Upload
samrulezzz
View
221
Download
0
Embed Size (px)
Citation preview
8/6/2019 Trading and Investing in International Market
1/69
Chapter 2
Trading and Investing in
International Market
8/6/2019 Trading and Investing in International Market
2/69
Outline of the chapter
Meaning and nature of foreign
investment Forms or types of foreign investment
Need of foreign investment
Advantages & disadvantage of FDI FDI and India
Multinational Corporations (MNCs)
Reasons for growth of MNCs Advantages & disadvantages of MNCs
8/6/2019 Trading and Investing in International Market
3/69
After the II World War, the developing countries aremaking concerted efforts to achieve rapid economicdevelopment removing unemployment and poverty.
The developing countries like India have been facingthe problem of shortage of capital, to meet thisshortage, capital flows are very essential to economicgrowth of our country.
Foreign governments, private foreign investors &
international institutions such as World Bank, IMF,ADB etc important sources of foreign investments.
Russia, China, America, France, Germany& others haddevelopment after foreign capital assistance.
8/6/2019 Trading and Investing in International Market
4/69
Industrialization &
Economic Development
Breaking ViciousCircle of Poverty
Technological Transformation
Development of Infrastructure
Development of Heavy
Industries
Employment Generation
Removing BOP deficit
Role oforeign Capital
8/6/2019 Trading and Investing in International Market
5/69
8/6/2019 Trading and Investing in International Market
6/69
1. Vital role in the industrialization andeconomic development
Nearly every developed countries had takenassistance from foreign capital in its earlystage development.
England borrowed from Holland in the
17th
and 18th
century now it assistingalmost all countries of the world.
The USA, now the richest country in theworld borrowed heavily in the 19th
century. India and China are also developed
substantially with the help of foreigncapital.
8/6/2019 Trading and Investing in International Market
7/69
2. Break the vicious circle of poverty
The less developed countries are caught in
a vicious circle of poverty. There is low per capita income and,
therefore, low rate of saving and low rate ofinvestment which again results in low per
capita income etc. Thus, the foreign capital flows for a
developing country would help infilling he gap between the rate of
savings and the required rate ofinvestment for sustained andaccelerated growth of the economy.
8/6/2019 Trading and Investing in International Market
8/69
3. Technological transformation
Backward and developing countries of the world sufferfrom technological backwardness.
They are characterized by low productivity of labour andcapital due to abundance of unskilled labour andobsolete capital equipment.
The inflow of capital from advanced countries
apart from removing capital deficiencies, bringsin advanced technology and skills, organizationalexpertise and market management.
At present, India is fairly advanced intechnological development with the help of USA,UK, France, Germany and Japan etc.
8/6/2019 Trading and Investing in International Market
9/69
4. Development of adequate infrastructure
Development of adequate infrastructure is a
necessary condition for further economicdevelopment and growth.
The growth process in the LDCs remainhindered on account of the absence of
economic and social infrastructure transport and communication, irrigation, power, educational, training andresearch institutions etc.
These infrastructural facilities developedthrough foreign capital
8/6/2019 Trading and Investing in International Market
10/69
5. Development of heavy and basicindustries
Foreign capital immensely helps thedeveloping countries in thedevelopment of heavy and basicindustries.
LDCs will not be in a position to invest ontheir own and establish and develop basicand heavy industries.
All these industries have higher capitalintensity and a long gestation period.
It is only through a substantial inflow offoreign capital that the developingcountries can hope to develop heavyindustries
8/6/2019 Trading and Investing in International Market
11/69
6. Greater employment opportunities
Foreign capital provides greater employment
opportunities in the economy.
As foreign capital builds up the necessaryinfrastructure, assists in setting up of heavy andbasic industries employment generations.
Foreign capital can modernize agriculture throughnew farm machinery and also chemical fertilizers,besides new methods of cultivation.
