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MULTINATIONAL CORPORATION

Introduction

A multinational corporation/ company is an organization doing business

in more than one country. Transnational company produces, markets,

invests, and operates across the world. It is integrated global enterprise

which links global with global market at profit. These companies have

sales offices and/ or manufacturing facilities in many countries. A

corporation (MNC) engages in various activities like exporting,

importing, manufacturing in different countries. MNCs have worldwide

involvement and global perspective in its management and decision-

making

1.MNCs consider opportunities throughout the globe through they do

the business in a few countries.

2.MNCs invest considerable portion of their assets internationally.

3.MNCs engage in international production and operate plants in the

number of countries.

4.MNCs take managerial decision based on a global perspective. The

international operations are integrated into the corporations overall

business.

MNCs are huge industrial/ business organizations. They extend their

industrial/ marketing operations through a network of branches or their

majority owned foreign affiliates. MNCs produce the products in one or

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few countries and sell them in most of the countries. Transnational

corporations produce the products in each country based on the specific

needs of the customers of that country and market these. A transnational

corporation mostly uses the inputs of the host country where it operates

unlike a multinational company. Large corporations having investment

and business in a number of countries, knows by various names such as

multinational corporations, international corporations and global

corporations have become

a very powerful driving force at the world‘s economy

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MEANING AND CHARACTERISTICS OF MULTINATIONAL

COMPANIES

Multinational company is the company which is registered in one

country but conduct its business operations in multiple countries. It

evolved during the 19th century.

First multinational company was formed in 1860 in U.S.A. At present

these companies are operating worldwide.

Multinational company are not only found in USA, but also in

many other countries like China, England, France, Germany, Japan,

South Korea etc. These companies are doing well in India also.

Multinational companies are also known as Trans-National

Corporations or the International Corporations or the Global

Giants.

Hindustan Lever Limited, Hero Honda, Reliance Infosys, etc. are

some examples of multinational companies operating in India.

Definitions of MNCs:

1) According to UNO, multinational companies means, “Those

enterprises which own or control production or service facilities

outside the country in which they are

based."

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2) According to International Labour Organisation “The essential

nature of the multinational enterprises lies in the fact that its

managerial headquarters are located in one country, while the enterprise

carries out operations in number of other countries‟.

3) According to N.H. Jacob, “A multinational corporation owns &

manages its business in two or more countries.”

Characteristics of Multinational Companies (MNCs)

The distinctive features of multinational companies are as follows.

1. Large Size:

A multinational company is generally big in size. Some of the

multinational companies own and control assets worth billions of

dollars. Their annual sales turnover is more than the gross national

product of many small countries.

2. Huge Capital:

These companies can easily raise huge capital by way of issuing

shares to general public, within & outside the country. They

exercise great degree of economic dominance. A large part of the

capital assets of the parent country are owned by the

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citizen‘s of the home country.

3. Worldwide operations:

A multinational corporation carries on business in more than one

country. Multinational corporations such as Coco cola has branches in

as many as seventy countries around the world.

4. International management:

The management of multinational companies are international in

character. It operates on the basis of best possible alternative

available anywhere in the world.Its local subsidiaries are managed

generally by the nationals of the host country. For example the

management of Hindustan Lever lies with Indians. The parent company

Unilever is in The United States of America.

5. Mobility of resources:

The operation of multinational company involves the mobility of

capital, technology, entrepreneurship and other factors of production

across the territories.

6. Integrated activities:

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A multinational company is usually a complete organisation comprising

manufacturing, marketing, research and development and other

facilities.

7. Several forms:

A multinational company may operate in host countries in several ways

i.e., branches, subsidiaries, franchise, joint ventures. Turn key projects.

8. Centralized Control:

These multinational companies have their branches worldwide.

They control all its branches through head office which is situated in

home country of those companies.

9. Employment:

It provides with employment opportunities to a large number of

unemployed individuals in the respective countries of their

operation. In 2006, foreign affiliates of MNCs

employed over 73 million people, compared to 25 million in 1990.

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Classification of MNCs:

MNCs can be classified on the basis of several criteria, such as

function, control, investment, origin, turnover, products, etc.

On the basis of functional criterion, the MNCs are broadly grouped into:

1. Service MNCs:

A service MNCs is defined as a transnational company which derives

more than 50 per cent of its revenues from services. Service MNCs are

found in areas such as banking, insurance, finance, transport, tourism,

etc.

