Advantages of multinational companies. IGCSE GCEO LEVEL NOTES

What are Multinational Businesses?

Businesses which have their operations, factories and assembly plants in more than one country are known as Multinational Business. They are also known as Transnational businesses.

Advantages of being a Multinational

• Multinational can set up their business operations in countries where the labour and raw material is cheaper, which can give them cost advantage in the international market.
• Multinational have access to many markets which spreads the risk of failure. If any product may not be successful in a particular market, it might be successful in another.
• MNCs produce in large quantities thus achieving greater economies of scales.
• A multinational business is less vulnerable to trade barriers. MNCs set up their local operations in countries where there is potential market for them and get away with import duties and restrictions.
• MNCs can locate their operations near the potential market which results in lower transportation cost.

Advantages of Multinational to the host country

• Multinationals create employment.
• They bring new technology and techniques of production.
• MNCs usually provide training to their worker which results in better skills for the country’s workforce.
• Multinational businesses usually produce in large quantities and export to other countries which can result in valuableforeign exchange for the host country.
• They pay huge taxes to the government which can be used for the development of the host country.

What are the Sources of finance? IGCSE NOTES

Sources of finance

A business might have access to various sources of financing its needs. These sources of finance can be classified as:

Internal and external

Internal: this is money raised from inside the business. It includes

• Sales of assets: Business might sell off old, obsolete assets which are no longer used by the business to raise additional cash for the business.

Advantage	Disadvantage
Better use of capital	A new business might not have any old or obsolete assets

• Retained profits : Businesses (especially limited companies) usually keep some part of the profit every year for future use. This is also known as ploughed back profit. Over a period of time it can total up to a huge amount which can be used for financing the business.

Advantage	Disadvantage
Does not increase liabilities No need to pay interest	Not available to new businesses

• Reduction in working capital: Cutting the stock levels can also help the business to raise additional cash.

Advantage	Disadvantage
Costs related to storage of stock is reduced	May lead to shortage of stock and loss of sales

External sources of finance 

External: This is the money raised from outside the business. It includes

Short Term

Bank overdraft: Bank overdraft is a facility given by banks to its business customers, people having current accounts. Through this facility the customers can overdraw their accounts to a greater value than the balance in the account. To overdrawn amount is agreed in advance with the bank manager. The bank assigns a limit to overdraw from the account and the business can meet its short term liabilities by writing cheques to the extent of limit allowed.

Advantage	Disadvantage
No need for collaterals or security. More flexible and the overdraft amount can be adjusted every month according to needs.	Interest rates are usually variable and higher than bank loans Cash flow problems can arise if the bank asks for the overdraft to be repaid at a short notice.

Trade Credit: Usually in business dealing supplier give a grace period to their customers to pay for the purchases. This can range from 1 week to 90 days depending upon the type of business and industry.

Advantage	Disadvantage
No interest has to be paid.	The business may not get cash discounts.

By delaying the payment of bills for goods or services received, a business is, in effect, obtaining finance which can be used for more important expenditures.

Factoring of debts: It involves the business selling its bills receivable to a debt factoring company at a discounted price. In this way the business get access to instant cash.

What are resources?

What are resources?

Resources of an economy are the factors of production or the inputs which are used to produce an output i.e. goods and services. These can be classified into four categories.

Land

Land includes all resources found in the sea and on land. They are also known as natural resources. Land is said to be immobile and is limited in supply. Land is subject to the law of diminishing returns.

Law of diminishing returns states that given a fixed factor, variable factors added to it will eventually lead to a fall in marginal product.

Labour

Labour refers to input of human efforts, both physical and mental. However, only those human efforts are considered in economics as labour which has the sole purpose of receiving rewards. Any kind of labour done for pleasure is cannot be considered as labour.
Labour has greater mobility than land but is less mobile than capital and cannot be stored.

Mobility of labour

It refers to the movement of labour. There are two types of labour mobility. These are:

Geographical mobility

It is the movement of labour from place to another. But there are many barriers to geographical mobility which are as follows:

1. Workers may have insufficient information or unawareness of the opportunities existing in different places.
2. Sometimes age may be a factor. Older workers are more immobile than younger ones.
3. Social ties or sentimental reason may discourage workers to move to other places.

