1.6. Growth and Evolution

The merits of small versus large organisations

It can be difficult to define the term 'small organisation' and the classification will be different from country to country. It is likely that the measure will include:

• Sales turnover
• Number of employees
• Market share
• Privately owned

A small organisation, therefore, is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. It is likely to have fewer than 500 employees.

In the United States the Small Business Administration classifies a small business as having fewer than 500 employees for manufacturing businesses and less than $7 million in annual receipts for most non-manufacturing businesses. In the European Union, a small business has fewer than 50 employees. However, in Australia, a small firm is defined as having fewer than 15 employees. A business of less than 10 employees can be defined as a 'microbusiness'.

Often small businesses get subsumed into the category of small and medium sized enterprises (SMEs).

There are many reasons why small organizations survive and prosper. A small organisation:

• can be started at a very low cost, carried out with minimum investment and potentially run on a part-time basis. Small business grants, financial aid and economic support is readily available as governments like to promote small business developments.
• can be from the home with low overheads, meaning they can be competitive on price despite their lack of scale.
• can be entrepreneurial and the owner is usually highly motivated by the independence provided .
• can manage their assets and liabilities and cash transactions relatively easily and the owner can setup an accounting system on a home PC using off the shelf software.
• tends to be intimate with its customers and clients, which results in greater accountability and maturity. The business can provide exclusivity in their products and services and meet niche market needs which are uneconomic for big companies as they need to standardise their products and services to gain economies of scale.
• is suited to internet marketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution.
• not being tied to any bureaucratic inertia, it is typically more flexible in its response to change in the marketplace.

Small businesses, however, often face a variety of problems related to their size. Drawbacks for small organisations include:

• working on a low budget and therefore requiring very competent marketing and the planning to achieve strategic objectives.
• the improper handling of loans and poor liquidity ratios.
• frequent underfunding, which is a common cause of bankruptcy.
• higher costs than large firms such as higher interest rates, insurance costs and tax rates.
• concern about excessive government bureaucracy and regulation.
• lack of trust from customers who have not heard of them and would prefer to rely on well know corporations and brands.
• the 'Entrepreneurial Myth' based on an assumption that an expert in a given technical field will also be expert at running a business. Additional business management skills are needed to keep a business running smoothly.
• the capacity of much larger businesses to influence or sometimes determine their chances for success.

It is true that large businesses provide the society with employment and wealth, but in return they may remove the entrepreneur mind set. They forces people to become employees, rather than business owners who can start something of their own. This is because small business is often the life blood of an economy and the source of future job creation.

The appropriate scale of operation

We have seen that the optimum size for a business, is the point where average costs are at their lowest. This is, however, a theoretical concept and it may be impossible for the owners of a business to know when this point has been achieved. It is more likely that other factors are more influential, such as:

• the aims, objectives and goals of the owners
• the potential size of the market
• access to funding and investment
• competition in the market

There are examples of large organisations that have remained as private limited companies rather than floating the business, because the owners are determined to keep the business in family hands.

Source: http://textbook.stpauls.br/Business_Organization/page_112.htm

Task 3: Take note of the purported natural advantages of small organisations over large organisations

Difference between internal and external growth

There are two main ways in which a business can grow - internal growth and external growth.

Internal growth

Refers to a situation where a business increases its size by investing in its existing product range; innovating the product; selling in more outlets; promotional strategies; developing new products (R & D).

Internal Growth

There are basically four strategies that you can pursue:

• Market penetration/concentration: this requires the company to concentrate on doing better what it already does well
• Market development: here the company markets present products with possible modifications to customers in related markets
• Product development: this means substantial modifications or additions to existing products in order to increase their market penetration within existing customer groups
• Innovation: this involves significant changes to the product or service. It involves the replacement of existing products with ones that are new and which means a new product life cycle.

Internal growth, as we have seen, is a firm expanding by using its own resources. This is achieved by:

• Increasing sales revenue by improving products and services and making them more attractive to customers

• Better marketing of its product range

• Investment in research and development

• Improved training of its workforce

• Expanding the number of offices, factories and outlets

Benefits of organic growth

• Internal growth is relatively inexpensive, and the firm will not have to rely on outside sources of funds as most expansion is funded by retained profits.

• The owners of the business will be able to maintain control of the business whereas external growth may require the raising of additional capital. This may lead to a change in ownership.

• The business will be able to retain its identity and corporate culture as these will not be diluted by joining with other organisations.

