eco final.docx

8/11/2019 eco final.docx

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Introduction

A multinational corporation (MNC) or multinational enterprise (MNE) is acorporationthat is

registered in more than one country or that has operations in more than one country. It is a

large corporation which both produces and sells goods or services in various countries. It can

also be referred to as an international corporation. They play an important role

inglobalization.The first multinational corporation was theDutch East India Company,

founded March 20, 1602

Such a company is even known as international company or corporation. As defined by I. L.

O. or the International Labor Organization, a M. N. C. is one, which has its operational

headquarters based in one country with several other operating branches in different other

countries. The country where the head quarter is located is called the home country whereas;

the other countries with operational branches are called the host countries. Apart from

playing an important role in globalization and international relations, these multinational

companies even have notable influence in a country's economy as well as the world economy.

The budget of some of the M. N. C.s are so high that at times they even exceed the G. D. P.

(Gross Domestic Product) of a nation.

Definition

There is more universally accepter definition of the term multinational corporation. Different

authorities define the term differently

As ILO Report

The essential nature of the multinational enterprise lies in the fact that is managerialHeadquarters are located in one country ( home country ) while the enterprise carries out

operations in a number of other countries as well (host countries)

Obviously, what is meant is, A corporation that controls production facilities in more than

one country, such facilities having been acquired through the process of foreign-direct

investment. Firms that participate in international business however large they may be, solely

by exporting or b hunting technology is not Multinational enterprises.
http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Dutch_East_India_Companyhttp://en.wikipedia.org/wiki/Dutch_East_India_Companyhttp://en.wikipedia.org/wiki/Dutch_East_India_Companyhttp://en.wikipedia.org/wiki/Dutch_East_India_Companyhttp://en.wikipedia.org/wiki/Globalizationhttp://en.wikipedia.org/wiki/Corporation


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The United Nations

MNCs as ,Enterprises which control assets- factories, mines, sales offices and the like in two

or more countries.

History

The genesis of MNCs lies in transnational trading in early days conducted by the Greek,

Phoenician and Mesopotamian merchants. After the fall of the Roman Empire, trade between

nations become difficult.

When Europe and the Middle East steeped in feudalism resulting in wars between feudal

lords and church prohibited trade with Muslim States. Later on, merchants/traders of Italy

established trade who were considered the fore runners of the multinational firms.

The cities of Genoa, Venice, Florence and Pica became the supply depots of traders. Active

transnational operations flourished with the development of banks and money lending

agencies.

Multinationals in the form of trading companies started in the seventeenth and eighteenth

centuries. The Hudson Bay Company, the East India Company, the French Levant Company

were the major transnational companies established in those days.

During the nineteenth century, huge foreign investment flowed from the Western Europe to

the underdeveloped countries or Asia, Africa and America. England was the leading exporter

of capital, followed by France, the Netherlands and Germany.

In the early twentieth century British Petroleum, Standard Oil, Ana Conda Copper and

International Nickel were the major MNCs investing mainly in mining and petroleum

industries.

The MNCs have attained their present dominating position in the world economy through a

long process of growth. S.A. Cockeril Steel Works established in Persia in 1815, followed by

several others such as Bayer of Germany in 1863, Nestle of Switzerland in 1967, Michelin of

France in 1853 and Lever Brothers of U.K. in 1890.


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There are three phases in the growth of MNCs. The first phase lasted upto the 1st World War.

The field was captured mostly by the European Companies such as Imperial Tobacco,

Dunlop, Siemens, Philips, etc. The Growth of MNCs halted during the post-war period

between 1930-1950 on account of recessionary situation prevailing the world over in those

days.

During the second phase, covering the decades of fifties and sixties, American MNCs such as

General Motors, Ford Motors and IBM emerged on the world scene.

The third phase of the growth of MNCs began since 1970s. This new era belonged to the

European, German and Japanese MNCs.

In recent years, MNCs have also emerged from developing countries such as India, Malaysia,

Hong Kong, Singapore, South Korea, Indonesia, etc.

Based U.N. (1993) data, the number of MNCs in 1992 had exceeded 37000 and their global

sales exceeded 5.5 U.S. dollar. American, European and Japanese companies are the world's

largest corporations.

Characteristics of multinational corporations (MNCs):

The multinational corporations have certain characteristics which may be discussed below :

(1) Giant Size :

The most important feature of these MNCs is their gigantic size. Their assets and sales run

into billions of dollars and they also make supernormal profits. According to one definition

an MNC is one with a sales turnover of f 100 million. The MNCs are also super powerful

organisations. In 1971 out of the top ninety producers of wealth, as many as 29 were MNCs,

and the rest, nations. Besides the operations, most of these multinationals are spread in a vast

number of countries. For instance, in 1973 out of a total of (,000 firms identified nearly 45

per cent had affiliates in more than 20 countries.

(2) International Operation :

A Fundamental feature of a multinational corporation is that in such a corporation, control

resides in the hands of a single institution. But its interests and operations sprawl across


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national boundaries. The Pepsi Cola company of the U.S operates in 114 countries. An MNC

operates through a parent corporation in the home country. It may assume the form or a

subsidiary in the host country. If it is a branch, it acts for the parent corporation without any

local capital or management assistance. If it is a subsidiary, the majority control is still

exercised by the foreign parent company, although it is " incorporated in the host country.

The foreign control may range anywhere between the minimum of 51 per cent to the full, 100

per cent. An MNC thus combines ownership with control. The branches and subsidiaries of

MNCs operate under the unified control of the parent company.

(3) Oligopolistic Structure :

Through the process of merger and takeover, etc., in course of time an MNC comes toassume awesome power. This coupled with its giant size makes it oligopolistic in character.

So it enjoys a huge amount of profit. This oligopolistic structure has been the cause of a

number of evils of the multinational corporations.

