Concept of MNC’s:

A multinational corporation is an enterprise that carries on busine3ss operations in more than one

country. It extends its manufacturing and marketing operations through a network of branches

and subsidiaries which are known as its foreign affiliates.

According to a report of international labour office “the essential nature of multinational

enterprises lies in the fact that its managerial headquarters are located in one country while the

enterprise carries out operations in a number of other countries as well.”

Characteristics of MNC’S:

1. Large size

2. Worldwide operations

3. Centralized control

4. Sophisticated technology

5. Professional management

6. International market

7. High brand equity

International Corporation:

An international corporation has a domestic orientation in so far as the overseas operations are

treated as appendages to the headquarters. The parent company extends the domestic product,

price, promotion and other business practices to the foreign markets. The assets, processes and

decisions in overseas affiliates are controlled from the headquarters.

Multinational Corporation:

It operates like a domestic company of the country and responds to the specific needs of each

country’s market.

Global Corporation:

It produces in home country and markets these products globally and focuses on marketing these

products domestically. Overseas operations are used to build global scale and overseas affiliates

act as implementing agencies for the decisions taken by the headquarters.

Transnational Corporation:

A transnational corporation invests, produces, markets and operates across the world. It seeks to

achieve global competitiveness through worldwide flexibility and learning. The resources and

decisions of all the units are decentralized and these units act in an interdependent but integrated

manner.

Reasons for the growth of MNC’s:

1. Market Expansion:

The growth of GDP and per capita income in various countries led to increasing

demand for goods and services. Companies in developed economies expand their

operations overseas to exploit the expanding markets abroad.

2. Marketing Superiorities:

MNC’S enjoy the following marketing superiorities over the domestic companies:

a. Availability of more reliable and up to date information about market conditions

b. Reputation in market due to popular brands and image

c. More effective advertising and sales promotion techniques.

d. Wide distribution network.

e. Quick transportation and warehousing facilities.

3. Financial Superiorities:

MNC’S are financially superior to domestic companies in the following respects:

a. Huge financial resources

b. More effective and economical utilization of funds through transfer of excess

funds from one country to another

c. Easy access to foreign capital markets.

d. Easy mobilization of high quality resources of different types.

e. Access to international banks and financial institutions.

4. Technological Superiorities:

MNC’S have strong R&D departments. They can invent and innovate new products

and processes more easily and frequently. This provides them an edge over national

companies. Developing countries invite MNC’S for advanced technology due to the

following reasons:

a. Developing countries do not have the resources to develop advanced

technology and the level of industrialization is low.

b. They are unable to exploit their rich mineral and other natural resources due to

shortage of funds and low level technology.

c. They do not have adequate foreign exchange reserves to import raw materials,

capital equipment and technology on their own.

d. They face difficulty in marketing their products in highly competitive world

markets.

Advantages of MNC’S:

1. Benefits to the host country:

a. The levels of investment, employment and income increase due o the operation of

MNC.

b. MNC help in growth of ancillary and service industries thereby increasing

industrialization and economic development.

c. MNC brings advanced technology to the host country.

d. Business firms in the host country get sophisticated management techniques and

practices.

e. MNC enable the host country to increase its exports and reduce the imports.

f. Domestic industry gets the benefit of R&D systems of MNC’S. Their capability

of invention and innovation increases.

g. MNC’S increase competition and break domestic monopolies.

h. MNC’S help to integrate national economies both economically and culturally.

2. Benefits to the home country:

a. The products manufactured in home country can e easily marketed throughout the

world.

b. Employment opportunities for home country people are increased both at home

and abroad.

c. The level of industrial activity in the home country increases.

d. In long run, the BOP position of the home country improves through

inflows in the form of dividend, interest etc.

Disadvantages of MNC’S:

1. Costs and risks to the host country:

a. MNC’S employ capital intensive technology which is not appropriate to the needs

of developing countries.

b. Due to their immense power, MNC’s can undermine economic and political

sovereignty of developing countries.

c. MNC’S may kill the domestic industry and acquire monopoly over the host

country’s market.

d. Employment growth in the host country may be retarded because MNC’S may

employ foreign staff.

e. MNC’S may cause fast depletion of host country’s natural resources through their

indiscriminate use.

f. The host country’s BOP may be under pressure when MNC’S repatriate huge

amount in the form of profits, dividends and royalty.

g. MNC’S may undermine local culture, distort consumption patterns and promote

conspicuous consumption in the host country.