Problems of organic growth and a change in size

Internal growth can cause problems within the firm. Since growth requires change in management structure, decision making process and its reporting systems.

As more people are employed, there is a need for more layers of hierarchy. As a result the chain of command becomes longer and decision making slower. Businesses will have to decentralise, and allow decision making to be taken more remotely. Trust will have to be earned and given. This is the area of diseconomies of scale, and will be a distinct disadvantage to future growth. Firms will have to cut bureaucracy, and eliminate layers (de-layering) of non-productive staff.

If a firm grows faster than its ability to manage its staff or control its costs, it is said to be 'overtrading'. This is frequently the underlying cause for falling profits and cash flow problems.

For private and public limited companies, the owners are the shareholders even if the founders are still majority shareholders, they have a legal obligation to consider the interests of all the other shareholders. In reality they can often run the company for themselves, almost ignoring the shareholders. This may be easy to do if there are many small shareholders, but harder if there is a group of large shareholders. Real conflicts can develop between the owners and the directors of a large company.

See - Revealed: How Tony Fernandes’ distaste for acquisitions drove AirAsia’s growth into Southeast Asia’s biggest passenger carrier -https://www.scmp.com/business/companies/article/3003983/revealed-how-tony-fernandes-distaste-acquisitions-drove-airasias

Growth by external means

External growth

Involves much greater sums of money and takes place through the use of mergers and takeovers (often known as growth through amalgamation, or simply integration). Regardless of the method of growth, there are several reasons why firms wish to grow:

• To help reduce competition by purchasing a competitor
• To acquire a needed resource quickly such as new technology or management skills
• To balance or fill out the company’s product line
• To help improve the stability of the firm’s earnings and sales; this is usually done by acquiring businesses whose earning and sales pattern complements the company’s peaks and valleys
• To increase efficiency and profitability; this is achieved through synergy
• To make a sound investment by purchasing a business which makes a better use of funds than ploughing the funds into an internal growth strategy
• To diversify the product line and help counteract products that have peaked in terms of their life cycle.

The scope of external growth strategies is considerable. They are frequently implemented through acquisitions, mergers and joint ventures or can involve the purchasing of, or an arrangement with, companies which are behind or ahead in terms of the company’s present value chain.

External growth has the advantages of being:

• a faster way to grow and diversify
• a method of reducing competition
• able to grow market share
• an excellent way of gaining new skills, experience and ultimately customers

However, external growth tends to be an expensive method of growth and can radically change the nature and culture of a business.

There are four methods of external growth:

1. Mergers and acquisitions (M&A activity)
2. Joint ventures
3. Strategic alliances/strategic partnerships
4. Franchising

Mergers and Acquisitions

A merger occurs when the total operations and assets of two companies are combined by placing them under the control of the management of a new company, which is jointly owned by the shareholders of the original companies.

An acquisition or takeover occurs when one company takes control over another by acquiring a controlling interest in its voting share capital. A controlling interest is usually defined as one exceeding 50%.

Reasons for Mergers & Acquisitions

The main reason for a merger or acquisition should be the creation of synergy i.e. where the value of the combined entity is greater than the sum of the individual parts of which it is made up. Acquisitions and mergers can take the form of:

▪ Horizontal integration

▪ Vertical integration

▪ Conglomerate integration

Horizontal integration occurs when firms combine and the firms are in the same business and at the same stage of the production cycle

Vertical integration is a combining of firms that are in the same business but at different stages of the production cycle. Such integration can be either forward integration into the marketing outlets or backward integration into the raw material or components supplier.

Conglomerate integration arises when the merger or acquisition involves firms that are in totally unrelated business areas.

The motives for mergers and acquisitions can be divided into defensive motives, where the intention may be to protect the position of the business against adverse market conditions or predators, and offensive motives where the intention is generally to take advantage of perceived weaknesses in other firms or industries.

Summary

Risks and rewards

The opportunities from takeovers and mergers are obvious - increased market share, access to new markets, access to private R&D, less competition - but they can be obvious to the competition as well. A plc is always vulnerable to an unfriendly takeover. All that is required is for 50% of the shares of a business, plus one more, to be bought by the acquiring business. As quoted companies cannot restrict sales of their shares on the stock market, they have little defence to a predator, except to try to persuade existing shareholders not to sell their stake.