Occupational mobility

It refers to the willingness and mobility of worker to change from one occupation to another.

1. Labour may lack necessary skills and qualifications needed to relocate to another job.
2. Certain occupation may have entry requirements and restrictions.
3. Personal liking of the occupation may discourage a worker to move to other occupations.
4. Some workers may be too cautious in taking risk and moving to another occupation.

Capital

These are manmade resources which help to produce many other goods and services.
It can be classified as:

Fixed capital

These are physical assets which do not vary as the level of output varies and its form does not change in the course of production. Examples include factories, machines, and dockyards and so on.

Working capital

It consists of stocks of raw materials and stocks of semi-finished and finished goods awaiting purchase of consumers. It varies with the level of output. Thus, when output increases, the working capital also increases.

Entrepreneur

Entrepreneur is the person who brings all the factors of production together and organises them to produce goods and services. An entrepreneur decides what to produce, how to produce and for whom to produce.

What are the Factors affecting the choice of location of a firm?

Factors affecting the choice of location of a firm

Near to the Market

The most important factor affecting the location of a firm is the nearness to the market. Every business wants to be near to its customers. This is especially true for retail businesses.

Near to the raw materials

In case of manufacturing firm it is more economical to locate near to the source of raw material. This results in low transportation cost.  If the output of the firms is more expensive to transport than its input, it is a bulk decreasing industry and is more likely to locate near to the market. For example, brewing industries locate near to the market because it is expensive to transport finished product.

On the other hand, if the raw material used by the firm is bulky and expensive to transport, it is a bulk decreasing industry. In this case, the firm would locate near to the raw material.

Supply of labour

If a firm requires skilled labour, than the location decision might be affected by availability of skilled, cheap labour. Many multinational firms are locating their production facilities in South East Asian countries just because the labour is cheap in these countries.

Availability of cheap land

Firms which need large areas of land might consider cost of land before locating. Automobile manufacturing plants need large chunks of land.

Traditional locations

Locating in an area that contains similar businesses, suppliers and markets may also be a considerable advantage. In Indonesia, most of the wood craft businesses prefer to locate in Bali because of its long reputation of producing excellent wood craft.

Amenities

Basic amenities such as gas, electricity, water, waste disposal and drainage may also be considered.

Climate

Many production processes may be affected by the climatic conditions also. Chip manufacturers prefer to locate in dry areas, e.g. Silicon Valley.

Safety requirements

Some products may be hazardous for the community and thus need to be located away from high density population. For example, Nuclear power plants, Chemical plants.

Management’s Preference

In many cases the location of a firm may be influenced by the likes and dislikes of its management.

Government’s Influence

Government also influences the location decisions of the firms. Government may give special incentives to firms which locate in underdeveloped or high unemployment areas of the country. These incentives may be in the form of Tax holidays, subsidies, cheap land etc.  A firm in order to harness these incentives may locate in these regions.

short answer,Capital Intensive Vs. Labour Intensive

Capital Intensive Vs. Labour Intensive 

A business is capital intensive if it requires heavy capital investment in buying assets relative to the level of sales or profits that those assets can generate.
A capital intensive business will typically have some mixture of the following characteristics:

• high depreciation costs
• high barriers to entry
• large amounts of fixed assets on the balance sheet.

A labour intensive business is one in which the main cost is that of labour, and it is high compared to sales or value added.
Just a capital intensive business may attempt to reduce operational gearing by, for example, leasing or renting assets, a labour intensive one may try to reduce operational gearing by outsourcing or automation.

What is meant by Productivity?

Productivity is the ratio of outputs to inputs. It refers to the volume of output produced from a given volume of inputs or resources. If the firm becomes more productive, then it has become more efficient, since productivity is an efficiency measure. Productivity can be:

Labour productivity

Total output in a given time period	=	Output per worker
Quantity of labour employed

Capital productivity

Total output in a given time period	=	Output per capital input
Quantity or Value of Capital employed

How to improve productivity?

Productivity can be improved by:

• Raising the skill level of the workers through training
• Using more technologically advanced equipment in the production process.
• Improving the motivation level of the employees
• By managing the available resource in a more efficient way.