2. Dangers to home country:

a. Pressure on BOP due to transfer of capital to host countries.

b. Loss of employment for home country people due to location of manufacturing

and marketing facilities abroad.

c. Investment in more profitable countries may retard industrial and economic

development in the home country.

d. Cultures of foreign countries may distort home country’s culture.

GLOBALISATION:

Globalisation may be defined as the integration of countries into world economy or one global

market. It involves removal of all trade barriers between countries.

Globalisation is the shift towards a more integrated and interdependent world economy – Charles

Hill.

Features of Globalisation:

1. It involves expansion of business operations throughout the world.

2. It leads to integration of individual countries of the world into one global market thereby

erasing difference between domestic market and foreign market.

3. Buying and selling of goods and services takes place from / to any country in the world.

4. It creates interdependency between nations.

5. Manufacturing and marketing facilities are set up any where in the world on the basis of

their feasibility and viability rather than on national considerations.

6. Products are planned and developed for the world market.

7. Factors of production like raw materials, labour, finance, technology and managerial

skills are sourced from the entire globe.

8. Corporate strategies, organizational structures, managerial practices have a global

orientation.

Essential conditions of Globalisation:

1. Removal of quotas and tariffs.

2. Liberalization of government rules and regulations.

3. Freedom to business and industry.

4. Removal of bureaucratic formalities and procedures.

5. Adequate infrastructure.

6. Competition on the basis of quality, price, delivery and customer service.

7. Autonomy to public sector undertakings.

8. Incentives for R&D.

9. Development of money and capital markets.

10. Administrative and government support to industry.

Indicators of Globalisation:

1. Share of foreign trade in national income

2. Foreign investment as a proportion of total investment in the country.

3. International investment income flows as a proportion of total investment income in the

economy.

4. International tourism traffic as a proportion of total population of the country.

5. Share of foreign remittances.

6. Value of credits and debits to BOP as a proportion of national income.

Strategies for Globalisation:

1. Exporting:

It is an appropriate strategy under the following conditions:

a. Cost of production in the foreign market is high

b. The volume of exports is not large enough to justify production in the

foreign market.

c. There are production bottlenecks in the foreign market.

d. Investment in the foreign country involves political and other risks.

e. There is no guarantee of long term availability of the foreign market.

f. The company does not have permanent interest in the foreign market.

g. The foreign country concerned does not favour foreign investment.

h. The company has underutilized production capacity.

i. Domestic government provides incentives for export production.

j. It is easier and less costly to export than to set up production facilities

abroad.

2. Licensing and franchising:

Franchising is a form of licensing in which a parent company grants another

company through a written contract the right to offer, sell or distribute goods or

services through a business system created by the franchiser.

Its advantages are as follows:

a. It requires neither capital investment nor marketing strength in foreign

markets.

b. It reduces risk of exposure to government intervention and host country

regulations.

c. It provides a means to test foreign markets without involving major capital

or management time.

d. It can be used as a pre emptive strategy against competitors by combing

the foreign markets before competitors could enter.

e. It can be used to harvest obsolete products in poor countries.

f. The licensor can earn royalty income.

g. The licensee gets a proven product.

3. Contract manufacturing:

Under this strategy the company enters into a contract with a firm in the foreign

market to manufacture or assemble the product. The company retains the

responsibility of marketing the product. This is common practice in book

publishing industry.

Advantages:

a. The company has not to invest resources in setting up production facilities.

b. The company is free from the risk of investing in foreign markets.

c. The company can start immediately when idle production capacity is

available in the foreign country.

d. Contract manufacturing may enable the company to obtain host country’s

support.

Disadvantages:

a. Potential profits from manufacturing are not available.

b. The company has less control over manufacturing.

c. There is risk of developing a potential competitor.

d. Contract manufacturing is not suitable in cases involving technical secrets

and in high tech products.