The rewards for the acquiring business can be summarised as:

• Faster growth

• New products

• Access to R&D

• New key personnel

• Access to new markets

• Greater market share

Firms looking for suitable merger partners or acquisitions often seek economies of scale and synergies. Synergies refer to a fit of complementary activities; rather like pieces of a jigsaw. A synergy is like saying '2 + 2 = 5, the whole is greater than the value of the two independent parts. This was a term first adopted in a business context by Igor Ansoff, who was responsible for establishing strategic planning as a management activity in its own right.

Problem may arise with takeovers and mergers. Mergers are dangerous; one side will want to dominate. It might mean you lose control at the critical moment. You may also pay too much and this may cause financial problems in the future (perhaps from having had to borrow too much and therefore having become too highly geared). Valuation of another firm can be difficult from the outside.

Task 5: Group work - each group will be assigned a real-life M&A case and your objective is to elicit the reasons for why the merger/acquisition was being mooted and why it was allowed to go ahead or blocked.

Synergy - a major reason for M&A activity

Strategic alliance

A strategic alliance is a collaborative agreement between two or more firms to pursue a set of agreed goals, but the firms remain completely independent organisations. The alliance ends when the goals are achieved.

Advantages:

• Competition may be reduced - by working in cooperation with another firm.

• A synergy is created where the joint skills, resources and experience of the businesses collaborating far exceed those of the two businesses acting independently.

• By partnering with a local firm, there may be fewer logistical problems entering a new and/or overseas market and it may be possible to take advantage of the local knowledge and distribution channels of the partner firm. This may lower distribution costs and may also reduce any problems due to language or cultural issues.

• Allows firms to work together without being burdened by these costs or the permanency of the arrangement. Mergers or takeovers are expensive and difficult to reverse.

• Enable a firm to move into a new product or market much faster.

• Avoidance of taxation, or at least rates on tax in the country of production.

Disadvantages

• Profits are shared - this may be regretted by the firm if subsequently they feel they could have carried out the activity quite easily themselves.

• Communication and control issues - there may be some issues with control in a joint venture - who has the final say? There may also be communication problems caused by cultural and language differences if the firms are very different in their organisational structure and management style.

• Conflict - there may be disagreements between the partner organisations especially if there are inadequate conflict resolution procedures. The joint arrangement requires goodwill to be maintained throughout the term of the agreement.

Example of Strategic alliances in the airline industry

http://www.hopper.com/articles/860/a-guide-to-the-three-major-airline-alliances-star-alliance-oneworld-and-sky-team

Task 7: The four articles below relate to strategic alliances. Read the articles and make a judgment about which strategic alliance will be most successful in its industry in the medium term (i.e. next five years).

Joint Ventures

In the context of international strategies, a joint venture is an agreement in which two or more partners own and control an overseas business. This business typically is located in the home country of one of the partners.

• A joint venture saves financial outlays for both parties, thereby lowering costs
• It helps to increase sales, thereby allowing for important production cost savings
• It can help to provide speedy channels acceptance and this reduce marketing costs
• It maintains the independence of both parties
• It provides the foreign country with better access. It also reduces the nationalist concerns of host governments fearing that foreigners may take over.

Joint venture arrangements can be of two types:

1. Non-equity ventures: this is where one group provides a service for another. The group providing the service is basically more attractive than the other. This is not a very common form
2. Equity joint ventures: this involves a financial investment by the multinational company in a business enterprise with a local partner. There are many variations on this in terms of finance contributed, technological expertise provided, and managerial expertise on offer.

Advantages of Joint Ventures

▪ Partners can complement one another and therefore reduce the risks associated with the venture; an example might be a small company which has the technology but does not have the production capacity. It will most likely enter into an agreement with another company which has this production capacity

▪ A firm with little cash but a great deal of international expertise can team up with a company that has lots of cash but little experience

▪ It may provide quick access to distribution networks

▪ They are very suitable as a means of doing business in an emerging economy

Task 8: Read both articles on JV involving Chinese companies. Which JV do you think will create more value for shareholders in the future?

Task 9: Harry goes it alone

Harry no longer enjoyed his job as second chef in a famous hotel. He never liked taking orders from the head chef and always hoped to use his talents preparing food for customers in his own restaurant. The main problem was his lack of business experience. Harry had just been to a business conference and had been interested in the franchising exhibition there. One of the businesses offering to sell franchises was Pizza Delight. This firm sold a new type of pizza recipe to franchisees and provided

all ingredients, marketing support and help with staff training. They had already opened 100 restaurants in other countries and offered to sell new franchises for a one-off payment of $100 000. If Harry signed one of these franchising contracts, then he would have to agree to:

• only buying materials from Pizza Delight
• fitting out the restaurant in exactly the way the franchisor wanted
• making an annual payment to Pizza Delight of a percentage of total turnover.
• In addition, he would have to find and pay for suitable premises and recruit and motivate staff. Pizza Delight

claimed that its brand and products were so well known that ‘success was guaranteed’. Since the product had already been tested, there should be little consumer resistance, and Pizza Delight would pay for national advertising campaigns.