(4) Spontaneous Evolution :

One thing to be observed in the case of the MNCs is that they have usually grown in a

spontaneous and unconscious manner. Very often they developed through "Creepingincrementalism." Many firms become multinationals by accident. Sometimes a firm

established a subsidiary abroad due to wage differentials and better opportunity prevailing in

the host country.

(5) Collective Transfer of Resources :

An MNC facilitates multilateral transfer of resources Usually this transfer takes place in the

form of a "package" which includes technical know-how, equipment's and machinery,materials, finished products, managerial services, and soon, "MNCs are composed of a

complex of widely varied modern technology ranging from production and marketing to

management and financing. B.N. Ganguly has remarked in the case of an MNG "resources

are transferred, but not traded in, according to the traditional norms and practices of

international trade."


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(6) American dominance :

Another important feature of the world of multinationals is the American dominance. In

1971, out of the top 25 MNCs, as many as 18 were of U.S. origin. In that year the U.S. held

52 per cent of the total stock of direct foreign private investment. The U.E. has assumed more

of the role of a foreign investor than the traditional exporter of home products.

Significance of multinational corporations (MNCs):

The multinational corporations today have a revolutionary effect on the international

economic system. It is so because the growth of international transactions of the

multinationals has affected the more traditional forms of capital flows and international trade

for many economies. Today they constitute a powerful force in the world economy.

The value of the products sold by the MNCs in 1971 was more than $ 500 billion which was

about one-fifth of the GNP of the entire world, excepting that of socialist economies. In the

host countries, the volume of their production was about $ 330 billion. The present growth

rate of their output in the host countries is a spectacular 10 per cent per annum which is

almost double the growth rate of the world GNP.

In the field of international trade and international finance, the multinational firms have come

to exercise enormous power. In early seventies the MNCs accounted for about one-eighth of

all international trade- From the nature of their growth it may be presumed that in the early

eighties their share will rise to one-fourth.

Among the developing countries only India had an annual income twice that of General

Motors, which is the biggest multinational corporation. Otherwise the annual income of the

other less developed countries is much less than that of the giant MNCs. By their sheer sizethe MNGs can disrupt the economies of the less developed countries, and may even threaten

their political sovereignty


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What are the Advantages and Disadvantages of Multinational

Corporations?

Multinational Corporations no doubt, carryout business with the ultimate object of profit

making like any other domestic company. According to ILO report "for some, the

multinational companies are an invaluable dynamic force and instrument for wider

distribution of capital, technology and employment; for others they are monsters which our

present institutions, national or international, cannot adequately control, a law to themselves

with no reasonable concept, the public interest or social policy can accept. MNC's directly

and indirectly help both the home country and the host country.

Advantages of MNC's for the host country

MNC's help the host country in the following ways

1. The investment level, employment level, and income level of the host country increases

due to the operation of MNC's.

2. The industries of host country get latest technology from foreign countries through MNC's.

3. The host country's business also gets management expertise from MNC's.

4. The domestic traders and market intermediaries of the host country gets increased business

from the operation of MNC's.

5. MNC's break protectionalism, curb local monopolies, create competition among domestic

companies and thus enhance their competitiveness.

6. Domestic industries can make use of R and D outcomes of MNC's.

7. The host country can reduce imports and increase exports due to goods produced by

MNC's in the host country. This helps to improve balance of payment.

8. Level of industrial and economic development increases due to the growth of MNC's in the

host country.


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Advantages of MNC's for the home country

MNC's home country has the following advantages.

1. MNC's create opportunities for marketing the products produced in the home countrythroughout the world.

2. They create employment opportunities to the people of home country both at home and

abroad.

3. It gives a boost to the industrial activities of home country.

4. MNC's help to maintain favourable balance of payment of the home country in the long

run.

5. Home country can also get the benefit of foreign culture brought by MNC's.

Disadvantages of MNC's for the host country

1. MNC's may transfer technology which has become outdated in the home country.

2. As MNC's do not operate within the national autonomy, they may pose a threat to the

economic and political sovereignty of host countries.

3. MNC's may kill the domestic industry by monpolising the host country's market.

4. In order to make profit, MNC's may use natural resources of the home country

indiscriminately and cause depletion of the resources.

5. A large sums of money flows to foreign countries in terms of payments towards profits,

dividends and royalty.

Disadvantages of MNC's for the home country

1. MNC's transfer the capital from the home country to various host countries causing

unfavourable balance of payment.

2. MNC's may not create employment opportunities to the people of home country if it adopts

geocentric approach.


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3. As investments in foreign countries is more profitable, MNC's may neglect the home

countries industrial and economic development.

Applicability to particular business

MNC's is suitable in the following cases.

1. Where the Government wants to avail of foreign technology and foreign capital e.g. Maruti

Udyog Limited, Hind lever, Philips, HP, Honeywell etc.

2. Where it is desirable in the national interest to increase employment opportunities in the

country e.g., Hindustan Lever.

3. Where foreign management expertise is needed e.g. Honeywell, Samsung, LG Electronics

etc.

4. Where it is desirable to diversify activities into untapped and priority areas like core and

infrastructure industries, e.g. ITC is more acceptable to Indians L&T etc.

5. Pharmaceutical industries e.g. Glaxo, Bayer etc

What Are the Cultural Problems Encountered by Multinational Companies?

Multinational companies face a number of different cultural problems as they move forward

in today's global marketplace. Many of those problems are internal cultural problems, but

some may of an external nature also. Given the nature of the global environment,

multinational companies will increasingly find themselves having to make decisions that are

based on cultural problems created by the global market.

1.Diversity

o One of the main cultural challenges faced by multinational companies is the diversity of

cultural perspectives found within the organization. This can cause problems in terms of

management and policy development, because it makes it difficult for the organization tomake company-wide policy decisions without having to take into consideration the variety of


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cultural viewpoints represented within the organization itself. In short, as companies move

forward in the global context, too much diversity may create problems.