2. Manufacturing MNCs:

A Manufacturing MNCs is one which derives at least 50 per cent

of its revenue from manufacturing activity. A large number of

MNCs has entered into the manufacturing sector. Out of the top 200

MNCs, 118 firms are manufacturing MNCs. They produce a variety of

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goods. For example, Parry and Cadbury Fry produce Chocolates,

Colgate and Palmolive produce soaps and detergents, Ponds -

cosmetic goods, Olivetti -Teleprinting equipments, Dunlop, Good

Year, Ceat-tyres and tubes.

3. Trading MNCs:

A trading MNCs is the one which derives at least 50 per cent of its

revenue from trading activity. These are the oldest form of

multinationals. Trading MNCs control about 60 per cent of the

world's export trade. Tatas, Liptons, Brooke Bond, Hindujas etc.

are the trading MNCs.

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IMPORTANCE OF MNC’S AND THEIR BENEFITS

TO HOME/HOST COUNTRIES:

Importance of MNC’s

1) Economic Development: The Developing countries need both

foreign capital and technology to make use of available resources

for economic and industrial growth. MNCs can provide the required

financial, technical and other resources to needy countries in

exchange for economic gains.

2) Technology Gap: MNCs are the instruments of transfer of

technology to the host country. Technology is necessary to bring

down cost of production and produce quality goods on a large scale.

The services of MNCs can be of great help to bridge the technological

gap between developed and developing countries.

3) Industrial Growth: MNCs are dynamic and offer growth

opportunities for domestic industries. MNCs assist local producers to

enter the global markets through their well established international

network of production and marketing. And there by ensure industrial

growth.

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4) Marketing Opportunities: MNCs have access to many

markets in different countries. They have the necessary skills and

expertise to market products at international level. For example, an

Indian Company can enter into Joint Venture with a foreign company to

sell its product in the international market

5) Work Culture: MNCs introduces a work culture of excellence,

professionalism and fairness in deals. The sole objective of

Multinational is profit maximisation. To achieve this, they use

various strategies like product innovation, technology up gradation,

professional management etc.

6) Export Promotion: MNCs assist developing countries in

earnings foreign exchange. This can be done by promoting and

developing export oriented and import substitute industries.

7) Tax Revenues: For the host country, there is a likelihood that the

MNC will have to be subject to the tax regime in that country. As a

result, many MNCs pay large sums in taxes to the host government. In

less developed countries the problem might be that there is a large

amount of corruption and bad governance and as a result MNCs might

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not contribute the tax revenue they could and even if they do it might

not find its way through to the government itself.

8) Improvements in Infrastructure: In addition to the investment

in a country in production or distribution facilities, a company

might also invest in additional infrastructure facilities like road,

rail, port and communications facilities. This can provide benefits

for the whole country.

9) Raising Standards: Multinational corporations bring about

competition in the foreign markets they venture in. Multinationals

produce goods and services that adhere to the best possible standards.

Since consumers are willing to spend their money on only the best

products, local businesses are forced to improve on the quality of

their products. This competition to produce good quality ends up

benefiting consumers who get good value for their money

10) Job Creation: Multinational corporations play a big role in

creating employment in the foreign countries they venture in.

Because of their massive operations, they employ many local people

in those countries to work there. They also employ some to work in

their headquarters, thereby giving foreign nationals a chance to

gain international career exposure. In 2006, foreign affiliate of

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MNCs employed over 73 million people, compared to 25 million in

1990. Greater part of increase of employment in foreign affiliates in

recent times has taken place in developing countries.

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.

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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

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

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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 host countries

to grow. Even consumers get new goods and services due to the

operations of MNC’s.

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DEMERITS OF MULTINATIONAL COMPANIES (MNC’S)

1) Profit maximization: The basic purpose of MNCs in the

maximization of profit through exploitation of host country's

resources. MNCs hardly bother about the economic development of

the host country.

2) Plunder of wealth: MNCs plunder wealth to their home

countries in the form of transferring the huge amount of foreign

exchange gamed through royalties, fees, dividends etc. to their home

countries.

3) Useless transfer of technology: The technology transfer which takes

place is of the nature of capital intensive and import oriented which

doesn't suit to the underdeveloped countries. Generally it is observed

that the MNCs do not transfer their advanced technology to the

underdeveloped countries.

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4) Effect on Employment: Employment might not be as extensive

as hoped, many jobs might go to skilled workers from other countries

rather than to domestic workers.