Harry was promised that no other Pizza Delight restaurant would be permitted to open within five kilometres of his. Harry was almost convinced that this was the business for him. He had inherited money from a relative. However, several things still bothered him – for example, would it give him the independence he so wanted?

Questions

1 What is meant by a ‘franchise agreement’? [4]

2 Explain three potential drawbacks to Harry of agreeing to the terms of the franchise contract. [6]

3 If he decided to open his own restaurant but under his own name, why might the risks of failure be greater than for a Pizza Delight franchise? [4]

4 Using all of the evidence, would you advise Harry to take out a franchise with Pizza Delight? Justify your answer. [10]

Source: Business and Management for the IB Diploma

The role and impact of globalisation on the growth and evolution of businesses

Globalisation

Fundamentally, globalisation is the closer integration of countries and peoples of the world which has been brought about by the enormous reductions of costs of transport and communications and the breaking down of artificial barriers to the flow of goods, services, capital, knowledge and to a lesser extent, people across borders

Joseph Stiglitz, former chief economist at the World Bank

Globalisation is an umbrella term for a complex series of economic, social, technological, cultural and political changes seen as increasing interdependence, integration and interaction between people and companies in disparate locations.

The concept has been referred to as 'the shrinking of time and space'.

Globalisation in the economic, social and political fields has been on the rise since the 1970s, receiving a particular boost after the end of the Cold War. Many economists believe globalisation may be the explanation for key trends in the world economy such as:

● Lower wages for workers, and higher profits, in Western economies

● The flood of migrants to cities in poor countries

● Low inflation and low interest rates despite strong growth

Globalisation has accelerated in the last 15 years. During a period of relatively strong economic growth, world exports as a share of GDP increased from under 20% in 1994 to over 32% in 2008, and whilst global trade fell back in 2009, as a result of the global slowdown, but bounced back in 2010.

Increasing foreign investment can be used as one measure of growing economic globalization. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. The largest flows of foreign investment occur between the industrialized countries. However, in recent years the flows into and out of emerging countries has grown significantly.

Following the recent worldwide recession, world GDP fell more than1% in 2009. Some of the world's key emerging economies suffered sharp recessions during 2009, whilst others notably India and China, were able to maintain strong growth.

FIVE major developments over the past twenty years or so that have led to globalization

1. Increased competition - this is caused by more foreign investment flowing to countries, de-regulation which allows businesses to enter markets from which they once precluded.
2. Greater awareness and reactions to customer needs - the consumer is now very selective on such essentials as quality, service and price.
3. Economies of scale - by selling across many continents business can acquire economies of large-scale production. This makes them very competitive.
4. Location flexibility - many modern production techniques and service provisions can be allocated almost anywhere. This allows to them gain the advantages of low cost labour and other resource charges.
5. Increased mergers and joint ventures - allowing access to bigger markets and associated cost advantages.

Reasons for the growth of multinational companies (MNCs)

Multinational Corporations (MNCs)

Multinational or transnational corporations (MNC/TNC) are businesses with a headquarters in one country, but with business operations in a number of others.

There are numerous examples of multinational corporations, car manufacturers like Ford, GM, Toyota, Honda and Volkswagen, oil companies like Shell, Chevron and Exxon Mobil, technology companies like IBM, Dell, Microsoft and Hewlett Packard and food and drink companies such as Coca Cola, Pepsico, Kraft and McDonalds.

The following is a quote from the General Motors website site which is an excellent example of a multinational operation:

General Motors, one of the world's largest automakers, traces its roots back to 1908. With its global headquarters in Detroit, GM employs 204,000 people in every major region of the world and does business in some 140 countries. GM and its strategic partners produce cars and trucks in 34 countries, and sell and service these vehicles through the following brands: Buick, Cadillac, Chevrolet, GMC, GM Daewoo, Holden, Opel, Vauxhall and Wuling. GM's largest national market is the United States, followed by China, Brazil, Germany, the United Kingdom, Canada, and Italy.

Multinationals are normally conglomerates and may own a huge number of brands. As consumers we may not always be aware that a range of household brands are in fact owned by a single multinational. Two examples of multibrand manufacturers are Kraft and Unilever. It is fascinating and illuminating to examine their brand portfolio. You may be surprised by some of the names in these lists.