2. Organizational Culture

o Along the same lines as an overabundance of diversity, multinational companies also face the

difficult task of developing a unified organizational culture from within. Because of the

different cultural perspectives represented within the organization as a whole, company

leaders generally face the difficult task of having to create a workplace culture to which all

employees can adhere. Concepts of teamwork and unity may have different meanings across

the national boundaries, making it far more tricky to develop a unified company perspective.

3. Human Resources

o Companies of a multinational variety will also face problems when it comes to human

resources operations. For instance, when it comes to recruiting, human resources managers

may find themselves having to overcome cultural barriers to find qualified candidates for

positions abroad. In some cases, management professionals may find themselves facing a

lack of qualified talent to fill important positions that require advanced degrees and training.

Finding employees at home who are qualified or willing to step in and fill such positions in a

context outside of their home country may also prove problematic. Some employees may

simply not want to serve in certain parts of the world.

4.Sales

o Another problem that multinational companies may face in a global environment is the ability

to develop products and market those products in a way that appeals to a wide segment of the

world's population. Companies run the risk of developing products and strategies that run

contrary to the cultural norms of the people to which they are attempting to market theproducts. Multinational companies face the challenge of developing and marketing products

that have global appeal.

5. Communication and Cultural Norms

o Another significant issue faced by multinational companies is how business is conducted

across international lines. Differences in communication, for instance, make it essential to

understand cultural norms in the countries in which these companies operate. For instance,

John Hooker at Carnegie Melon University points out that some forms of communication


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This could also be the case if there are few substitutes or limited licenses in a foreign market.

The consolidation is often established by acquisition, merger or the vertical integration of the

potential licensee into overseas manufacturing. This makes it easy for the MNE to enforce

price discrimination schemes in various countries. Therefore Hymer considered the

emergence of multinational firms as "an (negative) instrument for restraining competition

between firms of different nations".

Market imperfections had been considered by Hymer as structural and caused by the

deviations from perfect competition in the final product markets. Further reasons are

originated from the control of proprietary technology and distribution systems, scale

economies, privileged access to inputs and product differentiation. In the absence of these

factors, market are fully efficient. The transaction costs theories of MNEs had been

developed simultaneously and independently by McManus (1972), Buckley & Casson (1976)

Brown (1976) and Hennart (1977, 1982). All these authors claimed that market imperfections

are inherent conditions in markets and MNEs are institutions that try to bypass these

imperfections. The imperfections in markets are natural as the neoclassical assumptions like

full knowledge and enforcement do not exist in real markets.

International power

1. Tax competition

Multinational corporations have played an important role in globalization. Countries and

sometimes subnational regions must compete against one another for the establishment of

MNC facilities, and the subsequent tax revenue, employment, and economic activity. To

compete, countries and regional political districts sometimes offer incentives to MNCs such

as tax breaks, pledges of governmental assistance or improved infrastructure, or lax

environmental and labor standards enforcement. This process of becoming more attractive to

foreign investment can be characterized as a race to the bottom, a push towards greater

autonomy for corporate bodies, or both.

However, some scholars for instance the Columbia economist Jagdish Bhagwati, have argued

that multinationals are engaged in a 'race to the top.' While multinationals certainly regard a

low tax burden or low labor costs as an element of comparative advantage, there is noevidence to suggest that MNCs deliberately avail themselves of lax environmental regulation


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or poor labour standards. As Bhagwati has pointed out, MNC profits are tied to operational

efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to tailor

production processes in all of their operations in conformity to those jurisdictions where they

operate (which will almost always include one or more of the US, Japan or EU) that has the

most rigorous standards. As for labor costs, while MNCs clearly pay workers in, e.g.

Vietnam, much less than they would in the US (though it is worth noting that higher

American productivitylinked to technologymeans that any comparison is tricky, since in

America the same company would probably hire far fewer people and automate whatever

process they performed in Vietnam with manual labour), it is also the case that they tend to

pay a premium of between 10% and 100% on local labor rates. Finally, depending on the

nature of the MNC, investment in any country reflects a desire for a long-term return. Costs

associated with establishing plant, training workers, etc., can be very high; once established

in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as,

e.g., expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory

purchase of unnecessary 'licenses,' etc. Thus, both the negotiating power of MNCs and the

supposed 'race to the bottom' may be overstated, while the substantial benefits that MNCs

bring (tax revenues aside) are often understated

2.Market withdrawal

Because of their size, multinationals can have a significant impact on government policy,

primarily through the threat of market withdrawal. For example, in an effort to reduce health

care costs, some countries have tried to force pharmaceutical companies to license their

patented drugs to local competitors for a very low fee, thereby artificially lowering the price.

When faced with that threat, multinational pharmaceutical firms have simply withdrawn from

the market, which often leads to limited availability of advanced drugs. In these cases,

governments have been forced to back down from their efforts. Similar corporate and

government confrontations have occurred when governments tried to force MNCs to make

their intellectual property public in an effort to gain technology for local entrepreneurs. When

companies are faced with the option of losing a core competitive technological advantage or

withdrawing from a national market, they may choose the latter. This withdrawal often

causes governments to change policy. Countries that have been the most successful in this

type of confrontation with multinational corporations are large countries such as United

States and Brazilwhich have viable indigenous market competitors.


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3.Lobbying

Multinational corporate lobbying is directed at a range of business concerns, from tariff

structures to environmental regulations. There is no unified multinational perspective on any

of these issues. Companies that have invested heavily in pollution control mechanisms may

lobby for very tough environmental standards in an effort to force non-compliant competitors

into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries.

For every tariff category that one multinational wants to have reduced, there is another

multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a

company's imported components will vary, so some firms favor tighter import restrictions,

while others favor looser ones. Says Ely Oliveira, Manager Director of the MCT/IR: This is

very serious and is very hard and takes a lot of work for the owner.pk

Multinational corporations such as Wal-mart and McDonald's benefit from government

zoning laws, to create barriers to entry.

