Multinational Companies in India Economics of Global Trade and Finance Research Work

Master of Commerce

Business Management

Semester II

(2012-2013)

Submitted

In partial Fulfillment of the requirement for the

Award of Degree of Master of Commerce in Business Management

Submitted By,

Name: Sarbjyot Singh Chahal

Roll No. 72

Under the Guidance of,

Prof. Lalit Tyagi

GURU NANAK KHALSA COLLEGE OF ARTS, SCIENCE AND COMMERCE,

MATUNGA, MUMBAI- 400019.

1

GURU NANAK KHALSA COLLEGE OF ARTS, SCIENCE AND COMMERCE,

MATUNGA, MUMBAI- 400019.

CERTIFICATE

This is to certify that Mr :Sarbjyot Singh Chahal. of M.Com Business

Management Semester II (2012-2013) has successfully completed the project on

Project Title under the guidance of Prof. Lalit Tyagi.

Course Co-ordinator Principal

Prof. Allan D’Souza Dr. Ajit Singh

Project Guide/Internal Examiner

Prof. Lalit Tyagi

External Examiner

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DECLARTION

I, Mr: Sarbjyot Singh Chahal, student of M.Com Business Management

Semester II (2012-2013) hereby declares that I have completed the

Project on Project Title. The information submitted is true and original

to the best of my knowledge.

Signature of student

Mr: Sarbjyot Singh Chahal

Roll No. 72

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ACKNOWLEDGEMENT

The college, the faculty, the classmates & the atmosphere, in the collegewere all the favorable contributory factors right from the point when thetopic was to be selected till the final copy was prepared. It was a veryenriching experience throughout the contribution from the followingindividuals in the form in which it appears today. I feel privileged to take this opportunity to put on record my gratitude towards them.Prof. Lalit Tyagi made sure that the resource was made availablein time & also for immediate advice & guidance throughout making thisproject. Prof. Allan D’Souza, the Co-ordinator for M.Com of our college Guru Nanak Khalsa College has always been inspiring & driving force. We are thankful to everyone associated with administration part of Business Management section has been very helpful in making the infrastructure available for data entry.

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Index

1. Impact on Indian Economy Pg no : 6-9

2. Research and Development Pg no : 10

3. Marketing Pg no : 11

4. Privatization of Public Sector Pg no :13

5. Disinvestment of public sector undertakings Pg no :17

6. The information technology industry in India Pg no :19

7. Problems Faced Pg no :20

8. Future prospects Pg no : 21

9. Role of mnc Pg no : 22

10. MNCs in Rural India: At a Turning Point Pg no : 25-31

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Multinational Companies(MNC's)

Impact on Indian Economy

Multinational corporations (MNCs) are huge business organizations which open up income-

generating assets in more than one country through branches or their Majority Owned Foreign

Affiliates (MOFAs). They are also known as Transnational Companies or Corporations (TNCs).

An MNC engages itself in the production of goods or services outside the country of its origin.

By opening up income generating assets in more than one country, it makes its presence felt in

the global market. It has been estimated that around a quarter of the world economy is being

controlled by the big MNCs. The combined sales of these top MNCs are estimated to be much

higher than the combined worth of economies of around 182 countries. The MNCs, because of

their huge resources and international presence, are able to conjure up desires for their products

in the minds of the people in the country of their marketing base. The MNCs are characterized by

their huge assets. The principal decisions taken by the company take into account their global

market. The emergence of the MNCs has led to the monopolization of the markets. Production

and investment have become global as a result of which economic activities pertaining to

production; investment and trade are being conducted by the MNCs through their branches or

firms in the different countries. Inter-firm transactions have led to the concentration of economic

power across the countries. Initially, the development of the MNCs was through 'creeping

increment'. Slowly, but steadily, the MNCs have established their subsidiaries beyond their

country of origin, in developed and underdeveloped countries. The MNCs also aid in the transfer

of resources from the host country to the country of its operations which includes technical

expertise, equipment, managerial and marketing skills, among others. The MNCs help to initiate

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development processes in several underdeveloped countries through the transfer of capital and

technology. To establish a proper base in a foreign country, the MNCs invest in labor, raw

materials, advertising and marketing. This helps the underdeveloped countries to develop their

resources. The MNCs help in the development of human resource generates further employment

and also help to transfer sophisticated western technologies to the underdeveloped countries. The

technological expertise, advanced production skills and use of local labor in the units facilitate

transfer of technology to those countries. Through Research and Development, the MNCs

develop products which are superior in all respects to those which are indigenously produced by

the host countries. This induces the indigenous industries to brace up for competition and

encourages them to develop superior products. The MNCs, thereby, end the domestic monopoly

of the indigenous industries. The MNCs, apart from the transfer of technology for production,

sometimes provide marketing services for the export of indigenous products manufactured by the

host countries. Exports generate foreign exchange which helps the host country in developing its

economy. The MNCs have been quite successful in India. In the post-liberalization era, as the

license regime has been more or less abolished the MNCs are thriving in India. They are present

in almost every sector of the Indian economy, especially in the consumer durable market and

automobiles. Automobile manufacturers like General Motors, Ford, Toyota and Hyundai are

making good profits. Korean companies LG and Samsung have become market leaders in

electronic goods. The entire soft drink market of India is being monopolized by US

Multinationals Pepsi and Coke. Though the pesticides controversy has affected the popularity of

Pepsi, Coke and Cadbury's they are still key players in their segments.