8/6/2019 Trading and Investing in International Market
12/69
Foreign Investment
oreign Direct InvestmentPortfolio Investment
Investment by FIIsInvestment in GDRS,
FDRS, FCCBs etc
Wholly ownedsubsidiary
Joint VentureAcquisition
8/6/2019 Trading and Investing in International Market
13/69
Forms of Foreign
CapitalForeign Direct Investment (FDI)
Foreign Collaboration
Inter Government Loans
Loans from International Institution
External Commercial Borrowings
Portfolio Investment
8/6/2019 Trading and Investing in International Market
14/69
1. Foreign Direct Investment (FDI)
Foreign direct investment means investment in aforeign country where the investor retains control
over the investment.The Head Office is in the investing country and
Operations are in the developing countries
The FDI is the investment in the construction ofphysical capital such as building factories &
infrastructure power, telecom, port etc. The FDI not only have the ownership of assets, but
also control the activities that generate the incomeflows in the recipient country.
8/6/2019 Trading and Investing in International Market
15/69
The investor are not only concentratedon physical capitaland
infrastructure but also investing onbuying equities, bonds or othersecurities aboard.
FDI are governed by long termconsiderations because theseinvestments cannot be easily
liquidated. Foreign direct investors have direct
responsibility with the promotion andmanagement of the enterprise.
8/6/2019 Trading and Investing in International Market
16/69
2.Portfolio Investment Portfolio investments are generally much
sensitive than FDIs. When the investor makes only
investment and does not retain controlover the enterprise portfolioinvestment.
The investor is interested only in returnon his capital and does not want controlover the use of the invested capital.
Portfolio investment is for a short period &is influenced by short term gains.
Portfolio investors have no directresponsibility for promotion &management of the enterprises.
8/6/2019 Trading and Investing in International Market
17/69
The LDCs strongly preference for the portfolioinvestment rather than foreign directinvestment due no control over themanagement.
There are mainly two routes of portfolio investments inIndia Foreign institutional investors (FIIs), Mutualfunds and GDRs.
Global Depository Receipts (GDRs) American Depository Receipts (ADRs) &
Foreign Currency Convertible Bonds (FCCBs)
8/6/2019 Trading and Investing in International Market
18/69
Foreign Direct Investment
1.Long term gains
2.Direct control on
particularcompany/industry
3. Less liquidity
4. Long term finance
Portfolio Investment
1.Short termgains
2.No control oncompany/industry
3. More liquidation
4. Short term
finance
Difference between FDI & PI
8/6/2019 Trading and Investing in International Market
19/69
2. Foreign Collaboration
In recent years there has beenjoint participation
of foreign & domestic capital.
India has been encouraging this form of import offoreign capital.
There are three types of foreign collaboration
1. Joint participation between private parties
2. Foreign firms & Indian Government
3. Indian Government & foreign government
8/6/2019 Trading and Investing in International Market
20/69
3. Inter government loans
Since the second world war, there hasbeen a growing tendency towardsdirect inter government loans &grants.
Marshall Aid was a massivesystems of American Aid given to thewar devasted European countries tore-constructing their economies.
Other advance countries providegrants & loans to government ofless developed countries.
8/6/2019 Trading and Investing in International Market
21/69
4. Loans from international institutions
World Bank & its affiliates (IBRD)
International Monetary Fund (IMF)
Asian Development Bank (ADB)
International Development Association (IDA)
5. External Commercial Borrowing (ECB)
India has also been tapping export creditagencies like the
US Exim Bank
Japanese Exim Bank ECGC of the UK.
8/6/2019 Trading and Investing in International Market
22/69
FDI Flow by Region
8/6/2019 Trading and Investing in International Market
23/69
Need for foreign capital
1. Sustaining a high level of investment
Economic Development2. The technological gap transfer of
technology
3. Exploitation of natural resources
4. Undertaking the initial risk
5. Development of basic economicinfrastructure
6. Improvement in the balance of paymentsposition.
8/6/2019 Trading and Investing in International Market
24/69
1. Sustaining a high level of investment
Since the under developed countries want to
industrialize themselves within a short periodof time, it is necessary to raise foreigninvestmentsubstantially.