Many industries such as General Electric and Boeing lobby the government to receive

subsidies to preserve their monopoly.

4.Patents

Many multinational corporations hold patents to prevent competitors from arising. For

example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on

equipment and infrastructure and Microsoft benefits from software patents. The

pharmaceutical companies lobby international agreements to enforce patent laws on others.

What are the management functions in Multinational

Corporation?

1. Planning in the MNC

Planning involves analyses of international and external environment to find out the

strengths, weaknesses, opportunities and threats. After conducting the SWOT analysis, the

management sets the objectives. It is very difficult to analyse the external environment. This


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is because the world markets, are changing continuously.

Even large MNCs find it difficult to compete in the world markets. Therefore, they form

Global Strategic Partnerships (GSPs) with local companies. Due to GSPs, planning becomes

easier. That is because the managers of the local branches have full knowledge about the

local environment. Some MNCs use consultants to study the external environment of foreign

countries.

2. Organising in the MNC

Organisation is a structure, which helps to achieve corporate objectives.

A MNC can select an organisation structure from the following options:-

1.

A MNC may appoint one Vice-President for all its foreign branches. He will control

all the foreign branches from the MNC's head office.

2. A MNC may use geographic structures. It may appoint a head in every single country

or region in which it operates. For e.g. A manager may be appointed as a Head for the

Asian region or for India; another manager may be in-charge of the European region,

etc.

3.

A MNC may also organise the structure on the basis of production lines. For eg. One

manager may be in charge of one product. Another manager may be incharge of

another product, etc.

3. Staffing in MNC

Staffing involves selecting the right man for the right job. It also includes manpower

planning, promotion, transfers, training and development, compensation, etc.

Staffing function of an international business is very important, especially while appointing

the top-level managers. The top-level managers must be competent and committed persons.

A MNC has three options to select managers :-

1. Managers from the home country who are working in the headquarters of the MNC.

These managers know about the MNC's policies and operations.


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2.

Managers from the host-country can be selected to manage the operations in that

country. These managers know their countries environment, i.e. culture, legal,

educational, political, etc. This environmental knowledge is very important for the

success of the MNC.

3. Managers from a third country who have worked in the MNC's parent headquarters,

or experienced managers from some other MNC, can be selected.

The MNC must select the right managers to manage the international business. They must

consider factors, such as compensation, labour laws of the host country, level of competence

of the managers in the host country, etc.

4. Leading in the MNC

Leading is the process of influencing the subordinates to perform willingly towards group

objectives. Leading involves motivating and communicating. Managers must have effective

leadership qualities.

Leading and motivating employees require an understanding of employees and their cultural

environment. For eg., Participative management may work well in democratic countries, but

it may confuse the employees in a country having a dictator.

Communication is a problem for MNCs because they do business in countries where different

languages are spoken. However, their communication problems can be solved by having local

managers.

5. Controlling in MNC

Controlling involves monitoring actual performance and taking corrective measures, to

correct deviations, if any.

Controlling is a bit difficult in international business due to certain reasons:-

1. Revenues, costs, and profits are measured in different currencies.

2. The ratios between currencies are subject to foreign exchange fluctuations.

3. Accounting practices and financial reporting differ from country to country.


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GROWTH OF MNCs

The rapidity with the MNCs are growing is indicated by the fact that while according to the

world investment report 1997

there were about 45,000 MNCs with 2,80,000 overseas affiliates; according to the

world investment report 2001,

there were over 63,000 of them with about 8,22,000 overseas affiliates. China was host to

about 3.64 lakh of the affiliates (i.e., more than 44% of the total) compared to more than 1400

in India. The developed countries have less than 12% if these affiliates

The possess staggering resources as would be clear from the fact that the sales of 200 top

corporations in1982 were equivalent of 24.2 per cent of the worlds GDP and have risen to

28.3 per cent of the world GDP in 1998. This shows that 200 top MNCs now control over aquarter of the worlds economic activity. In fact the combines sales of thee 200 MNCs

estimated at &7.1 trillion in 1998 surpass the combined economies of 182 countries. If we

subtract the GDP of the big 9 economies -USA, Japan, Germany, France, Italy, UK, Brazil,

Canada and china-from the worlds GDP, the GDP of the remaining 182 countries of the

world comes to $6.9 trillion in 1998 which is less than the sales of the 200 top MNCs. An

idea of the giant size of these MNCs can also be had from the revelation made in a study

conducted by the Washington based institute of policy studies (IPS) that of the 100 largest

economies in the world, 51 are corporations; only 49 are countries.

The MNCs are estimated to employ directly, at home and abroad. Around73 billion

people representing nearly 10 per cent of paid employment in non-agricultural activities

world wide and close to 20 per cent in the developed countries considered alone/ in addition ,

the indirect employment effect of the TNC activities ate at least equal toy hew direct effects

and probably much larger. For example, the US footwear company Nike currently employs

9000 people; while

nearly 75,000 people are employed by is independent sub- contractors located in different

countries. Based on such information, the total number of jobs associated with TNCs world

wide may have been 150 million at the beginning of the 1990s. 6

1.

Expansion of market territory: The increase in per capita income alongside the growth

of various economies and growth of GDP resulted in the rise of living standards of the

people. Due to these factors. The market territory of the firms expended. In additionto this, the large operations of the MNCs builds up its international image, which


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contributed to extend its market territory beyond the physical boundaries of the

country in which it is incorporated?

2.

Market Superiorities: A number of market superiorities can ve observed in MNCs

over the domestic companies. They may be:

a. Availability of more reliable and up to date data and information:

b. They enjoy market reputation:

c. They adopt more effective advertising and salad promotion technique and

thymus they face less difficulties in marketing the products:

d. They have efficient warehousing facilities due to lower inventory requirement

and also enjoy quick transportation

3. Financial superiorities: An MNC enjoys financial superiorities over domestic

companies. They are:

a.

