34
MULTINATIONAL CORPORATION INDEX

Multinational Corporation

Embed Size (px)

Citation preview

Page 1: Multinational Corporation

MULTINATIONAL CORPORATION

INDEX

Page 2: Multinational Corporation

MEANING AND DEFINATION OF MNC:

Any business corporation which has holdings, management, production and marketing extended

over several countries , owns huge resources and extensive potentiality , and encourages a

collective transfer of resources among various countries with a view of increasing profitability

under a centralized ownership is called a “ multinational corporation”.

Jacques Maisonrouge, president of IBM world trade corporations defines an MNC as a company

that meets five criteria:

1) It operates in many countries at different levels of economic developments.

2) Nationals manage its local subsidiaries.

3) It maintains complete industrial organizations, including R and d and manufacturing facilities

in several countries.

4) It has a multinational central management.

5) It has multinational stock ownership.

James C. Baker also defines MNC’s as a company:

1) Which has direct investment base in several countries.

2) Which generally derives from 20% to 50% or more its net profits from foreign operations.

3) Whose management makes policy decisions based on the alternatives available anywhere in

the world.

A significant share of the world’s industrial investment, production, employment and trade are

accounted for by these more than 65000 MNC’s with over 8,00,000 affiliate

Page 3: Multinational Corporation

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 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.

Page 4: Multinational Corporation

(3) Oligopolistic Structure :

Through the process of merger and takeover, etc., in course of time an MNC comes to assume

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 "Creeping

incrementalism." 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."

(6) American dominance :

Page 5: Multinational Corporation

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

Page 6: Multinational Corporation

FUNCTIONAL NATURE OF MNC:

Functional nature of MNCs means the functions of Multinational Organizations which they

follow and succeed.

There may be five different functions of MNCs-

Planning

Organizing

Staffing

Leading and;

Controlling

Planning in MNC Involves Study of International and External environment to do SWOT analysis.

Setting the objectives.

To compete in world markets, form GSP (Global Strategic Partnership) with the local players.

Organizing in the MNC To achieve corporate objectives

Can appoint VP for all foreign branches. He will control these branches from Head Office.

Page 7: Multinational Corporation

A MNC may organize the structure on the basis of production line. E.g; one manager will be

incharge of one product.

Staffing in MNC Select managers from the home country. These mangers will know the values of the company

clearly

Select mangers from the host country. They will know the culture of the host country.

Select mangers from the third country.

Leading in MNC Involves motivating and communicating.

Managers must have effective leadership qualities

Staffing in MNC Select managers from the home country. These mangers will know the values of the company

clearly

Select mangers from the host country. They will know the culture of the host country.

Select mangers from the third country.

Leading in MNC

Involves motivating and communicating.

Managers must have effective leadership qualities

Page 8: Multinational Corporation

IMPORTANCE OF MNC’S AND THEIR BENEFITS

TO HOME/HOST COUNTRIES:

Importance of MNC’s 1.Vehicles of technology transfer to developing countries

2.They work to equalize the cost of factors of production around the world.

3.Efficient means of integrating national economies.

4.Contribute to R & D due to enormous resources.

5.Help to increase competition & break down domestic monopolies

.

Page 9: Multinational Corporation

Benefits of MNC’s to home country:

1) Facilitate inflow of foreign exchange: - MNC’s collect funds from the enterprises of other

countries in the form of fees, royalty, and service charges. This money is taken to the country of

their origin. MNC’s make their home countries rich by facilitating inflow of foreign exchange

from other countries.

2) Promote global co-operations: - MNC’s provide co-operation to poor or developing countries

to develop their industries. The countries of their origin participate in such international co-

operation, which is beneficial to all countries- rich and poor.

3) Ensure optimum utilization of resources: -MNC’s ensure optimum utilization of natural and

other resources available in their home countries. This is possible due to their worldwide

business contacts.

4) Promote bilateral trade relations: -MNC’s facilitate bilateral trade relations between their

home countries and the other countries with which they have business relations.

