Goldcrust crosses the border: Goldcrust plc, the chain of 400 bakeries from 1.2.3, is going abroad, to Marovia, a smaller country next door.
The plan
- Build a bakery factory in Seren, the second city of Marovia.
- Open 30 shops across Marovia.
- The plan costs $40 million.
- Marovia's government wants it badly: in Seren, one adult in eight is out of work.
Goldcrust is now a multinational company (1.6.1). Its head office stays at home, in the home country. Marovia is the country it moves into, the host country. The money Goldcrust spends building a factory and shops it owns in Marovia is foreign direct investment. The question here is what that investment does for Marovia.
Six things Marovia gains
Jobs
250 people in the factory and 450 in the shops: 700 jobs in a city short of work. More follow at the businesses that supply Goldcrust. The mill that grinds its flour takes on 40 workers, and builders, cleaners and lorry drivers find work too (indirect jobs).
Skills
Goldcrust trains every new worker in food hygiene, and its engineers teach Marovian staff to run and repair automated baking lines. The workers keep those skills when they move on (skills transfer).
Tax
700 wages mean 700 income tax payments to Marovia's government, and in time Goldcrust will pay tax on its profit too. That money pays for schools, hospitals and roads.
Infrastructure
Goldcrust pays to upgrade the power line to the industrial estate, and a new road links the estate to the motorway. Every other firm and household on that side of Seren uses them too.
Competition
Seren's bakeries now have a rival with low prices. To keep their customers, some bake better bread, open earlier or waste less. Shoppers get more choice and lower prices.
Exports
The Seren factory also bakes for Goldcrust's shops in two other countries. Bread sold abroad brings foreign money into Marovia (export revenue).
A benefit is a chain, not a word: 'Creates jobs' is a word. The chain is what makes it a benefit. 700 people earn about $12,000 a year each: $8.4 million of wages a year, much of it spent in Seren's shops and cafés, which then need more staff of their own.
Follow each benefit one step past Goldcrust: who in Marovia gains, and how.
| Group in Marovia | What it gains from Goldcrust |
|---|---|
| People out of work in Seren | 700 jobs, with training |
| The mill and other suppliers | A large, steady customer, and 40 new jobs at the mill |
| The government | Income tax from 700 workers now, tax on Goldcrust's profit later |
| Shoppers | Lower prices and more choice |
| The country as a whole | Foreign money from bread sold abroad, and a better road and power supply |
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Two streets from Goldcrust's first shop in Seren, Mira Horvat runs a bakery with three shops, the same size as Lena's Bakery back in Goldcrust's home country.
Her rye loaf costs $1.60. Goldcrust's white loaf costs $1.00. The benefits in the last section are real. So is what happens on Mira's street.
The profit leaves
- Goldcrust's Marovian business expects a profit of $6 million a year
- About $5 million goes to the head office at home, to pay Goldcrust's shareholders
- Money sent home is not spent or reinvested in Marovia (profit repatriation)
Local firms are squeezed
- Goldcrust buys flour by the lorry-load, so it can sell a loaf for $1.00
- Mira cannot match that price, and her sales fall by a fifth
- If local bakeries close, their jobs and their owners' profits leave Seren with them
The jobs may be the low-paid ones
- Most shop jobs pay Marovia's minimum wage, and the factory runs night shifts
- The five top managers come from Goldcrust's head office
- Marovians fill the jobs that need the least skill
What Marovia paid to get it: To win the factory, Marovia's government offered Goldcrust a five-year tax holiday: no tax on its profit for five years. It also agreed to pay $10 million towards the new road.
The cost to Marovia: That is money the government would otherwise spend on schools, hospitals or other roads. Tax on Goldcrust's profit starts only in year six, and only if Goldcrust is still there.
| Goldcrust's profit in Marovia, one year | Amount | Where it goes |
|---|---|---|
| Profit | $6 million | Earned from Marovian shoppers |
| Sent to the head office | $5 million | Paid out to shareholders in the home country (repatriated) |
| Kept in Marovia | $1 million | Reinvested in new ovens and shops |
| Tax on the profit | $0 | The tax holiday, for five years |
Squeezed or sharpened?: Competition is on both lists. The same $1.00 loaf that pushes Mira to bake better and open earlier (a benefit) can push her out of business (a drawback).
Which one it is: Which one it is depends on the local firm. A bakery that sells something Goldcrust does not, like Mira's rye bread, can survive. One that sells the same white loaf at a higher price usually cannot.
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Five years on: The tax holiday is over, and Goldcrust's board starts to ask whether the Seren factory should move.
What has changed
- Wages in Marovia have risen by a fifth.
- Goldcrust must now pay tax on its profit.