Huge financial resources at the disposal of the MNCs. they can turn the

environment and circumstances in their favor by utilizing these resources:

b. They have easy access to external capital markets:

c.

Because of its international regulation, thy can raise funds from international

banks and financial institutions easily.

4.

Technological superiorities: Expansion or growth of MNCs is dot to the technological

backwardness of underdeveloped contraries. Infect MNCs are rich in technology.

Thee rich financial resources of the MNCs enable them to invest on R$ D and develop

the advanced technology. There are certain reasons due to which the developing

countries regard the transfer of technology from the MNCs. These reasons are:

a. Lack of industrialization and insufficient resources:

b. Local manpower , capital, etc. cannot be optimally utilized by the developing

countries on their own:

c. Developing countries are unable to import raw materials, capital equipment,

technology, etc: on their own due to paucity of resources:

d. The developing countries also lack in marketing the products due to

competition:e. Lack in exploiting mineral and nature of its own.


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5. Product innovation: Advanced R$D departments enable MNCs to develop new

products and superior designs of their products. Developing and underdeveloped

countries suffer from limitation in this regard. Therefore, they invite MNCs to their

countries.

Globalization

Multinational corporations are important factors in the processes ofglobalization.National

and local governments often compete against one another to attract MNC facilities, with the

expectation of increasedtaxrevenue, employment, and economic activity. To compete,

political powers push towards greater autonomy forcorporations,or both. MNCs play an

important role in developing the economies of developing countries like investing in these

countries provide market to the MNC but provide employment, choice of multi goods etc

Criticism of Multinational companies

Anti-corporate advocates criticize multinational corporations for entering countries that have

lowhuman rightsor environmental standards. They claim that multinationals give rise to

huge merged conglomerations that reduce competition and free enterprise, raise capital in

host countries but export the profits, exploit countries for their natural resources, limit

workers' wages, erode traditional cultures, and challenge national sovereignty

Micro-multinationals

Enabled by Internet based communication tools, a new breed of multinational companies is

growing in numbers. These multinationals start operating in different countries from the very

early stages. These companies are being called micro-multinationals. What differentiates

micro-multinationals from the large MNCs is the fact that they are small businesses. Some of

these micro-multinationals, particularly software development companies, have been hiring

employees in multiple countries from the beginning of the Internet era. But more and more

micro-multinationals are actively starting to market their products and services in various

countries. Internet tools like Google, Yahoo, MSN, Ebay and Amazon make it easier for the

micro-multinationals to reach potential customers in other countries.
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Service sector micro-multinationals, like Facebook, Alibaba etc. started as dispersed virtual

businesses with employees, clients and resources located in various countries. Their rapid

growth is a direct result of being able to use the internet, cheaper telephony and lower

traveling costs to create unique business opportunities.

Low cost SaaS (Software As A Service) suites make it easier for these companies to operate

without a physical office.

MNC AND DEVELOPING WORLD

One of the economic hope and aspirations to get out poverty and under development which

had plagued the developing world from the time immemorial is to attract foreign direct

investments (FDI) into their various economies. It therefore becomes a dream come true

when Multinational Corporations (MNCs) decide to invest in developing countries.

Currently, there are over 35,000 multinational corporations globally, controlling more than

15,000 foreign subsidiaries and accounting for about one-third of the entire world production.The developing countries that received the most multinational investment are those perceived

to have the highest growth potential. They are generally known as the newly industrialized

countries and include Asian countries such as China, Singapore, Malaysia, Thailand and

Latin American countries such as Mexico, Brazil and Argentina. The ten biggest recipient of

foreign direct investment receive nearly 95% of the total, while all the African countries put

together receive less than 4%. The poorest 50 countries of the world between them receive

less than 2%.

Originally, most MNC investment in developing countries was in mines and plantations.

Today mining accounts for only 6% with manufacturing and services accounting for over half

and Oil & Gas for about one-third of the total. The value of the total MNC worldwide is

estimated to be more than $1.5 trillion of which approximately one-third is in the developing

countries.


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Virtually many of the world largest companies such as Coca cola, Shell, IBM, Guinness

Breweries, General motors to mention a few have managed to spread their tentacles in most

parts of the world. In terms of turnover, some of them exceed the national incomes of many

smaller countries like our country, but I must hasten to add that there are also thousands of

very small specialists multinationals which are a mere fractions of the above mentioned ones,

that are also operating significantly in the global system. MNCs cover the entire spectrum of

business activity from manufacturing to extraction agricultural production, chemical

processing, service provision and finance and therefore there is no peculiar line of activity of

the multinationals.

Consequences of MNCs on developing countries

As much as MNCs investments can be significantly rewarding in developing economies, it

could produce adverse consequences for the host developing countries.

Employment

Governments in the developing countries are always on the look-out to attract Foreign Direct

Investment (FDI) and are prepared to put up considerable finance by making considerable

concessions because of employment. MNCs investment constitutes a stimulus to economic

activity and employment creation. The employment that MNCs create is both direct in the

form of people employed in the new production facility and indirect through the impact that

the MNC has on the local economy. The Ghanaian economy for example has benefited

immensely with the influx of many mining, petroleum, banking and telecommunication

companies like MTN, Vodafone, and Zain to mention but a few. This has accounted for an

increase in the domestic incomes and expenditure and hence the stimulus in domestic

business as lots of jobs had been created. The workers also gain from the technology

imported by the MNCs (technology transfer).