Page 10: Multinational Corporation

Benefits of MNC’s to host countries:1) Raise the rate of investment: - MNC’s raise the rate of investment in the host countries and

thereby bring rapid industrial growth accompanied by massive employment opportunities in

different sectors of the economy.

2) Facilitate transfer of technology: -Multinationals act as agents for the transfer of technology to

developing countries and thereby help such countries to modernize there industries. They remove

technological gaps in developing countries by providing techno-managerial skills.

3) Accelerate industrial growth: - multinationals accelerate industrial growth in host countries

through collaborations, joint ventures and establishment of subsidiaries and branches. They

facilitate economic growth through financial, marketing and technological services. MNC’s are

rightly called “ messengers of progress”.

4) Promote export and reduce imports: - MNC’s help the host countries to reduce the imports and

promote the exports by raising domestic production. Marketing facilities at global level are

provided by MNC’s due to their global business contacts.

5) Provide services to professionals: - MNC’s provide the services of the skilled professional

managers for managing the activities of the enterprises in which they are involved/interested.

This raises overall managerial efficiency or enterprises connected with multinationals. MNC’s

bring managerial revolution in host countries.

6) Facilitate efficient utilization of resources: - Multinationals facilitate efficient utilization of

resources available in host countries. This leads to economic development.

7) Provide benefits of R and D activities: -Multinationals has enormous resources at their

disposal. Some are utilized for R and D activities. The benefits of R and D activities are passed

on to the enterprises operating in the host countries.

8) Support enterprises in host countries: - MNC’s support to enterprises in the host countries in

order to support their own operations indirectly. This is how MNC’s support enterprises in the

Page 11: Multinational Corporation

host countries to grow. Even consumers get new goods and services due to the operations of

MNC’s.

9) Break domestic monopolies: - MNC’s raise competition in the host countries and thereby

break domestic monopolies.

DEMERITS

1) Provide outdated technologies: - MNC’s design the technologies, which can be used in

different countries. They don’t supply technology to poor countries for industrial development

but for profit maximization. The technologies designed for profit maximization and not purely

for meeting the needs of developing countries. The technologies supplied may be costly and may

be outdated and obsolete or may not be suitable for the needs of developing countries.

2) Harm the national interests: - the activities of MNC’s in the host countries may be harmful to

the national interests as MNC’s are solely guided by the profit maximization. They ignore the

interests of host countries. MNC’s even make profits at the cost of developing countries.

3) Charge heavy fees: - MNC’s charge heavy fees and service charges from the enterprises in the

host countries. They repatriate profits of their subsidiaries to their home countries. This leads the

outflow of countries.

4) Develop monopolies: - MNC’s restrict competition and acquire monopoly power in certain

areas in the host countries.

5) Use resources recklessly: -MNC’s use the resources in the host countries in a very reckless

manner, which leads to fast reduction of non-renewable natural resources.

6) Dominate domestic policies: -MNC’s use their money power for political purposes. They take

undue interest in political matters in the host countries. MNC’s are being openly termed as an

extension of the imperialistic forces.

7) Adverse effects on life style/culture in the host countries: - MNC’s create demand for goods

and services in developing countries through advertising and sales promotion techniques. As a

result, people purchase costly/ luxury goods which are not really useful nor within their capacity

Page 12: Multinational Corporation

to purchase. MNC’s create adverse effects on the cultural background of many developing

countries.

8) Interfere in economic and political systems: - they put indirectly pressures for the formulation

of policies that are favorable to them. They even topple the government in the host countries if

its policies are against the MNC’s and their operations.

9) Avoid tax liabilities: - transfer pricing enables multinational corporations to avoid taxes by

manipulating prices in the case of intra company transactions.

10) Lead to brain drain in developing countries: - multinationals are now entering in countries

like India in a bigger way. They hire qualified technocrats and managerial experts. These people

work for a few years in India, acquire experience and relocated as experts in Singapore, Korea or

the United States for managing the activities of MNC’s. This leads to brain drain in developing

countries.

