Inward foreign investment by multinational corporations
These were introduced in Unit 2 – go back and revise if you have forgotten. It is now time to increase our knowledge of how they operate.
The case for MNC’s investing in the UK and the rest of Europe
The EU likes MNC’s and the investment that they bring in:
• They bring in skills.
• They create jobs (this is usually well-publicised when a new factory is opened.)
• They add competition to a smaller economy.
• They help to increase output.
• This pushes out the long run aggregate supply curve and is a good source of economic growth.
• They add to the capital available and the technology they bring is probably modern and very advanced. (Recall that increased capital plus technical advances are the main source of growth in most developed countries.)
• They generally add dynamism to the economy.
The case against MNC’s
There is a lot of myth and story-telling and the case against sometimes looks a bit speculative rather than hard-fact based but here goes.
• They take their profits in the lowest tax regime country in which they operate. It is easy to do, as they simply sell from one branch in high-tax country “A” at a low price (so making little or no profit there) to a branch in a low-tax country “B” which then makes high profits as a result – and of course pays little tax. This process is called “transfer pricing”.
• They have often proved to be either corrupt or behaving in ways that border upon corruption, in order to help themselves and improve their position and profits.
• They may favour their head-office home base country over the interests of the local nations in which they operate.
• They will prevent cheap versions of their patented goods being made in poor third world countries, even if the people are dying of aid. (This is not an economic argument.)
• They successfully pressure national governments to water down environmental and tax laws so as to favour their own profits.