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Taxation revenues

Taxation is also a plus in the operations of the MNCs for the domestic economy. MNCs and

domestic producers are required to pay taxes and therefore contribute to the public finances.Giving the highly profitable nature of many MNCs, the level of tax revenue raised from this

source is mostly significant. The host countrys balance of payment position is also likely to

improve on a number of counts as a result of MNC investment. Firstly, the investment will

represent a direct flow of capital into the country and secondly, in the long term, the MNC

investment is likely to result in both import substitution and export promotion, for, goods

previously purchased as imports could now be produced locally. Despite the gains,

multinational investment may not always be beneficial either in the short or long term with

particular reference to the developing world. It is possible that jobs created in one region of a

host country by a new MNC with its superior technology and working practices may cause

businesses to fold else where and thus increase in the level of unemployment in those region.

Profits repatriation which constitutes capital flight might effectively undermine many or all of

the potential gains from multinational investment. In addition to these concerns, there are also

the following problems;

Uncertainty

There is much uncertainties associated with the operations of MNC. They are highly dynamic

and therefore can simply close down their businesses in the foreign countries and move. This

is especially likely with older plants which would need upgrading if the MNC were to remain

or with plants that can be easily sold without much loss. If a country has a large foreign

multinational sector within the economy, it will become very vulnerable and face great

uncertainty in the long term. It may thus be force to offer the multinational perks in the form

of grants, special tax relief and other concessions in order to persuade them to remain all of

which are costly to the tax payers in the developing countries.

Control

The fact that MNC can shift production locations not only gives them production advantages

or economic flexibility, but it enables them to exert control over their host nations. This is


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particularly the case in many of the developing nations where MNCs are not only major

employers but in many cases the principal wealth creators. Thus attempts by the host state,

for example to improve workers safety and welfare or impose pollution controls may go

against the interest of the MNCs. MNC might thus oppose such measures or even threaten to

withdraw from the country if such measures are not modified or dropped, rendering those

developing economies vulnerable to serious economic fluctuations and shocks.

Transfer pricing

Like domestic producers, MNCs are always finding ways to reduce their tax liabilities. One

unique way that an MNC can do this is through the process know as transfer pricing. This

enables the MNC to reduce its profits in countries with high rate of profit tax, and increase

them in countries with low rates of profit tax. This can be achieved by simply manipulating

its internal pricing structure. For example, take a MNC where subsidiary A in one country

supplies materials to subsidiary B in another country. The price at which the materials are

transferred between the two subsidiaries will ultimately determine the costs and hence the

level of profit made in each country. Assume that in the country where subsidiary A is

located, the level of corporate tax is half of that of the country where subsidiary B is located.

If materials are transferred from A to B at very high prices, the Bs costs will rise and its

profitability will fall. On the other hand, As profitability will rise. The MNC clearly benefits

as more profits is taxed at a lower rather than higher rate. Had it been the other way around,

with subsidiary B facing the lower rate of tax, then the materials would be transferred at a

low price. This would increase subsidiary Bs profits and reduce As.

Environment

Many MNCs are accused of simply investing in countries to gain access to natural resources,

which are subsequently extracted in a way that is not sensitive to the environment. In the

developing nations where there is the dire need for foreign direct investments, they are

frequently prepared to allow MNCs to do this. We often put premium on the short run gains

from the MNCs presence than on the long run depletion of precious natural resources or

damage to the environment. Perhaps, we are a victim of this circumstance as a nation as far as

the mining sector of the country is concerned. Governments in the developing world often


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have a very short run focus. They are concerned more with their political survival through the

ballot box rather than the long term interest of their people.

MNCS IN INDIA

Various MNCs contribution to Indias industrial development has been a very mixed

blessing. The entries of all hues of MNCs have made the industrial development scene even

more uneven and patchy. However, the scene is changing faster than ever, and it is just a

short time before even this picture changes significantly.

Why are Multinational Companies in India?

There are a number of reasons why the multinational companies are coming down to India.

India has got a huge market. It has also got one of the fastest growing economies in the

world. Besides, the policy of the government towards FDI has also played a major role in

attracting the multinational companies in India.

For quite a long time, India had a restrictive policy in terms of foreign direct investment. As a

result, there was lesser number of companies that showed interest in investing in Indian

market. However, the scenario changed during the financial liberalization of the country,

especially after 1991. Government, nowadays, makes continuous efforts to attract foreign

investments by relaxing many of its policies. As a result, a number of multinational

companies have shown interest in Indian market


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Regulation of MNCs in India

Different government agencies in India control MNCs. These agencies include: (i) the

department of company affair (ii) The Reserve Bank of India (iii) The Ministry of Industrial

Development and (iv) The ministry of finance. Control over MNCs in India is not efficient as

these agencies have no coordination among themselves. The government of India imposed

certain regulation to control MNCs. These are:

1 . Permissible period of agreement was reduced from 10 to 5 years.

2. The maximum rate of royalty was imposed in technology imports for those industries

which were allowed to import technology.

3. Those industries were moot allowed to import technology where domestic companies ate

competent.

4. Exports and other marketing restrictions were imposed.

Some regulations as stated above were imposed. However these regulations are moot

adequate and therefore MNCs be properly regulated to safeguard the interest of the country.

Following suggestions ate given to regulate them.

a. Government interference: Host country government should have its representatives on the

management of thee corporations. Interferences of the representatives of the government is

must on such matters as influence or are likely to influence the economic development of the

country. It should be made clear to the MNCs that if they do not function in the Interest of the

country they are likely to be nationalized.

b. Local ownership: Majority or 51 per cent shares of the subsidiaries of MNCs should be

held special industries of the host country.

c. Beneficial collaborations: Government should allow collaboration of MNCs for those

special industries where such collaboration is essential.

d. Research of an appropriate technology: MNCs many be compelled to spend a part of their

profit in the development of appropriate R $ D for the benefit of host country.