The sheer size of many multinationals means they often have considerable power and influence, especially when they locate in less developed countries. Not surprisingly over the years many have been criticised for their commercial behaviour resulting in some very negative press. Indeed, pressure groups have conducted some very high profile campaigns against prominent multinationals. One of the most notorious concerned the Swiss food company Nestle and its marketing of its infant milk formula to mothers in developing countries, an issue that attracted significant attention in 1977 and a led to a boycott of Nestle products worldwide.

Several sport's manufacturers including Nike and Puma have been criticised overpoor working conditions and exploitation of cheap overseas labour employed in the free trade zones where their goods are typically manufactured. Nike has also been accused of violating minimum wage and overtime laws in countries such as China, Vietnam, and Mexico.

In addition, events like the Bhopal chemical explosion in 1984 attracted much criticism and, cemented the view that MNCs are by their nature detrimental to the countries in which they operate. Bhopal is ranked with Chernobyl in Ukraine as the site of one of the world's worst industrial accidents. The accident happened at the pesticide plant in Bhopal in the central state of Madhya Pradesh. On the night of 2 December, forty tonnes of a toxic gas leaked from the pesticide factory and settled over slums in Bhopal. Official figures show at least 3,000 people died at the time and as many as 15,000 have died since.

Why the drive to become multinational?

There are some significant drivers to become multinational. Some of these include:

1. Reduced transport and distribution costs: By producing goods and services locally or regionally, firms can save considerable transport costs

2. Avoidance of trade and non-tariff barriers: By locating in overseas markets, firms may avoid tariffs, quotas and other forms of protectionism. For instance, Asian firms invested in large numbers in the UK in the 1990s to allow then to export to the European Union and to compete with European suppliers without a cost disadvantage.

3. Access to raw materials: by locating overseas, firms can ensure access to raw materials at reduced prices.

4. Other cost advantages: for example lower labour, energy and property costs.

5. Increased sales turnover: expanding overseas can provide access to large markets, including those of the developing world such as China and other Asian markets.

6. Economies of Scale: Increasing scale of operations can lead to both internal and external economies of scale and spreading of risk. Overspecialisation is potentially disastrous for a business. However, multinationals have other markets to compensate, if one market is suffering decline or subject to political instability or natural disasters.

7. First Mover Advantage: Getting into markets first provides marketing and distribution advantages, e.g. Tesco chose to expand their retail business into Eastern Europe such as Hungary and Poland, allowing them to acquire market share and customer loyalty before other competitors appear.

8. Other Marketing advantages: Overseas brands may have an exclusive desirability allowing premium prices to be charged.

However, some firms have found expansion into overseas markets problematic because of:

● Cultural differences which may mean products and services need to be adapted or will not sell at all, e.g. dairy products in Asian countries.

● Lack of experience in the local market - no core competence

● Language difficulties, e.g. Vauxhall Nova translated as 'no go' in Spain

● Little brand awareness.

● Currency fluctuations and instability

● Political instability

● Local opposition or pressure group activities, e.g. over low rates of pay or use of child labour e.g. Nike and BAT in Burma/Myanmar

● Possible legal restrictions on access - e.g. must find a local partner to operate.

● Limited control over supply and distribution chains

● Greater set-up costs

Note: Solutions to some of these problems may be found through local joint ventures, strategic alliances or use of local agents.

Task 11: What are the arguments for and against Chinese investment in Europe?

Task 12: How has integration into the global economy affected these Chinese firms?

Task 13: Using each of the following examples, explain the reason for multinational existence

(a): The Canadian telecommunications giant Northern Telecom has moved so many of its manufacturing functions to the United States that it can win Japanese contracts on the basis of being a US Company.

(b): When Germany’s BASF launched biotechnology research at home, it confronted legal and political challenges from the environmentally conscious green movement. So it moved its cancer and immune system research to Cambridge, Massachusetts.

(c): When Xerox Corp, started moving copier-rebuilding work to Mexico, its union in Rochester, New York, objected. The risk of job loss was clear, and the union agreed to undertake the changes in work style and productivity needed to keep the jobs.

(d): When Dow Chemical saw European demand for a certain solvent decline, the company scaled back its production in Germany and shifted to producing another chemical there, one previously imported from Louisiana and Texas.