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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 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 it 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

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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 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 it 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 :

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Asian Paints ICI (UK)

Premier Automobiles transferred two plants to Peugeot (France)

Lakeme brand by Lever.

Hero Honda by TVS Suzuki etc.

Merits :

Capital and Technology: The Service of MNC's In respect of supply of capital is of great

importance . The investment of a single MNC's is much greater than that of several Indian

companies. It is a great advantage for industrial growth. Along with capital transfer of

technology also takes place. They transfer technology highly intensive to the use unskilled

labour. But their aim is cheep production and more profit. They also develop new technology

needed by India. Sophisticated technology in areas like petroleum, chemical, minerals are of

great help to India, since local development needs long time and resources, which our country

cannot offered or wait.

Research and Development :

This is must for promotion of technology which involves huge expenditure. A goo past of

the expenditure of R&D is spent outside the country of MNC Salaries of research personnel is

much in Indian than in the country of the MNC.

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Marketing

The marketing services that MNC make available for the goods and services from less developed

countries is great. International competition is necessary involves several market related key

services such as Research, advertising warehousing package design, removal of barriers in

importing company.

Demerits :

1. Oligopolisation of Market : MNC's brought about the internationalization of

investment, production and marketing. A good past of their international trade is in the

form of internal transaction of these companies. This will result in the Oligopolisation of

market and concentration of economy powers at the world level.

2. Harmful to producers and consumers: Their loyalty to any one is doubtful and

they do anything and everything for profit and to eliminate competition. They impose

their will on producers and consumers. Their aim is global profit. The study of US

companies showed that :Prices for the consumer is raised.Income of producer is

lowered .Quality is made inferior.Best profit of MNC are increased

3. Evil of transfer pricing : These include an agreement between firms for sharing the

market manipulation of markets, products are valued at deceptive prices for maximum

profit. These ingenious techniques are called transfer pricing , Through dummy trading

companies they buy from low tax countries and sell in high tax countries to maximize the

profit.

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4. Currency Manipulation : They deal in several national currencies. Accumulate

their funds in safe places with strong currency at high interest rates in case of weak

currencies they advise the affiliates to go for large debts. Thus they make assets in strong

currency and debts in weak currency. Since the amount involved is huge they make

currency crisis.

5. Bad business ethics: The activities of MNC's fall outside the basics ethics and legal

system of the host counties US MNC's have paid bribes to influence people to get things

done, mainly in Asia Africa and Europe. They are even known for interfering in political

affairs.

Conclusion :

When we consider an overall picture of the MNCS, the beneficial role is much limited in the

limited stages of development they are helpful in area of needed technology and global

marketing. They care only to the need of upper middle and affluent classes. It create a new

culture of colas,jams, ice-creams and processed goods. Another threat to Indian economy is the

manipulation on the capital market to suit their goals. They are increasing the shareholding in

Indian companies swallowing them. They transfer attractive and profitable business to this newly

started subsidiaries so a large number of Indian share holders get cheated. Summing up over

dependence on MNC may be harmful in terms of economic dependence and political

interference. Capital flow of MNC's may be permitted but not at the cost of national

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interest. Note : An oligopoly is a market form in which a market is dominated by a small number

of sellers

Privatization of Public Sector

The wave of privatization spread all over the world, as a reaction to the inefficient working of

the state-owned enterprises. The disillusionment witnessed in the socialist economies and the

wave of economic reforms under "perestroika" accelerated the process. The continued losses in

the public sector forced the governments to rethink about the virtues of P.S. IMF, World Bank

and International Financial Institutions also forced them to accept privatization as the new

philosophy of regeneration. Privatization wave that swept the world has its effects in India also.