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e. Substitution of technology: Only in the initial stages of development the imported

technology should be used. Thereafter that technology should be developed indigenously so

that the dependence on MNCs could be reduced.

f. Collaboration in heavy and basic industries: Collaboration with MNCs should be allowed

only in heavy and basic industries. Collaboration in consumer goods industry should not be

allowed as it many hamper the domestic industry.

g. Check on monopolistic tendencies: Oligopolistic or monopolistic tendencies of MNCs

should be closely watched to safeguard the interest of consumers as well as of local

producers.

Salient feature of MNCs in India:

The salient features of MNCs in India are as follows:

a. Bi-Country: Most of the MNCs functioning in India have the rheas offices in two countries

i.e. and U.S.A... Out of 171 subsidiary companies 116 had their head offices in U.K.

and 25 in U.S.A.

b. Trends of MNCs: Numbers of MNCs in India have gone down but the volume of their

assets increased considerably. In 1974, the number of MNCs in India was 575 which came

down to 350 in 1980. But their assets increased from Rs. 1741 crore to Rs. 2401 crore.

During the same period the number of subsidiaries also came down to 125 from 188.

c. Sources of capital: Large numbers of subsidiaries operating in India have mobilized their

financial resources from within India.

d. Industry wise distribution: Of all the MNCs operating in India 30 per cent are engaged in

plantation (tea) and mining. Large of their branches are also found in the field of trade

banking and services their number is relatively less in case of industries. Share of commerce

trade and finance in the total assets of these corporations is 76 per cent. Share of processing

industry and transport is 6 per cent each respectively.


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e.High rate of profitability: The rate of profitability of MNCs in comparison to domestic

industry is very high. Profitability of MNCs (private) on an average was 34% whereas that of

Indian private companies was 11.5 per cent. Similarly the profitability of foreign public

limited companies was 24 per cent as again only 11 per cent in case of domestic public

limited companies.

f. Subsidiaries: a company is called a subsidiary company if atleast 50per cent of its paid up

capital is held by another company. Presently there are 88 subsidiaries of MNCs. Out of these

83 companies the share of MNC varies 70 to 100 per cent of their share capital.

g.Heavy remittances abroad: according to Dr.K.N.Raj, rate of profitability on MNCs is very

high. In a short period they repatriate the amount of initial investment to their head office.

Besides they also remit to their parent company; large amounts by way of royalty and

technical services. For example Essoan American Petroleum Company had remitted to its

head office Rs. 83 crore as a part of profit on investment of Rs. 30 crore in India.

h. Limited transfer of improves technology: The MNCs in India have kept their technology a

closely guarded secret. Transfer of improved technology by MNCs to India has taken place

on a very limited scale. It is the old technologies which mostly continue to prevail in India.

i. Indianisation: MNCs have accepted the proposal of Indianisation. According to the

provision of foreign exchange management act (FEMA), all foreign companies had to reduce

their ownership to 74 per cent or they had to reduce their share in the share capital of Indian

branches to 40 per cent. Most of the MNCs have accepted these conditions. Many of them

have already taken steps to reduce the amount of foreign capital.

Profit of MNCs in India

It is too specify that the companies come and settle in India to earn profit. A company

enlarges its jurisdiction of work beyond its native place when they get a wide scope to earn a

profit and such is the case of the MNCs that have flourished here. More over India has wide

market for different and new goods and services due to the ever increasing population and thevarying consumer taste. The government FDI policies have somehow benefited them and


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drawn their attention too. The restrictive policies that stopped the company's inflow are

however withdrawn and the country has shown much interest to bring in foreign investment

here.

Besides the foreign directive policies the labour competitive market, market competition and

the macro-economic stability are some of the key factors that magnetize the foreign MNCs

here.

Following are the reasons why multinational companies consider India as a preferred

destination for business:

1. Huge market potential of the country

2. FDI attractiveness

3. Labour competitiveness

4. Macro-economic stability

Advantages of the growing MNCs to India

There are certain advantages that the underdeveloped countries like and the developing

countries like India derive from the foreign MNCs that establishes. They are as under:

1. Initiating a higher level of investment.

2. Reducing the technological gap

3. The natural resources are utilized in true sense.

4. The foreign exchange gap is reduced

5. Boosts up the basic economic structure


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Disadvantages of the growing MNCs to India

Some of disadvantages are

1. Supplant domestic savings by destroying competition, remove local entrepreneur, unstable

industrial growth

2. Cause strain to BOP i.e. balance of payment by repetration of profits, interests, loyalities,

management fees.

3. Local professional cannot access to working strategies of MNCs

4. Mncs by introducing new technology cause technological unemployment. mncs adopt

capital intensive technique. so machine takes place of workers

MNCs and Indian Industries:

Some economists think that MNCs are helpful for Indian industrial sector they think that

Indian companies learn new technique of production and new management techniques with

the arrival of MNCs in the Indian economic scene. MNCs increase competition in the

industrial sector so when Indian companies compete with global giants they also improve in

their working. With the entrance of MNCs in India demand for skilled persons increased to a

great extent so more and more people are becoming skillful and the problem of skilled

persons is solved for Indianindustriesalso. MNCs also bring foreign capital in the country,

which help to expand the market and Indian industries also take benefit of it.

There are some economists who have some different opinion according to them the

technology transferred by them is not useful for countries like India because MNCs use

capital intensive technique and developing countries have scarce capital and labour abundantso the technology they transfer is of little use. The competition increased by MNCs is also

disastrous for domestic industries only few strong domestic industries have enough strength

to face the competition with global giants. As well as skilled persons are concerned MNCs

give higher salaries to the skilled persons and thus able to explore the services of the most

skilled persons and the Indian industries are still out of the services of these skilled people.