(e): Otis Elevator Inc’s latest product the Elevonic 411 was developed by six research centers in five countries. Otis’ group in Connecticut, USA, handled the systems integration. Japan designed the special motor drives that make the elevators ride smoothly. France perfected the door systems. Germany handled the electronics and Spain took care of the small-geared components.

Impact of multinational companies on the host country

Clearly, multinational corporations can provide developing countries with critical financial infrastructure for economic and social development. However, these institutions may also bring with them relaxed codes of ethical conduct that serve to exploit the neediness of developing nations, rather than to provide the critical support necessary for countrywide economic and social development.

When a multinational invests in a host country, the scale of the investment (given the size of the firms) is likely to be significant. Indeed governments will often offer incentives to firms in the form of grants, subsidies and tax breaks to attract investment into their countries. This foreign direct investment (FDI) will have advantages and disadvantages for the host country.

Advantages

The possible benefits of a multinational investing in a country may include:

● Improving the balance of payments - inward investment will usually help a country's balance of payments situation. The investment itself will be a direct flow of capital into the country and the investment is also likely to result in import substitution and export promotion. Export promotion comes due to the multinational using their production facility as a basis for exporting, while import substitution means that products previously imported may now be bought domestically.

● Providing employment - FDI will usually result in employment benefits for the host country as most employees will be locally recruited. These benefits may be relatively greater given that governments will usually try to attract firms to areas where there is relatively high unemployment or a good labour supply.

● Source of tax revenue - profits of multinationals will be subject to local taxes in most cases, which will provide a valuable source of revenue for the domestic government.

● Technology transfer - multinationals will bring with them technology and production methods that are probably new to the host country and a lot can therefore be learnt from these techniques. Workers will be trained to use the new technology and production techniques and domestic firms will see the benefits of the new technology. This process is known as technology transfer.

● Increasing choice - if the multinational manufactures for domestic markets as well as for export, then the local population will gain form a wider choice of goods and services and at a price possibly lower than imported substitutes.

● National reputation - the presence of one multinational may improve the reputation of the host country and other large corporations may follow suite and locate as well.

Disadvantages

The possible disadvantages of a multinational investing in a country may include:

● Environmental impact - multinationals will want to produce in ways that are as efficient and as cheap as possible and this may not always be the best environmental practice. They will often lobby governments hard to try to ensure that they can benefit from regulations being as lax as possible and given their economic importance to the host country, this lobbying will often be quite effective.

● Access to natural resources - multinationals will sometimes invest in countries just to get access to a plentiful supply of raw materials and host nations are often more concerned about the short-term economic benefits than the long-term costs to their country in terms of the depletion of natural resources.

● Uncertainty - multinational firms are increasingly 'footloose'. This means that they can move and change at very short notice and often will. This creates uncertainty for the host country.

● Increased competition - the impact the local industries can be severe, because the presence of newly arrived multinationals increases the competition in the economy and because multinationals should be able to produce at a lower cost.

● Crowding out - if overseas firms borrow in the domestic economy this may reduce access to funds and increase interest rates.

● Influence and political pressure - multinational investment can be very important to a country and this will often give them a disproportionate influence over government and other organisations in the host country. Given their economic importance, governments will often agree to changes that may not be beneficial for the long-term welfare of their people.

● Transfer pricing - multinationals will always aim to reduce their tax liability to a minimum. One way of doing this is through transfer pricing. The aim of this is to reduce their tax liability in countries with high tax rates and increase them in the countries with low tax rates. They can do this by transferring components and part-finished goods between their operations in different countries at differing prices. Where the tax liability is high, they transfer the goods at a relatively high price to make the costs appear higher. This is then recouped in the lower tax country by transferring the goods at a relatively lower price. This will reduce their overall tax bill.

● Low-skilled employment - the jobs created in the local environment may be low-skilled with the multinational employing expatriate workers for the more senior and skilled roles.

● Health and safety - multinationals have been accused of cutting corners on health and safety in countries where regulation and laws are not as rigorous.

● Export of Profits - large multinational are likely to repatriate profits back to their 'home country', leaving little financial benefits for the host country.

● Cultural and social impact - large numbers of foreign businesses can dilute local customs and traditional cultures. For example, the sociologist George Ritzer coined the term McDonaldization to describe the process by which more and more sectors of American society as well as of the rest of the world take on the characteristics of a fast-food restaurant, such as increasing standardisation and the movement away from traditional business approaches.

Source - https://phis.rchk.edu.hk/pluginfile.php/43096/mod_resource/content/2/B_M_T1/Business_organisation_student/page_138.htm

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