MNC’S have helped and also harmed the developing countries. It is a peculiar mixture of virtues

and vices, boons and banes. However no country can afford to avoid MNC’s only because it has

dangers associated with them. It may be concluded that MNC’s constitute a mixed blessing to

developing countries. They are helping as well as harming the developing countries. It is rightly

said “MNC’s are bound to exist and  eveloping countries have to learn to live with Them”.

Page 13: Multinational Corporation

GROWTH OF MNC:

The MNCs share in global investment, production, employment and trade has assumed

considerable proportions.

According to the UN, there are 63,000 MNCs with 6,90,000 affiliates all over the globe with

2,40,000 in China and only 1400 in India. The US was the forerunner in giving births to MNCs.

Today, biggest MNC’s are Japanese. T

He global liberalization wave, paved the path for faster expansion and growth of MNCs. The

value added by the foreign affiliates of MNCs, as a percentage of global GDP grew from 5% in

the 1980s to about 7% by the end of 90s. The MNCs control about a third of world output and

the total sales of their foreign affiliates is almost equal to the GNP of all developing countries.

The value of the annual sales of the largest manufacturing multinational General Motors, was

about $178bn in 1996. The total sales of the 3 largest automobile firms of the world, namely,

General Motors, Ford and Toyota is greater than the value of India’s GDP.

In terms of direct employment, the MNCs accounted for 73mn people worldwide and if indirect

employment is considered, the figure approximates 150mn people. Over 350m people were

employed by the foreign affiliates of MNCs in 1988.

A number of factors have contributed to the phenomenal growth of MNCs. Some of the

important factors are as follows: -

1) Expansion of market territories: -

Rapid economic growth in a number of countries resulting in rising GDPs and per capita

incomes contributed to the growing standards of living. This in turn contributed to the

continuous expansion of market territories. MNCs, both contributed to the expansion of market

territories and also grew in size and spread as a result of expansion of market territories.

2) Market superiorities: -

Page 14: Multinational Corporation

In many ways, MNCs have an edge over domestic firms, such as: -

a) Availability of reliable and current data,

b) MNCs enjoy market reputation,

c) MNCs encounters relatively less problems and difficulties in marketing the products,

d) MNCs adopt more effective advertising and sales promotion techniques, and

e) MNCs enjoy faster transportation and adequate warehousing facilities

3) Financial superiorities: -

MNCs also enjoy a number of financial advantages over domestic firms. These are: -

a) Availability of huge financial resources with the MNCs helps them to transform business

environment and circumstances in their favor.

b) MNCs can use the funds more effectively and economically on account of their activities in

numerous countries.

c) MNCs have easy access to international capital markets, and

d) MNCs have easy assessed to international banks and financial institutions.

4) Technological superiorities: -

MNCs are technologically prosperous on account of high and sustained spend on R&D.

developing countries on account of their technological backwardness welcome MNCs to their

countries because of the attendant benefits of technology transfer.

Page 15: Multinational Corporation

CHALLENGES FACED BY MNC:

There is no company without problems it is facing. Whether an organization is big or small, there

will certainly be some sort of problems or negative factor/influence militating against its survival

or continuity. Weihrich and Koontz (1994) states that the operation of multinational companies

needs to be weighed against the environmental challenges and most of the challenges being faced

by multinational companies are:

1. There is usually acute shortage of manpower - people with lack of managerial and technical

skills

2. The challenge of unfriendly business environment

3. There is usually the problem of conflicting interest among the three parties - the government,

the MNC and the general public

4. There may be huge cost of labour in the host country, at least to get the expatriate managers

from home country or somewhere else

Conclusively, the above mentioned authors have given all round and comprehensive note on the

benefits of MNCs to the host country where they operate and as well highlighted the derivable

benefits to the MNCs themselves from the host country. Likewise, in spite of the challenges and

the problems being faced by these MNCs, they still continue to survival and waxing stronger.

