IGCSE Economics 0455

Topic: International Trade and Globalisation

Objective: Causes of changes in globalisation: Movement of Multinational Companies (MNCs)

This section explores how the movement of multinational companies (MNCs) has been a significant driver of changes in globalisation. We will examine the factors that encourage MNCs to operate across borders and the resulting impact on international trade.

What are Multinational Companies (MNCs)?

Multinational companies are businesses that operate in multiple countries. They typically have headquarters in one country but establish production facilities, sales offices, and other operations in various locations around the world.

How do MNCs contribute to globalisation?

The activities of MNCs significantly contribute to globalisation in several ways:

• Foreign Direct Investment (FDI): MNCs invest directly in foreign countries, establishing or acquiring businesses. This increases international capital flows.
• Trade in Goods and Services: MNCs often trade goods and services between their different locations, facilitating international trade.
• Transfer of Technology and Knowledge: MNCs can bring new technologies, management techniques, and knowledge to countries where they operate.
• Creation of Global Supply Chains: MNCs often coordinate production processes across multiple countries, creating complex global supply chains.
• Spread of Brands and Culture: MNCs promote their brands and products globally, contributing to the spread of consumer culture.

Factors Encouraging MNC Movement

Several factors motivate MNCs to expand their operations internationally:

• Access to New Markets: Expanding into new countries provides access to a larger customer base and higher potential sales.
• Lower Production Costs: Countries with lower labour costs, cheaper raw materials, or more favorable tax regimes can offer significant cost advantages.
• Natural Resources: Access to valuable natural resources in other countries can be a major incentive.
• Government Incentives: Some governments offer tax breaks, subsidies, or other incentives to attract foreign investment.
• Reduced Trade Barriers: The reduction of tariffs and other trade barriers through organisations like the WTO makes international operations more attractive.
• Political Stability: Countries with stable political environments are less risky for foreign investment.
• Skilled Labour: Access to a skilled and educated workforce is crucial for many MNCs.

Impact of MNCs on International Trade

The activities of MNCs have a profound impact on international trade:

• Increased Trade Volumes: MNCs facilitate both exports and imports, leading to higher overall trade volumes.
• Changes in Trade Patterns: MNCs can shift trade patterns as they establish production facilities in different countries.
• Development of Global Supply Chains: MNCs create intricate global supply chains, where different stages of production occur in different countries.
• Competition and Efficiency: The presence of MNCs can increase competition in local markets, leading to greater efficiency and innovation.
• Potential for Exploitation: There are concerns that MNCs may exploit workers or resources in developing countries.

Table Summarising Factors and Impacts

Factor Encouraging MNC Movement	Impact on International Trade
Access to New Markets	Increased exports and imports; shifts in trade patterns
Lower Production Costs	Increased exports; potential for lower prices for consumers
Natural Resources	Increased imports of raw materials; potential for exports of finished goods
Government Incentives	Increased FDI; potential for new trade relationships
Reduced Trade Barriers	Increased trade volumes; more efficient supply chains

In conclusion, the movement of multinational companies is a key driver of globalisation, significantly impacting international trade through increased investment, trade flows, and the development of global supply chains. Understanding these dynamics is crucial for comprehending the interconnectedness of the world economy.