However, because of general poverty ofmasses & unemployment - low level ofsavings
Hence emerges a resource gap between
investment & savings this gap has tobe filled up through foreign capital.
8/6/2019 Trading and Investing in International Market
25/69
2. The technological gap (technological transfer)
The under developed countries have very low level oftechnology as compared to the advanced countries.
However, they possess a strong urge for industrialization todevelop machineries ,tools & equipments.
Such technology usually comes with foreign capital.
3. Exploitation of natural resources
A number of LDCs possess huge mineral resources which
await exploitation These countries themselves do not possess the required
technical skill & expertise to accomplish this task.
As a consequence, they have to depend upon foreigncapital to undertake the exploitation of their mineral
wealth.
8/6/2019 Trading and Investing in International Market
26/69
4. Undertaking the initial risk
Many LDCs suffer from acute scarcity of
private entrepreneurs. This creates obstacles in theprogramme of industrialization.
An argument advanced in favour of theforeign capital is that is understandsthe risk of investment in the hostcountries & that provides the much
needed impetus to the process ofindustrialization.
8/6/2019 Trading and Investing in International Market
27/69
5. Development of basic economicinfrastructure
The domestic capital of the LDCs countries is
often too inadequate to build up the economicinfrastructure on its own.
These LDCs require the assistance offoreigncapital to undertake this task.
In the mid of the 20th century especially during thelast 3 4 decades, international financialinstitutions & international government ofadvanced countries have made substantial capital
available to the LDCs.
8/6/2019 Trading and Investing in International Market
28/69
6. Improvement in the balance ofpayments position
In the initial phase of their economicdevelopment, the LDCs needs much largerimports (machines, capital goods,industrial raw-materials, spares &
component) than export. As a result, the BOP generally turn adverse.
This creates a gap between the earnings
and expenditure of foreign exchange.Balance BOP imports = exports
Surplus BOP exports > imports
Deficit BOP exports < imports
8/6/2019 Trading and Investing in International Market
29/69
FDI in India
FDI has been expanding rapidly in
India, especially since economicliberalisation in July 1991 LPG
Despite increase in the absolute amount of
FDI inflows, Indias share in the totalFDI inflow in less developed countrieshas been less than 1%.
Actual FDI inflow has been much less than
the FDI approved by the government actual flow of FDI less than approvals
8/6/2019 Trading and Investing in International Market
30/69
The share of Indias FDI in total privateinvestment has also been low despite a hugedomestic market and an open door policy
towards FDI. According to the World Investment Reportpublished by UNCTAD, India ranked 119th on thebasis of FDI performance index (0.2).
This shows India receives much less FDI thanwhat is expected from its relative size.
Most of the barriers to FDI are built into the countryseconomic, political and social system.
Strong institutional and administrative reforms arerequired to break the barriers.