Page 16: Multinational Corporation

ROLE OF MNC 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.

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 the varying

consumer taste. The government FDI policies have some how benefited them and 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.

Page 17: Multinational Corporation

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:

Huge market potential of the country

FDI attractiveness

Labor competitiveness

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:

Initiating a higher level of investment.

Reducing the technological gap

The natural resources are utilized in true sense.

The foreign exchange gap is reduced

Boosts up the basic economic structure.

Disadvantages of MNCs

Roses does not come without thrones. Disadvantages of having an MNCs in a developing

country like India are as under-

Page 18: Multinational Corporation

Competition to SMSI

Pollution and Environmental hazards

Some MNCs come only for tax benefits only

Exploitation of natural resources

Lack of employment opportunities

Diffusion of profits and Forex Imbalance

Working environment and conditions

Slows down decision making

Economical distress

Top MNCs in India

The country has got many M. N. C.s operating here. Following are names of some of the most

famous multinational companies, who have their headquarters of operational branches based in

the nation:

IBM: IBM India Private Limited, a part of IBM has been operating from this country since the

year 1992. This global company is known for invention and integration of software, hardware as

well as services, which assist forward thinking institutions, enterprises and people, who build a

smart planet. The net income of this company post completion of the financial year end of 2010

was $14.8 billion with a net profit margin of 14.9 %. With innovative technology and solutions,

this company is making a constant progress in India. Present in more than 200 cities, this

company is making constant progress in global markets to maintain its leading position.

Page 19: Multinational Corporation

Microsoft: A subsidiary, named as Microsoft Corporation India Private Limited, of the U. S.

(United States) based Microsoft Corporation, one of the software giants has got their headquarter

in New Delhi. Starting its operation in the country from 1990, this company has got the

following business units:

Microsoft Corporation India (Pvt.) Limited (Marketing Division)

Microsoft Global Services India

Microsoft Global Technical Support Centre

Microsoft India Development Center

Microsoft IT

Microsoft Research India

The net income of Microsoft Corporation grew from $ 14, 569 million in 2009 to $ 18, 760

million in 2010. Working in close association with all the stakeholders including the Government

of India, the company is committed towards the development of the Indian software as well as I.

T. (Information Technology) industry.

Nokia Corporation: Nokia Corporation was started in the year 1865. Being one of the leading

mobile companies in India, their stylish product range includes the following:

Normal mobile handsets

Smartphones

Touch screen phones

Dual sim phones

Business phone

Page 20: Multinational Corporation

The net sales of the company increased by 4 % in the last financial year with sales of EUR 42.4

billion as compared to 2009's EUR 41 billion. Over the past few years, this company in India has

been acquiring companies, which have got new and interesting competencies and technologies so

as to enhance their ability of creating the mobile world. Besides new developments to fight

against mineral conflicts, they are even to set up Bridge Centers in the country for supporting re-

employment. Their first onsite for the installation of renewable power generation are already in

place.

PepsiCo: PepsiCo. Inc. entered the Indian market with the name of PepsiCo India from the year

1989. Within a short time span of 20 years, this company has emerged as one of the fast growing

as well as largest beverage and food manufacturer. As per the annual report of the company in

the last business year, the net revenue of PepsiCo grew by 33 %. By the year 2020, this food

manufacturing company intends to triple their portfolio of enjoyable and wholesome offerings.

The expansion of their Good-For-You portfolio is believed to be assisting the company in

attaining the competitive advantage of the growing packaged nutrition market in the world,

which is presently valued at $ 500 billion.

Ranbaxy Laboratories Limited: Ranbaxy Laboratories Limited, one of the biggest

pharmaceutical companies in India, started their business in the country from the year 1961. The

company made its public appearance in 1973 though. Headquartered in this nation, this

international, research based, integrated pharmaceutical company is the producer of a huge range

of affordable cum quality medicines that are trusted by both patients and healthcare professionals

all over the world. In the business year 2010, the registered global sales of the company was US

$ 1, 868 Mn. Successful development of business forms the key component of their trading

strategy. Apart from overseas acquisitions, this company is making a continuous endeavor to

enter the new global markets, which have got high potential. For this, they are offering value

adding products as well.