Moreover, the amount of new jobs are created depends on the

type of investment. Investment into capital intensive production

facilities might not bring as many jobs to an area as hoped.

5) Misuse of weak Government: The size and power of multinationals

can be used to exploit weak or corrupt governments to get better deals

for the MNC. The MNCs may use their economic power to turn the

political table in their own favour. They may even see to it that the

choicest party Govt. should get elected by hook or crook.

6) Undermining Local Cultures and Traditions: The MNCs have

been criticized for their business strategies and practices in the ho st

countries. They may undermine local cultures and traditions, change

the consumption habits of the people for their benefit against the

long term interest of the local community, promote conspicuous

consumption, and dump harmful products in the developing countries.

7) High tempo of show and advertisement:- The MNCs may take

undue advantage of their financial strength in terms of lavishly

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spreading the huge amount in unnecessary showrooms and

advertisement as a result of which the prices of goods zoom like

anything in the host country.

8) Repatriation of profits: Profits might go back to the headquarters of

the MNC rather than staying in the host country. Hence, the benefits

might not be as great. These funds will not be beneficial for the

domestic country which is allowing MNCs to establish their

base in the home country.

9) Destruction of Local Industries: Multinationals usually have more

money in terms of capitalization than local businesses. This means

that they are able to finance operations for a long time even without

making a profit in the knowledge that, once they have developed brand

loyalty, they will start making sustainable profits thereafter. This

means that they can deliberately set very low prices so as to take the

market share of the companies they have found in that market. This

may therefore lead to the local companies to close down as they

cannot afford to charge these low prices.

10) BOP Problem: The MNCs transfer the technology which is import

oriented due to which the host countries imports increase . On the

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contrary due to high prices prevailing in the host country its exports

curtail. Thus the B.O.P. problem gets aggravated.

11) Monopoly: The MNC's being the joint companies establish

their monopolies and iron out competition in the host country.

12) Evasion of taxes: The MNC's may evade the taxes by manipulating

their accounts.In the era of Liberalization we are not suppose to

look towards MNCs as a agents of exploitation but they also act as

agents of development by helping the host countries to increase

domestic investment and employment generation, boost exports, transfer

of technology and accelerate economic growth.

What is needed is to have a proper code of conduct for MNCs and an

effective competition policy and law in the host countries.

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

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Japanese. THE 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

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

market territories.

2) Market superiorities: -

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.

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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.

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

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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.

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Multinational Companies(MNC's) Impact on Indian Economy.

MNC may be defined as a company, which operates in number of

countries and has

production and service facilities outside the country of its origin. They

are also called Trans

National Company (TNC) Their activities have both good and bad

impacts on the economy. They take decisions on a global context or

basis. Their maximum profit objectives take no account of the reactions

produced in the countries felling in their orbit. They operate in different

institutional forms Some are: Subsidiaries companies wholly owned by

MNC in other countries Subsidiary company enter into joint venture

with a company another company Agreement among companies of

different countries regarding production and discussion of market.

Development and Activities: Soon after independence foreign capital

entered India in the form of direct investments through MNC's

Companies had been formed in advanced countries with the specific

purpose of operating in India. Such companies started their subsidiaries,

branches and affiliates in India . At times government gave some tax

concession to them with in the FERA (Foreign Exchange Regulation

Act) and streamlined the licensing procedures. The purpose was to

secure advanced, technical and industrial know how. During the janata

rule the policy was outright purchase of technical know how skills and

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machinery. They took two major decisions. Coco cola was asked to

wind up their operation . Asked IBM to reduce their foreign equity to

40%. They did not agree, so asked to wind up MNC's operate in several

sectors like tobacco, toiletries beverages etc.

Industrial Policy of 1991 accepted foreign investment essential for

modernization

technology up gradation and industrial development. Several

concessions were given FERA

regulations were liberalized and permitted to use their trademarks in the

domestic market. Now has become a wide spread phenomena with USA

the biggest among them. Recently a large number of Indian brands were

taken over by them some important takeovers are

Asian Paints ICI (UK)

Premier Automobiles transferred two plants to Peugeot (France)

Lakeme brand by Lever.

Hero Honda by TVS Suzuki etc.

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

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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.

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.

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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-

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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:

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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.

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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.

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

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Post completion of the financial year 2010 to 2011, the global sales of

the company grew by 24.2 % with sales crossing INR. 1MILLION

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

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.

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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.

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