8/6/2019 Trading and Investing in International Market
31/69
1 63 9
6 5
1 , 3
2 , 1
2 , 7
3 , 6
3 , 0
2 , 4
2 , 9
4 , 2
3 , 1
2 , 6 2 , 6
3 , 7
2
0
5 0 0
1 0 0 0
1 5 0 0
2 0 0 0
2 5 0 0
3 0 0 0
3 5 0 0
4 0 0 0
4 5 0 0
1 9 9 1 -
9 2
1 9 9 2 -
9 3
1 9 9 3 -
9 4
1 9 9 4 -
9 5
1 9 9 5 -
9 6
1 9 9 6 -
9 7
1 9 9 7 -
9 8
1 9 9 8 -
9 9
1 9 9 9 -
2 0 0 0
2 0 0 0 -
0 1
2 0 0 1 -
0 2
2 0 0 2 -
0 3
2 0 0 3 -
0 4
2 0 0 4 -
0 5
2 0 0 5 -
0 6
2
India: Year wise FDI inflow
US$
Millions
Years
8/6/2019 Trading and Investing in International Market
32/69
1 6 3 9 6 5 1 , 3 2 , 12 , 7 3 , 6 3 , 0 2 , 4 2 , 9 4 , 2 3 , 1 2 , 6 3 , 7 2 , 1
3 5 , 5
05 0 0 0
1 0 0 0 01 5 0 0 02 0 0 0 02 5 0 0 0
3 0 0 0 03 5 0 0 04 0 0 0 0
1991-92(AugMarch)1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-20002000-01
2001-02
2002-03
2003-04
2004-05
2005-06
GrandTotal
India: Year wise FDI inflow
8/6/2019 Trading and Investing in International Market
33/69
Nameof the regions 1980 1985 1990 1995 2000 2005 2008
World 55,262 57,959 201,594 342,592 1,411,366 945,795 1,697,353
Developed 47,575 43,748 165,627 222,000 1,146,238 590,311 962,599
Developing 7,664 14,197 35,892 115,963 256,088 314,316 620,733
Asia 663 5,421 22,642 80,008 148,333 208,744 387,828
South Asia 203 173 575 2,808 4,658 9,866 50,669
India 79 106 237 2,151 3,585 6,676 41,554
Global Trends of Foreign Direct Investmentinward during 1980 2008
(US $ in Mi
Share of top investing countries FDI inflow in India
8/6/2019 Trading and Investing in International Market
34/69
Sl No. Country August 1991 toMarch 2002
2002-03 (April-March)
2003-04 (April-March)
2004-05 (April-March)
2005-06 (April-Sept)
Cumulative inflows(from Aug 1991 to Sept2005)
% age withinflow
1. Mauritius 27,446(6,632)
3,766(788)
2,609(567)
5,141(1,127)
3,882(882)
42,844(10,096)
35.55
2. U.S.A. 12,248(3,188)
1,504(319)
1,658(360)
3,055(668)
1,409(320)
19,974(4,856)
16.49
3. Japan 5,099(1,299)
1,971(412)
360(78)
575(126)
342(78)
8,348(1993)
6.93
4. Netherlands 3,856(986)
836(176)
2,247(489)
1,217(267)
161(37)
8,317(1,954)
6.90
5. U.K. 4,263(1,106) 1,617(340) 769(167) 458(101) 843(192) 7,950(1,905)6.60
6. Germany 3,455(908)
684(144)
373(81)
663(145)
167(38)
5,343(1,317)
4.43
7. Singapore 1,997(515)
180(38)
172(37)
822(184)
521(118)
3,690(893)
3.06
8. France 1,947(492)
534(112)
176(38)
537(117)
35(8)
3,229(768)
2.68
9. South Korea 2,189(594)
188(39)
110(24)
157(35)
26(6)
2,669(698)
2.21
10. Switzerland 1,200(325)
437(93)
207(45)
353(77)
170(39)
2,366(579)
1.96
Total 92,611
(23,829)
14,932
(3,134)
12,117
(2,634)
17,138
(3,754)
9,553
(2,171)
1,46,351
(35,522)
-
Share of top investing countries FDI inflow in India
8/6/2019 Trading and Investing in International Market
35/69
Sl No. Sectors2006-07 (Apr
March)
2007-08 (Apr
March)2008-09 (Apr
March)2009-10 (Apr
Nov)Cumulative
inflow (April 00to Nov 10)
% age to totalinflow (in termsof US$)
1. Service Sector(financial & non financial)
21,047(4,664)
26,589(6,615)
28,411(6,616)
20,958(4,392)
105,411(23,640)
21%
2. Computer Software &Hardware
11,786(2,614)
5,623(1,410)
7,329(1,677)
4,350(919)
43,846(9,872)
9%
3. Telecommunication 2,155(478)
5,103(1,261)
11,727(2,558)
12,338(2,554)
40,706(8,931)
8%
4. Housing & Real Estate 2,121(467) 8,749(2,179) 12,621(2,801) 13,586(2,844) 37,369(8,357) 8%
5. Construction Activities 4,424(985)
6,989(1,743)
8,792(2,028)
13,544(2,868)
35,721(8,059)
7%
6. Power 713(157)
3,875(967)
4,382(985)
6,908(1,437)
20,919(4,627)
4%
7. Automobile Industry 1,254
(276)
2,697
(675)
5,212
(1,152)
5,609
(1,177)
20,677
(4,565)
4%
8. Metallurgical Industries 7,866(173)
4,686(1,177)
4,1,57(961)
1,935(407)
13,440(3,130)
3%
9. Petroleum & Natural Gas 401(89)