Page 21: Multinational Corporation

Reebok International Limited: This global brand is a famous name in the field of sports as well

as lifestyle products. Reebok International Limited, a subsidiary of Adidas AG, is based in U. S.

A. (United States of America) started its operation in 1890s. During the last financial year,

Adidas's currency neutralized group sales increased by 9 %. Apart from their alliance with

CrossFit that is among the largest contemporary fitness movements, in the current year, Reebok's

announcement of its partnership with artist, designer and producer Swizz Beatz reflects its long

term future growth.

Sony: Sony India is a part of the renowned brand name Sony Corporation, which started their

business operation in the year 1946 in Japan. Established in India in November 1994, this

company has captured one of the leading positions in the field of consumer electronics goods. By

the end of the business year 2010 on 31st March, 2011, the company showed a remarkable

increase in the share related to numerous categories. Sony India is planning to invest around

INR. 150 crore for the marketing of the activities related to ATL and BTL. As far as Bravia TVs

are concerned, they are looking forward to hold their market share of 30 %. In between the last

and the current financial year, the number of their outlets in the country increased by 1, 000.

Tata Consultancy Services: Commonly known as T. C. S., this multinational company is a

famous name in the field of I. T. (Information Technology) services, Business Process

Outsourcing (B. P. O.) as well as business solutions. This company is a subsidiary of the Tata

Group. The first center for software researching was established in the country in 1981 in the city

of Pune. Tata Consultancy earned a growth of 8.9 % during the latest quarter of this financial

year, which ended on 30th September, 2011. This renowned company is presently looking

forward to the 10 big deals that they have received besides the Credit Union Australia's contract

as well as Government of Karnataka's INR. 94 crore deal for a total period of 6 years. In this

current business year, they are about to employ 60, 000 people to meet their business

requirement.

Page 22: Multinational Corporation

Vodafone: Vodafone Group Plc is an international telecommunication company, which has got

it's headquarter based in London in the United Kingdom (U. K.). Earlier known as Vodafone

Essar and Hutchison Essar, Vodafone India is among the largest operators of mobile networking

in the country. The parent company Hutchison started its business in the year 1992 along with

the Max Group, which was its business partner in India. Much later in 2011, Vodafone Group

Plc decided to buy out mobile operating business of Essar Group, its partner. The turnover of the

Vodafone Group Plc after the completion of the last financial year grew to £ 44, 472 m from £

41, 017 m that was the turnover of the business year 2009.

Tata Motors Limited: The biggest automobile company in India, Tata Motors Limited, is among

the leading commercial vehicles manufacturer in the country. They are one of the top 3

passenger vehicle manufacturers. Established in the year 1945, this company, a part of the

famous Tata Group, has got its manufacturing units located in different parts of the nation. Some

of their well known products of the company are categorized in the following heads:

Commercial Vehicles

Defence Security Vehicles

Homeland Security Vehicles

Passenger Vehicles

Post completion of the financial year 2010 to 2011, the global sales of the company grew by 24.2

% with sales crossing INR. 1MILLION

Page 23: Multinational Corporation

2012 Top Fortune Global 500 Companies (CNN Money

July 23, 2012 issue)

Rank Company Revenues (USD Mi) 1 ROYAL DUTCH SHELL 484,489

2 EXXON MOBIL 452,496

3 WALL MART STORES 446,950

4 BP 386,463

5 SINOPEC GROUP 375,231

6 CHINA NATIONAL PETROLEUM 338,356

7 STATE GRID 259,192

8 CHEVRON 245,621

9 CONOCCOPHILLIPS 237,372

10 TOYOTA MOTORS 235,269