No doubt MNCs bring foreign capital in India but this capital later becomes the cause of

reimbursement of profit to the MNCs parent countries, which cause capital flight from the

country.
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MNCs and agriculture:

Indian economy is an agrarian economy; a major part of the population depends on

agriculture directly or indirectly. If we go back to past few decades Indian agriculture was

considered backward but now the time is changing and MNCs such as Mahyco-Monsanto

help in modernizing Indian agriculture. They provide modern agricultural inputs such as

HYV seeds, pesticides, fertilizers and modern agricultural equipments to the Indian farmers

and thus Indian agriculture has turned itself from subsistence levelto making profits. MNCs

also encourageresearchactivities in the field of agriculture in developing countries like India.

If we see the other part of the picture India with billion plus population, has put agriculture at

the heart of its economy and food security at the center of its agriculture policy. In

developing countries, MNCs encourage commercial farming because they need cheap raw

material. Farmers also get good amount for their crop so the result is danger of food security,

which the world is facing these days. A big number of Indian farmers are small and medium

farmers who are not able to use expensive agricultural equipments so the gap is widening

among rich and poor farmers, which is disastrous for the agriculture. Moreover MNCs are

making Indian farmers dependent on HYV seeds provided by them and thus the biodiversity

of Indian varieties are in danger.

MNCs from social and moral viewpoint:

MNCs are not fair in their working in the developing countries. Many MNCs are not paying

their tax liability, they prefer to establish in that country where tax laws are not strict

similarly they prefer to establish in that country where environmental laws are also not much

strict and these are mainly developing countries. They even send their toxic waste in these

countries by taking advantage of loose environmental laws even the quality of their products

vary with country to country we can take the example of coca cola which is of superior

quality in USA and is of inferior in India. MNCs also responsible for misallocation of

resources in the developing countries. They provide mainly luxurious products because there

is more profit in it. Thus demand for these products increase due todemonstration effectand

this leads to misallocation of resources towards luxurious goods but the need of developing
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countries is to produce more and more necessary goods because most of the people belong to

poor or middle class.

Another aspect, which judges MNCs morally, is political interference. Generally it is the

practice of MNCs to gain the economic power in developing countries and then get political

power by giving help to the politicians at the time of elections and then manipulate industrial

policies in their favor they also interfere in the important political matters of these countries

which can cause a big danger to the sovereignty of developing countries.


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Foreign Collaboration in India

In India there are basically two forms of foreign collaboration. The collaboration may be either

financial collaboration or it may be technical. In case of financial collaboration the approving

authority is the Reserve Bank of India and in the case of technical collaboration the approving

authority is department of Industrial Development in the Ministry of Industry, Government of

India.

The approach of the Government has been roughly the same since the year 1949 that is to allow

foreign direct investment on preferential basis in sectors that will be beneficial for the country.

The foreign or Indian undertakings will have to conform to the Industrial policy of the country.

Foreign investors are in all cases considered equal to their Indian partners.

The Government has enforced The Foreign Exchange Management Act 1999 (FEMA) in place

of the Foreign Exchange Regulation Act,1973 (FERA). The Old act aimed at controlling foreign

exchange whereas the new Act seeks to regulate foreign exchange.

A breach of the provisions of the old act resulted in a criminal offence with the burden of proof

lying on the guilty. However the new Act provides for only a civil remedy and for an offence

the accused cannot be arrested unless he defaults in payment of penalty for contravention.

For setting up a foreign collaboration, approval from the government under the relevant foreign

exchange laws in force and the requisite Government policy is required.

Under the Act now a foreign collaboration may be formed by a foreign company without the

necessity of forming a company with an Indian counterpart. Any Foreign collaboration which

exceeds the minimum limited set out in the automatic route requires approval from the

government.

The Government has set up a foreign investment promotion board to encourage foreign

investment in India. Some of the functions of the Board include:

speed up clearance of proposals

to review the collaborations cleared

Earmarking and ascertaining of contacts to invest in India.


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10 Best MNCs

1. Microsoft

Microsoft Corporation, an American multinational corporation is headquartered in Redmond,

Washington, United States that develops, manufactures, licenses, and supports a wide range

of products and services mostly associated with computing through its various product

divisions.

2. NetApp

NetApp previously known as Network Appliance is a proprietary computer storage and data

management company headquartered in Sunnyvale, California.

3. Google

Google, an American multinational Internet and software corporation specialized in Internet

search, cloud computing, and advertising technologies is headquarters in United States. It

develops numerous Internet-based services and products, and makes profit primarily from

advertising through its Ad Words program.

4. FedEx Express

FedEx Express is a cargo airline based in Memphis, Tennessee, United States. It is

considered the world's largest airline in terms of freight tons flown and the world's fourth

largest in terms of fleet size

5. Cisco

Cisco Systems is, an American multinational corporation headquartered in San Jose,

California, United States, designs, manufactures, and sells networking equipment


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6. Marriott

Marriott Corporation, a hospitality company was founded originally by J. Willard Marriott

and Frank Kimball as Hot Shoppes

7. McDonald's

McDonald's Corporation today is the world's largest chain of hamburger fast food restaurants,

serving around 68 million customers daily in 119 countries

8. Kimberly-Clark

Kimberly-Clark Corporation is an American corporation that manufactures mostly paper-

based consumer products.

9. SC Johnson

S.C. Johnson was earlier previously known as S. C. Johnson Wax is a privately held, global

manufacturer of household cleaning supplies and other consumer chemicals based in Racine,

Wisconsin

10. Diageo

Diageo is a global alcoholic beverages company headquartered in London, United Kingdom.

It is the world's largest producer of spirits and a major producer of beer and wine.


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Conclusion:

After discussing various aspects of MNCs in developing country like India the big question

before us is whether MNCs play positive or negative role in developing countries? Generally

the governments of developing countries dont keep control on the working of MNCs, which

is major fault on their side. MNCs can be helpful for developing countries only when they are

kept under control. We should not give incentives to the MNCs only because they are coming

from some powerful advanced countries. So MNCs should face same rules and regulations as

the domestic industries of the developing countries are facing.

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