5,729(1,427)
1,931(412)
1,328(272)
11,504(2,666)
2%
10. Chemical (other than fertilizers) 930
(205)
920
(229)
3,427
(749)
1,707
(362)
11,274
(2,496)
2%
Sector wise FDI flow toIndia
8/6/2019 Trading and Investing in International Market
36/69
Advantages of Foreign Direct Investment
1. Enhance the level of economic development
Financing infrastructure, manufacturing and servicessector.
2. Transfer of technology
Transforming machinery, tools & equipmentto hostcountries.
It helps to reduce cost & improve quantity& qualityof products.
3. Managerial revolution of host countries improving entrepreneurship abilityBoostingemployment & income of host countries
8/6/2019 Trading and Investing in International Market
37/69
4. Boosting Employment & income of host country
Increasing number industries
Huge production increases income taxation.
5. Conservation of foreign exchange
It helps the host countries to increasing export &reducing imports
This results improve its BOP position.
Impact ofeconomic liberalization in - 1991 - dueto foreign exchange crisis.
6. FDI increase competition & break downmonopolies in the host countries.
7. Improving Standard of Living.
8/6/2019 Trading and Investing in International Market
38/69
Disadvantages of FDI1. FDI ignores the welfare of host
countries profit motives.2. Balance of Payment crisis of the host
countries withdrawing dividends,profits and interest.
3. Negative impacts on domestic firms due to large & massive industrial base -competition
4. Adverse impact on domestic savings& terms of trade of host countries.
5. FDI may involve costs & risks for thehome countries employmentopportunities may shrink & BOP maysuffer due to FDI.
8/6/2019 Trading and Investing in International Market
39/69
Costs and Benefits of FDI
FDI has its costs and benefits to the homecountry as well as host country.
Benefits to Home Country
1. Inflow of foreign currencies in the form ofdividend, interests etc Positive balance
of payments.2. FDI increases export of machinery,
equipment, technology etc from the homecountry to the host country. This is turn
enhances the industrial activity of thehome country.
3. The increased industrial activity in the homecountry enhances employment
opportunities.
8/6/2019 Trading and Investing in International Market
40/69
4. The firm and other home country firms can learnskills from its exposure to the host countryand transfer those skills to the industry in thehome country.
Costs to Home Country
1. There are costs to the home country, in addition
to benefits from the FDI. They include2. Home countrys industry and employmentposition are at stake when the firms enterforeign markets due to low cost labour.
3. Current account position of the homecountry suffers as FDI is a substitute fordirect exports.
8/6/2019 Trading and Investing in International Market
41/69
Benefits to Host Country
1. Resource transfer effects
the resources which are scarce in host country aretransferred from the foreign country foreigncapital, technology, machinery and equipment,management and organisation.
Transfer of these resources develop the host country
economically and socially.
Indian government has been encouraging theFDI after 1991 to develop the Indian industry,infrastructure and service sectors.
8/6/2019 Trading and Investing in International Market
42/69
2. Employment Effects
The FDI contributes for the establishment of newindustries and business directly and for the
employment of existing economic activity. Further, FDI helps for the developing of ancillary
industries. These developments invariablyincrease the employment opportunities for thepeople of the host country.