4. Management control:

Under this system a company contracts with a firm or government in a foreign

country to manage the entire product or undertaking for a specified period.

Advantages:

a. The risk involved is low.

b. It starts yielding income right from the beginning.

c. The arrangement is specially attractive if the contracting firm is given an

option to purchase some shares in the managed company within a stated

period.

d. Management contract can provide organisational skills, expertise and

support services that are not available locally.

e. It enables the firm to commercialize existing knowhow and the impact of

fluctuations in business volumes can be reduced by making use of

experienced personnel.

f. The managing company may obtain the business of exporting or selling

otherwise the products of the managed company or supplying the inputs to

it.

5. Turnkey contract:

In this the company contracts with a foreign firm to design and built an entire

operation. On completion the operation is turned over to the local personnel who

have been trained by the company.

6. Third country location:

When commercial transactions between two countries are not possible due to

political reasons, a company may have to enter the foreign market from a third

country.

7. Joint ventures:

A company may enter a foreign market by entering into a joint venture with a

foreign firm. The local firm and the foreign firm share ownership and

management in a joint venture.

8. Direct investment:

A company which wants to have substantial and long term interest in the foreign

market has to establish fully owned manufacturing facilities abroad. This strategy

provides the company complete control over production and quality. There is no

risk of developing potential competitor as in the case of licensing and contract

manufacturing.

Advantages of Globalisation:

1. Wider markets:

Globalization offers larger markets to domestic producers. Domestic firms can

export their surplus output. They realize higher prices from foreign markets.

Global operations help to improve public image which is helpful in attracting

better talent.

2. Rapid industrialization:

Globalization helps in free flow of capital and technology between countries this

help the developing countries to boost up their industralisation.

3. Greater specialization:

Globalization enables the domestic firms to specialize in areas where they enjoy

competitive advantage.

4. Competitive gains:

5. Higher production:

6. Price stabilization:

7. Increase in employment and income:

8. Higher standards of living:

9. International economic cooperation:

10. World peace:

Disadvantages of Globalisation:

1. Interdependence:

2. Threat to domestic industry:

3. Unemployment:

4. Drain of basic resources:

5. Technological dependence:

6. Alien culture:

Obstacles to Globalisation:

1. Bureaucracy:

2. High cost:

3. Poor quality:

4. Poor infrastructure:

5. Obsolete technology:

6. Resistance to change:

7. Lack of professional management:

8. Limited R&D:

9. Trade barriers:

Factors Favouring Globalisation:

1. Wide base:

2. Talent pool:

3. Huge market:

4. Growing entrepreneurship:

5. Non resident Indians:

6. Economic liberalization:

7. Global competition:

Policy options before India:

1. Appropriate macroeconomic policies:

2. Fair institutional framework:

3. Partnership with MNC’S:

4. International coordination:

5. Debt relief:

WORLD TRADE ORGANISATION (WTO):

WTO was established on January 1, 1995. It is the embodiment of the Uruguay Round and the

successor to GATT. WTO has 146 members. The head office is located in Geneva (Switzerland).

Objectives:

1. Raise standards of living

2. Ensure full employment

3. Expand production

4. Expand trade in goods and services

5. Optimize use of world’s resources

6. Achieve sustainable development

Functions:

1. Administering and implementing the multilateral and plurilateral trade agreements.

2. Providing a forum for multilateral trade negotiations among the members.

3. Facilitating settlement of trade disputes among members.

4. Overseeing national trade policies.

5. Cooperating with other international institutions involved in global policy making.

Benefits of WTO:

1. Boost to exports:

2. Security and predictability:

3. Policy assistance:

4. Trade links:

5. Settlement of disputes:

6. Special concessions:

7. Promotion of competition:

8. Technical assistance:

9. Sustainable development:

10. Policy review mechanisms:

Disadvantages of WTO:

1. No export push:

2. Prominence to developed nations:

3. Price rise:

4. Danger to service sector:

5. Not really free trade:

6. Erosion of autonomy:

Regional Trade Blocks or Organisations: