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The impact of MNCs on the national economy
Edexcel IAL Business · WBS14 Global business
Governments compete to attract MNCs because of their effect on the whole economy. The specification lists seven areas: growth, FDI flows, the balance of payments, technology and skills transfer, consumers, business culture and tax revenues.
Growth, FDI flows and the balance of payments
Economic growth: MNC investment adds to aggregate demand and expands productive capacity, raising GDP.
FDI flows: an MNC's arrival is an inflow of FDI; success can attract further investors.
Balance of payments: exports by the MNC and reduced need for imports improve the current account; the investment itself is a financial account inflow. But imports of components and the repatriation of profits to the home country are outflows that worsen the current account over time.
Technology and skills transfer, consumers and business culture
Technology and skills transfer: local workers learn new techniques and management methods; local suppliers must meet higher standards; staff who move to local firms take skills with them.
Consumers: more choice, better quality, often lower prices; but MNCs with market power may raise prices or drive out local brands.
Business culture: MNCs bring practices such as quality management, performance pay and formal governance that local firms may copy; they may also clash with local customs or weaken local enterprise.
Tax revenues and transfer pricing
MNCs pay corporation tax, and their employees pay income tax, increasing government revenue. But governments may offer tax holidays to attract them, and MNCs may use transfer pricing: a subsidiary in a high-tax country buys inputs from a sister subsidiary in a low-tax country at an inflated price, so profit (and tax) is recorded where tax is low.
Evaluation: the national impact depends on how much profit is reinvested rather than repatriated, the strength of the tax system, the type of jobs and the degree of linkage with local firms.
Worked example
A subsidiary in Country H (tax 30%) sells a product for $100 and buys it from a sister subsidiary in Country L (tax 10%) where it costs $40 to make. Compare total tax per unit if the transfer price is $50 or $90.
- At $50: H profit 50, tax 15; L profit 10, tax 1; total $16
- At $90: H profit 10, tax 3; L profit 50, tax 5; total $8
Answer: Raising the transfer price cuts total tax from $16 to $8 per unit, and Country H loses revenue.
Check yourself
- A subsidiary in a country with 25% profit tax sells at $80 and pays a transfer price of $50 to a sister company. Calculate the tax paid per unit in that country.
Show answer
$7.50. (80 - 50) x 0.25 = $7.50.
- Same subsidiary: the transfer price rises to $72. By how much does tax per unit fall?
Show answer
$5.50. New tax (80 - 72) x 0.25 = 2.00; fall = $5.50.
- An MNC's subsidiary makes profit of $240 m and repatriates 65% to its home country. How much (in $ m) is repatriated?
Show answer
156 $ m. 240 x 0.65 = $156 m.
- Explain how an MNC can worsen a host country's current account in the long run.
Show answer
It may import many components and send its profits back to its home country (repatriation), which are outflows on the current account.. Imports and repatriated profit are debits on the current account.
- Explain how an MNC can transfer technology and skills to the host economy.
Show answer
Local workers are trained in new techniques and management methods, and local suppliers must adopt new technology to meet the MNC's standards; these skills spread when workers move to local firms.. Spillovers raise productivity beyond the MNC itself.
- A government offers an MNC a ten-year tax holiday. Which is the main cost to the host country?
- Fewer jobs created
- Lower FDI inflows
- Lower tax revenue during the holiday
- Fewer exports
Show answer
Lower tax revenue during the holiday. The government gives up corporation tax it would otherwise receive.
- Which is a likely benefit to consumers when an MNC enters the national market?
- Wider choice and possibly lower prices from greater competition
- Fewer products available
- Higher prices for all goods
- Loss of all local brands
Show answer
Wider choice and possibly lower prices from greater competition. More competition and new products benefit consumers.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.