What is a multinational corporation, why do firms become multinational, and how do MNCs affect host and home countries?
Multinational corporations (MNCs): their features and reasons for becoming multinational, and the costs and benefits they bring to host countries and to their home country.
What multinational corporations are in Advanced Higher Business Management: why firms go multinational, and a balanced analysis of the benefits and costs MNCs bring to the host countries they invest in and to their home country.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this key area is asking
A multinational corporation (MNC) is an organisation that owns or controls production or service operations in more than one country. MNCs are the leading actors in globalisation, so you need to know what defines them, why a firm chooses to become one, and, crucially, how their presence affects both the host country they invest into and their home country. The skill the examiner wants is a balanced, evaluated analysis, not a one-sided list.
Defining a multinational
The defining feature is ownership or control of operations abroad, not merely selling abroad. A firm that only exports is an exporter; a firm that builds or buys facilities overseas is a multinational. Keep the home and host country labels straight, because impact questions turn on which one is asked about.
Why a firm becomes multinational
- Market access. Producing inside a foreign market reaches customers a saturated home market cannot, and avoids transport cost and delay.
- Lower costs. Locating production where labour, land, energy or materials are cheaper improves margins.
- Avoiding trade barriers. Producing locally gets inside tariff walls and trade blocs, sidestepping import taxes and quotas.
- Securing supplies. Owning operations at the source of raw materials protects supply and cost.
- Spreading risk. Operating across economies reduces exposure to any single market's downturn.
- Government incentives. Host governments offer grants, tax breaks and infrastructure to attract investment.
Impact on the host country
The host country is where the MNC invests. The effect is genuinely two-sided.
- Benefits. New jobs and lower unemployment; inward investment and tax revenue; transfer of skills, technology and management practice; improved infrastructure; wider consumer choice and competition; and support to the balance of payments through exports.
- Costs. Profits often repatriated home rather than reinvested; local competitors driven out; jobs that can be low-skilled, low-paid and insecure; possible exploitation of weaker labour and environmental standards; and dependence on a footloose investor that can relocate if conditions change.
Impact on the home country
The home country is where the MNC is based. Its presence cuts both ways here too.
- Benefits. Profits repatriated home boost national income; the firm extends national influence and exports of services and management; and shareholders and the tax base can gain.
- Costs. Production and jobs may shift abroad, raising domestic unemployment; the tax base can erode if profits are booked overseas; and skills and investment may follow the work out of the country.
Examples in context
Why MNCs matter strategically
MNCs are the vehicle through which globalisation, foreign direct investment, transfer pricing and trade-bloc strategy actually happen. Understanding why firms go multinational and the balanced impact they have underpins almost every other external-environment question.
Try this
Q1. Distinguish between an MNC's home country and a host country. [2 marks]
- Cue. The home country is where the MNC is based and headquartered; the host country is a country it invests into and operates in.
Q2. Explain two benefits an MNC can bring to a host country. [4 marks]
- Cue. Any two of: jobs and lower unemployment; inward investment and tax revenue; transfer of skills and technology; improved infrastructure; wider choice and competition, each developed with reasoning.
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA AH specimen10 marksDiscuss the impact of a multinational locating in a host country.Show worked answer →
The host country is the country an MNC invests into. Discuss means weigh both sides. Benefits to the host: new jobs and so lower unemployment and higher incomes; inward investment and tax revenue; transfer of skills, technology and management expertise; improved infrastructure; wider consumer choice and competition that can raise standards; and a boost to the balance of payments through exports.
Costs to the host: profits are often repatriated to the home country rather than reinvested; local firms may be driven out by a larger, lower-cost competitor; jobs created can be low-skilled and insecure; the MNC may exploit weaker labour or environmental rules; and the economy becomes dependent on a footloose investor that can relocate. A strong answer develops two or three points each way and judges that the net effect depends on the terms of the investment and the host government's bargaining power, rather than listing.
SQA AH style6 marksExplain reasons why a business may choose to become a multinational.Show worked answer →
Explain means reasons with development. To access new and larger markets and so grow sales beyond a saturated home market. To reduce costs by producing where labour, land or materials are cheaper. To get inside tariff walls and trade blocs by producing locally rather than exporting. To secure supplies of raw materials at source. To spread risk across several economies. To exploit government incentives such as grants and tax breaks offered to attract investment. And to follow major customers who have themselves gone global. The best answers tie each reason to the strategic gain it delivers, not just state it.
Related dot points
- Globalisation: the integration of national economies into a single world market, its drivers (technology, transport, trade liberalisation, deregulation), and the opportunities and threats it creates for organisations.
What globalisation means for an Advanced Higher Business Management organisation: the integration of world markets, the drivers behind it (technology, cheaper transport, trade liberalisation and deregulation), and the strategic opportunities and threats it creates.
- Methods of international expansion: foreign direct investment (greenfield and acquisition), joint ventures and strategic alliances, and the advantages and risks of each entry method.
How organisations expand internationally in Advanced Higher Business Management: foreign direct investment by greenfield build or acquisition, joint ventures and strategic alliances, and the advantages and risks that make each entry method suit different situations.
- Transfer pricing: the prices set for goods, services and intellectual property moved between divisions of the same multinational, how it is used to shift profit to low-tax countries, and the ethical and regulatory issues this creates.
What transfer pricing means in Advanced Higher Business Management: the prices a multinational sets for internal transfers between its divisions, how it can be used to shift profit to low-tax countries, and the ethical, reputational and regulatory issues this raises.
- Trade blocs and emerging markets: how regional trade blocs (the EU, ASEAN) and the rise of major economies such as China affect the opportunities, costs and trading conditions an organisation faces.
How trade blocs and emerging markets shape Advanced Higher Business Management strategy: the way the EU and ASEAN create free trade inside and barriers outside, and how the rise of economies such as China opens markets and intensifies competition.
- Business ethics, corporate social responsibility and environmental sustainability as contemporary external pressures: their drivers, the costs and benefits of acting responsibly, and the risk of being seen as merely greenwashing.
How ethics, corporate social responsibility and environmental sustainability shape Advanced Higher Business Management strategy: why these pressures have grown, the costs and benefits of acting responsibly, and the reputational risk of greenwashing.