3. Balance of Payment Effects
BOP position and foreign exchange resources arevery crucial from the view point of externalsituation of a country.
India faced severe foreign exchange resourcecrunch and thereby unfavorable BOP before July1991.
8/6/2019 Trading and Investing in International Market
43/69
Cost to Host Country
Though the FDI benefits the host country and
also cost the host country. Its costs are in the form of intensifying
competition, negative effects on BOP andimpact on national sovereignty and
autonomy.1. Intensifying Competition ForeignMNCs have more competitive abilities inview of their large size, resource base and
widespread operation than that of thedomestic companies.
Hence, they pose severe competition andthreat to the domestic companies.
8/6/2019 Trading and Investing in International Market
44/69
2. Negative Effects on the BOP Foreign companies affect the BOP of the host
country in three ways.
1. Foreign companies repatriate the dividends totheir home countries that affects the currentaccount foreign firms may purchase and sellthe machinery and equipment that affect thecapital account transaction.
2. The MNC in the host country imports the goodsfrom its subsidiaries from other countries these imports result in a debit on thecurrent account of the BOP of the hostcountry.
3. National Sovereignty and Autonomy Some of the host governments fear FDI as itaffects the sovereignity and autonomy of thecountry.
l i i l C i ( CS)
8/6/2019 Trading and Investing in International Market
45/69
Multinational Corporations (MNCS)
In simple terms, a MNCs is an entrepreneursthat carries on business operations - more
than one country 6 nations The multinational corporations are also
called different names such as internationalcorporation, transnational corporations and
global corporations etc.
MNCs occupies an important place in theglobalization era.
According to the WIR, 2007 there are more than79,000 MNCs with about 7.9 lakh affiliates.
1/3 these affiliates were in developedcountries China was host about 2.8 lakh &
India has 1,800 affiliates.
8/6/2019 Trading and Investing in International Market
46/69
Now multinational corporation account for a significantshare of the worlds investment, production,employment & trade.
According to ILO report The essential nature of theMNCs lies in the fact that its marginal head quartersare located in one country while enterprisecarries out operations in a number of othercountries (Home country & host countries).
Instead of aiming for maximisation of their profitsfrom one or two products, the MNCs operate in anumber of fields and extended over a number ofcountries.
USA, Japan, Germany, France, Italy, UnitedKingdom, Brazil & Canada.
i i i i i h d i
8/6/2019 Trading and Investing in International Market
47/69
MNCs engages in various activities such as - production,marketing, exporting, importing of manufacturing etc.
Obviously, MNCs is a corporation that controls production facilities in more than one or more than
two countries, such facilities having been acquiredthrough the process of foreign direct investment.
Although the MNCs took birth in the early 1860s, itwas after the II World War that multinationals havegrown rapidly.
In the early days, the USA was the home of most ofthe MNCs. Now there are a large number of Japaneseand European multinational
South Korea Samsung, Hyundai, LG & Daewoo.
Japan Toyota Motor & Nippon Telegraph &
Telephone.
8/6/2019 Trading and Investing in International Market
48/69
Characteristics of MNCs
1. MNCs carries business activities/operation in more thanone country for example coca-cola, IBM, Lipton etc.
2. The Head Office in one country but have theirbusiness connection in several countries Globalbusiness connections
3.Huge Capital - These enterprises posses large capital& invest funds in their business activities globally.
4.Monopoly - These enterprises has monopoly power inmarkets & goods & services.
5. MNCs focus on many areas like production, Investment,Marketing etc.
6.Worldwide operation MNCs operating almost all the
countries of the world dominated by USA, Japan &European Union
7.Sophisticated technology large scale production atworldwide.