- Tavel, a country further east, offers Goldcrust a new tax holiday and cheaper workers.
A factory can be moved. An MNC that can shift its production to whichever country is cheapest this year is footloose. Its jobs in the host country last only as long as the host stays the best deal. If Goldcrust goes, the 250 factory jobs, the mill's biggest customer and the export revenue all leave at once.
What else Marovia can lose
Local culture
Goldcrust's soft white loaf and identical shops appear on every high street. The dark rye bread Marovians have bought from local bakers for generations sells less each year, and so do the bakers who make it. Seren's shopping streets start to look like everyone else's.
The environment
The factory runs its ovens day and night and sends 40 lorries a day through Seren. Every loaf goes out in a plastic bag. The noise, fumes and waste land on the people who live near the estate, not on the head office.
Bargaining power
Because Goldcrust can leave, it can ask for more: a longer tax holiday, cheaper power, lighter rules on night work. A government afraid of losing 700 jobs may say yes, so the MNC shapes the host's laws (political influence).
Footloose, in one line: The jobs are real, but they are rented, not owned. An MNC stays while the host is a cheap, good place to produce, and a host that raises taxes or wages can find it has gone.
That is why what stays behind matters: the skills, the suppliers and the roads.
| If Goldcrust moves to Tavel | What happens in Marovia |
|---|---|
| Leaves | 250 factory jobs, the mill's biggest order, the export revenue |
| Stays | The skills the staff learned, the road and the power line |
| Already lost | The local bakeries that closed when Goldcrust arrived do not reopen |
So is Goldcrust good for Marovia? Both lists are true at the same time, so the answer is never a count of points. It depends on a few questions, and the facts of each case answer them differently.
Five questions that decide it
- Who gets the jobs? 700 jobs for people in Seren who were out of work count for far more than jobs filled by staff brought in from abroad.
- What stays behind? Skills, suppliers and roads outlast the factory. Wages stop the day it closes.
- Where does the profit go? $5 million of $6 million sent home is a large leak. Profit reinvested in Marovia is not.
- What did the host give away? A tax holiday and $10 million for a road are real costs, paid now, for tax that arrives later.
- How strong are the host's rules? Laws on pay, safety and pollution decide whether the costs in the last two sections are small or large.
| One year of the tax holiday | Working | Amount |
|---|---|---|
| Income tax from Goldcrust's staff | 700 workers × $12,000 × 15% | $1.26 million |
| Tax on profit given up | $6 million profit × 20% tax rate | $1.2 million |
| The road, paid once | The government's share | $10 million |
What the numbers say: Each year, the income tax from Goldcrust's staff roughly equals the tax on profit that the holiday gave away. But the $10 million road is about eight years of that income tax, paid on day one.
How long it stays: So Marovia comes out ahead on tax only if Goldcrust stays well beyond five years. The judgement turns on the same thing as the footloose risk: how long it stays.
Good for the host when
- Most of the jobs go to local people who were out of work
- Workers learn skills they keep
- The MNC buys from local suppliers, like the Seren mill
- It stays long after the tax holiday ends
Bad for the host when
- The profit is sent home and little is reinvested
- Local firms close and nothing replaces them
- Rules on pay, safety and pollution are weak
- It leaves as soon as a cheaper country calls
A judgement names a condition: 'Overall, Goldcrust is good for Marovia' is an opinion. 'Goldcrust is good for Marovia if it stays after the tax holiday, because only then does its tax repay what the country gave it' is a judgement.
Say which side weighs more, why, and on what condition.
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How this comes up: The long question gives a case in which a multinational plans a new site in another country.
How it is asked
- Long: discuss the potential impacts on that country or its people, for ten marks.
- Short: define host country.
- Short: state two benefits an MNC can bring to a host country.
- Short: explain one benefit and one drawback for the country in the case.
The ten-mark pattern
- Positive impacts, from the case. Two or three, each with a number: 700 jobs, training, bread exported to two countries.
- Negative impacts, from the case. Two or three, each with a number: $5 million of profit sent home, a $1.00 loaf against local bakers, a five-year tax holiday.
- Who gains and who loses. Split the host country into groups: people out of work, local firms, the government, the people who live near the site.
- A judgement with a condition. Which side weighs more, why, and what would change it.
- What the case does not tell you. One or two facts you would need to be sure.
Two traps: The MNC's view instead of the country's. 'Goldcrust gets cheaper workers' is an impact on Goldcrust. The question is about Marovia.
A list with no weighing. Six benefits and six drawbacks with no judgement stay in the middle marks, however accurate each point is.
Discuss the potential impacts on Marovia of Goldcrust opening a bakery factory in Seren and 60 shops across the country.
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