What are multinationals, why do they spread across the world, and who gains or loses?
Multinationals and globalisation: the nature and growth of multinational companies, the reasons they locate abroad, and the costs and benefits of multinationals to host countries.
An SQA Higher Economics answer on multinationals and globalisation, covering what a multinational company is and why these firms grow, the reasons they locate in foreign countries (lower costs, new markets, resources), and the costs and benefits of multinationals to the host country.
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What this key area is asking
The SQA wants you to define a multinational company, explain why these firms grow and locate abroad, and weigh the costs and benefits of a multinational to the host country. This is a "discuss" and "evaluate" topic: the marks come from balancing the gains (jobs, investment, technology) against the costs (profit outflows, weak regulation, power over governments).
What multinationals are and why they grow
Multinationals have grown with globalisation, the increasing integration of the world's economies. Falling transport and communication costs, freer trade and investment, and the pursuit of larger markets and economies of scale have all encouraged firms to spread across borders. Familiar examples operate in many countries at once, producing and selling worldwide.
Why multinationals locate abroad
Each reason ultimately lowers the firm's costs or widens its market, raising its profit, which is why the location decision is an economic one.
Costs and benefits to the host country
A multinational locating in a country brings a mix of gains and costs, which is the heart of the examinable judgement.
| Benefits to the host | Costs to the host |
|---|---|
| Investment and new jobs (lower unemployment) | Profits sent abroad rather than reinvested locally |
| Tax revenue for public services | Jobs may be low-skilled or insecure |
| Transfer of technology and skills | Pressure for lax regulation and tax avoidance |
| Higher exports, better balance of payments | Harm to local firms and the environment |
| Wider consumer choice; multiplier for local suppliers | Risk of the firm relocating, leaving job losses |
The net effect is not fixed: it depends on whether the jobs and investment are high quality and lasting, and on how effectively the host government regulates the firm (on tax, wages, conditions and the environment).
Worked example: a car plant in a host country
Why multinationals matter
Multinationals are a driving force of globalisation and a major source of trade, investment and employment, including in Scotland and the wider UK. They connect to global trade (foreign direct investment and supply chains), the balance of payments (investment and profit flows) and the impact of the global economy on developing countries, so this topic sits at the centre of the global area.
Try this
Q1. Define a multinational company. [2 marks]
- Cue. A multinational company is a firm that owns or controls the production of goods or services in more than one country, with its headquarters in one country and operations in others.
Q2. State one benefit and one cost to a host country of a multinational locating there. [2 marks]
- Cue. Benefit: any one of new jobs and investment, tax revenue, technology and skills transfer, higher exports. Cost: any one of profits sent abroad, insecure or low-skilled jobs, pressure for lax regulation or tax avoidance, harm to local firms or the environment.
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 Higher (style)6 marksExplain why a multinational company might choose to locate production in another country.Show worked answer →
Worth 6 marks. Three developed reasons, each linked to the firm's advantage, about 2 marks each.
Lower costs (about 2 marks). A multinational may locate where production costs are lower: cheaper labour, lower rents, or weaker regulation reduce its costs and raise profit. Locating near raw materials also cuts transport costs.
New markets and trade barriers (about 2 marks). Producing inside a country gives direct access to its market and to nearby markets, and getting inside a trade bloc avoids tariffs and quotas that would apply to exports. This widens the firm's customer base.
Incentives and economies of scale (about 2 marks). Host governments often offer grants, tax breaks and subsidies to attract multinationals, lowering costs further. Producing in several countries also lets the firm exploit economies of scale and spread risk. Each reason explains why the firm raises its profit by locating abroad.
SQA Higher (style)6 marksDiscuss the costs and benefits of a multinational company locating in a host country.Show worked answer →
Worth 6 marks. Balance genuine benefits against genuine costs, with a judgement.
Benefits (about 3 marks). A multinational brings investment and jobs, reducing unemployment, and pays taxes that fund public services. It transfers technology and skills, raises productivity, boosts exports and the balance of payments, and widens consumer choice. Local suppliers can gain from the extra demand (a multiplier effect).
Costs and judgement (about 3 marks). Against this, profits may be sent abroad rather than reinvested locally, jobs created may be low-skilled or insecure, and the multinational may use its power to win lax regulation, avoid tax or harm the environment. It can also drive out local firms. The host can lose if the firm later relocates. So the net effect depends on the quality of the jobs and investment and on how well the government regulates the firm, a balanced judgement reaches the top band.
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Sources & how we know this
- Higher Economics Course Specification — SQA (Qualifications Scotland) (2024)