8/6/2019 Trading and Investing in International Market
49/69
Types of MultinationalCorporations
MNCs
Branches
Franchis
e
JointVenture
SubsidiaryCompanies
8/6/2019 Trading and Investing in International Market
50/69
Few examples of MNCs
1.Electronic Products: national,
Philips, LG etc.2.Computer: IBM.
3.Software: Microsoft.
4.Cosmetics: Ponds, Revlon, Procter &Gambler.
5.Paint:Johnson & Nicholson.
6.Tea: Lipton & Tetley.
7.Car: Honda, Suzuki etc.
8.Drugs: Ranbaxy, Glaxo.
Th W ld l t MNC t i i
8/6/2019 Trading and Investing in International Market
51/69
Rank Name of the countries No. of MNCs
1. European Union 1632. United States of America 162
3. Japan 67
4. France 385. Germany 37
6. United Kingdom 34
7. China 16
10 South Korea 14
11. Switzerland 13
16. India 7
The World largest MNCs country-wise in
2008
T 10 2008 F t 500 C i
8/6/2019 Trading and Investing in International Market
52/69
Rank Company
2007 (Revenuesin $ millions)
2007 Profits ($millions)
1. Wal-Mart Stores 378,799 12,731
2. Exxon Mobil 372,824 40,610
3. Royal Dutch Shell 355,782 31,331
4. BP 291,438 20,845
5. Toyota Motor 230,201 15,042
6. Chevron 210,783 18,688
7. ING Group 201,516 12,649
8. Total 187,280 18,042
9. General Motors 182,347 -38,732
10 Conoco Phillips 178,558 11,891
Top 10 2008 Fotune 500 Companies
2008 Fortune 500 Indian Company
8/6/2019 Trading and Investing in International Market
53/69
Country
Rank Company
GlobalRank
2007Revenues ($
millions)
1. Indian Oil 116 57.427
2. Reliance Industries 206 35.915
3. Bharat Petroleum 287 27.873
4. Hindustan Petroleum 290 27.718
5. Tata Steel 315 25.707
6. Oil and Natural Gas 335 24.032
7. State Bank of India 380 22.402
2008 Fortune 500 Indian Company
8/6/2019 Trading and Investing in International Market
54/69
Reasons forGrowth of MNCs
Marke
tExp
ansio
nMarket
Superiorities
Technological
SuperioritiesFin
ancia
l
Supe
riorities
8/6/2019 Trading and Investing in International Market
55/69
Reasons for the Growth of MNCs1. Market expansion
2. Financial Superiorities
3. Market Superiorities
4. Technological Superiorities
8/6/2019 Trading and Investing in International Market
56/69
1. Market Expansion
The growth of GDP & PCI in various countriesled to increasing demand for goods & services.
Companies in developed economies, expandedtheir operations overseas to exploit theexpanding markets abroad.
8/6/2019 Trading and Investing in International Market
57/69
2. Financial Superiorities
MNCs are financially superior to domestic
companies in the following respects.1. Huge financial resources
2. More effective economic utilization offunds through transfer of excess funds
from one country to another.3. Easy access to foreign capital
markets.
4. Easy mobilization of high quality of
resources of different types.5. Access to international banks &
financial institutions.
8/6/2019 Trading and Investing in International Market
58/69
3. Marketing Superiorities
1.Availability of more reliable & up-
to-date information about marketconditions.
2.Reputation in the market due to
proper brands & image.3.More effective advertising & salespromotion techniques.
4.Wide distribution network.5.Quick transportation &
warehousing facilities.
4 T h l i l S i iti
8/6/2019 Trading and Investing in International Market
59/69
4. Technological Superiorities
Developing countries do not have the resources todevelop advanced technology & the level of
industrialization is low. They are unable to exploit their rich mineral
& other natural resources due to shortage offunds & low level technology.
They do not have adequate foreign exchangeresources to import raw-materials, capital,equipment & technology on their own.
They face difficulty in marketing theirproducts in highly competitive world markets.
