and there are no published data on how much of the value of Samsung’s exports stays in Vietnam, how much tax it pays there or how its wages compare with those of local firms.
Explain two reasons why Samsung chose Vietnam as a host country.
Analyse why Samsung’s export figure overstates its contribution to the Vietnamese economy.
To what extent has Samsung’s investment benefited Vietnam’s workers and businesses?
Exam practice
Questions on MNCs range from short definitions and explanations of their effects to extended responses that ask you to evaluate their impact on a host country or a stakeholder group. The command term “evaluate” or “discuss” means you must weigh positive and negative effects and reach a judgment about the net impact.
“Explain” questions on MNCs reward two distinct effects, each linked to the host country in the case.
Summary
A multinational company owns and controls operations in more than one country; its home country is where it is headquartered and each other country is a host country.
Businesses become MNCs through foreign direct investment, which gives them control over operations abroad.
Globalisation, driven by technology, transport, trade liberalisation, freer capital flows and growing markets, has increased the number and size of MNCs.
Businesses become MNCs to reach new markets, lower costs, avoid trade barriers, secure resources, reduce tax and spread risk.
MNCs can bring host countries investment, jobs, technology transfer, tax revenue, choice, infrastructure, exports and supplier links.
They can also force out local firms, repatriate profits, avoid tax through transfer pricing, exploit weak labour and environmental rules, homogenise cultures, influence politics and leave when costs rise.
Host governments attract MNCs with incentives and control them with local content rules, ownership rules, regulation and tax rules.
The net impact depends on the MNC’s behaviour, the sector, the host’s institutions, its stage of development and time.
Self-check
- To do:
I can define multinational company, host country, home country and foreign direct investment.
- To do:
I can explain the main drivers of globalisation.
- To do:
I can explain why businesses become multinational companies.
- To do:
I can analyse the positive effects of MNCs on host countries with examples.
- To do:
I can analyse the negative effects of MNCs, including profit repatriation and transfer pricing.
- To do:
I can calculate how much of an MNC’s spending and profit stays in a host country.
- To do:
I can explain how host governments attract and control MNCs.
- To do:
I can evaluate the net impact of an MNC on a host country from different stakeholders’ points of view.