8/6/2019 Trading and Investing in International Market
60/69
Advantages of MNCs
1. Benefits to the Host country
2. Benefits to the Home country
Disadvantage of MNCs
1. Cost and Risks to the hostcountry
2. Dangers to home country
8/6/2019 Trading and Investing in International Market
61/69
Benefits to the Host country
1.The levels of investment,employment & income increase dueto the operation of MNCs.
2.MNs help in the growth of ancillary &
service industry thereby increasingindustrialisation & economicdevelopment.
3.MNs bring advanced technology tothe host country.
8/6/2019 Trading and Investing in International Market
62/69
4. Business firms in the host country getsophisticated management techniques &practices.
5. MNs enable the host country to increase itsexports & reduce the imports.
6. Domestic industry gets the benefit of R & Dsystems of MCs. Their capability of invention
& innovation increases.7. MCs increase competition & breakdomestic monopolies.
8. MNs help to integrate national economiesboth economically & culturally.
8/6/2019 Trading and Investing in International Market
63/69
Benefit to the Home country
1.The products manufactured in the
home country can be easily marketedthroughout the world.
2.Employment opportunities for homecountry people are increased both athome & abroad.
3.The level of industrial activity in thehome country increases.
4.In the long run, the balance of paymentposition of the home country improvesthrough inflows in the form of dividend,interest & profit etc.
Di d t f MNC C t & i k t
8/6/2019 Trading and Investing in International Market
64/69
Disadvantages of MNCs - Costs & risks tothe Host country
1.MNs employ capital intensive technologywhich is not appropriate to the needs ofdeveloping countries.
2.Due to their immense power, multinationals
can undermine economic & politicalsovereigntyof developing countries.
3.MNs may kill the domestic industry & acquiremonopoly over the host countrys market.
8/6/2019 Trading and Investing in International Market
65/69
4. Employment growth in the host country may beretarded because MNs may employ foreign staff.
5. Multinationals may cause fast depletion of hostcountrys natural resources through theirindiscriminate use.
6. The host countrys balance of payments may beunder pressure when MNs repatriate huge amount
in the form of profits, dividends & royalty.
7. MNs may undermine local culture, distortconsumption patterns & promote conspicuousconsumption in the host country.
8/6/2019 Trading and Investing in International Market
66/69
Danger to Home Country
1.Pressure on balance of payments due to
transfer of capital to host countries.2.Loss of employment for home country
people due to location of manufacturing &marketing facilities abroad.
3.Investment in more profitable countries mayretard industrial and economicdevelopment in the home country.
4.Cultures of foreign countries may distort
home countrys culture.
l i i l C i i di
8/6/2019 Trading and Investing in International Market
67/69
Multinational Companies in India
Most of the MNCs in India had originally
entered the Indian market during thecolonial era East Indian Company.
But substantial growth of MNCs tookplace soon after emergence of New
economic policy in 1991. Most of MNCs enter India initially by
Foreign Collaboration with Indiancompanies.
More than 500 MNCs are operating inIndia, out of which about 157 are fromUSA & 120 from Japan.
Some of the Multinational Corporations in India
8/6/2019 Trading and Investing in International Market
68/69
Multinational Indian Affiliate
ABB ABB India
Bata Corporation Bata India
Cadbury Cadbury India
Ciba Geigy Hindustan Ciba Geigy
Coco-cola Corporation Coco-cola India
Danone Britannia Industries
GEC GE
Pepsi Corporation Pepsi India
Proctor and Gamble Proctor Gamble India
Philips Phillips India
Sony Corporation Sony India
Suzuki Maruti Suzuki
Unilever Hindustan Lever
Some of the Multinational Corporations in India
Th t MNC hi h l
8/6/2019 Trading and Investing in International Market
69/69
The recent MNCs, which are welcomein both high technical capital goods
industries & low technical consumergoods industries.
Several economists criticize Indias
open door policy towards MNCs. Alarge gambler of MNCs in India areoperating in consumer products likesoft drinks, biscuits etc.