India was a late entrant in this field, This issue much discussed in the 1980's came in to center

stage in 1990's as a part of over all economic reforms. The [1991] new Industrial policy

suggested reorientation of the working of the P.S along the principles of private sector or free

market. Privatization implies the induction of private ownership in the public or state owned

enterprises. Besides private ownership, it can be the induction of private management and

control in the P.S. In simple meaning, privatization involves a change in ownership from

government to the private sector or individuals. Ownership may be transferred by offering the

shares to the general public or to the employees wholly or partly. The form of privatization to be

adopted depends on the environment, whether competitive or not, and the social obligations. If it

is producing goods of fluctuating demand like textiles, watches, two wheelers etc, where

competitive environment is necessary, ownership should be changed. But in the case of public

utilities like water supply and public goods, non competitive or monopoly is good, because the

social obligations are strong. Privatization is adopted mainly for the improvement of the

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performances but with different objectives. In countries like U.K, France and Austria, the aim

has been to improve efficiency, profitability, productivity etc. In the newly privatized companies,

competition forced them to respond to the needs of the consumer, promote efficiency and reduce

costs. Japan sold off the shares of the P.S units to raise funds to reduce the national debt. For

Turkey, the objective was to reduce the cost of subsidies and raise capita for the economy. In

India, though political parties speak of reforms in the PS, they not willing to take actions.

Industrial policy of 1991 was a turning point. It limited priority areas for public sector only to

infrastructure and defense. More and more areas reserved for P.S are now opened to the private

sector.

1. Scope : In spite of the need and urgency, the scope for privatization is much limited,

because of the difficulties that come across.

2. Problem of Finance : Privatization in any form involve large finance. If it comes

from public financial institutions in the form of loans to private sector, it is only a transfer

of ownership from one public institution to another It is helping the private sector to own

public sector units through public financial institutions. So new investments will suffer.

The policy is fruitful only if new savings are used to meet the required finance. In the sale

of share also, only switching of old investment takes place and no benefit to the economy

3. . Strong Trade Unions : The emergence of strong trade unions made privatization

[in the sense denationalization] difficult. Proposals for denationalization of banks,

insurance, power generation etc aroused violent reactions from the unions. They forced

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the government to withdraw the proposal to transfer the ownership of loss-making

Scooters India to Bajaj Auto Ltd.

4. Inefficiency of Private Sector : The performance of private sector is also not

satisfactory. Many are sick with large over dues. In spite of the " Umbrella of Protection"

[restrictions in import, licensing etc] and captive domestic market they did not work well.

Most of them,much behind those in foreign countries in quality and technology.

5. Inbuilt resistance : Another problem is the behavior of the owners, employers and

capitalists towards labour in private sector. There is exploitation, low wages, lack of

amenities and benefits. Women and child labour are very common. So further

privatization means further exploitation.

6. Improvement in the performance of P.S : At the time of privatization we

cannot forget that the performance of public sector units are far better than before. This is

due to experience, completion of gestation period and improvement of managerial

output . The sector employs twice the manpower of private sector but with less labour

disputes. They have better labour relations and the staff is rated higher than staff in the

private sector The methods of privatization vary from country to country and from time

to time depending up on the nature of the industry and need and circumstances of the

country. Methods of transferring state-owned enterprises to private ownership are :

1. Divestiture or Disinvestment : Disinvestment is one of the important methods of

privatizing a public sector undertaking. Under the disinvestment, majority of the shares of

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the company are sold or auctioned to the private companies. In selling the equity shares

of the company to be privatized, preference is given to the employees of the company.

2. Denationalization: Denationalization or Re-privatization is the reverse process of

Nationalization. This method is generally adopted for privatization of nationalized private

enterprises.

3. Forming Joint Venture : Where total privatization is either not desirable for social,

political or economic reasons or private sector is unable or unwilling to take over the

ownership of the enterprise, the government opts for forming a joint venture transferring

a part of the equity shares to the private sector.

4. Liquidation : Under this method, the entire assets of the enterprise are sold to a person

or to an organization.

5. Formation of a Holding Company : Under this method, government forms a

holding company in which the government retains a majority share and power to control

top managerial decisions. This method privatizes the operations not the ownership.

6. Leasing : Under this method, the government leases the assets to the private bidders for

a specific period. This method transfers the ownership for a tenure.

Globalization

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Globalization refers to extensive and fast transactional flow of goods and services, finance,

manpower and technology across the globe. Italian Pizza, Foreign brands like McDonnell's and

Pepsi, Nokia, Samsung, Sony, Daewoo and Hyundai cars have become household names in

India.Similarly Indian origin companies like Airtel Bharati, Videocon, TCS have entered in

foreign soils also. Factors leading to globalization :

Economic compulsion of both developing and developed nations.

Changing world economic environment.

Efforts of international organizations like WTO.

Economic liberalization and Government support by individual countries.

Disinvestment of public sector undertakings

The term disinvestment refers to withdrawal of Govt. shares of capital invested in

Public Sector Undertakings. Government controlled Public Sector undertakings were

formed with the object of providing necessary infrastructure for the fast growth of

economy. They were to lead the industrialization programme of the country and act as a

safeguard against monopoly. It was believed that they would also create employment and

at the same time generate revenue surplus. But either due to mismanagement or the lack of

experience many of the PSU' could not give -expected-ef satisfactory results and finally became

a liability. In order to do away with the recurring loss the government in its Industrial Policy of

1991 envisaged disinvestment oil al of government holdings in the share capital of some selected

sick PSU's. that this would provide market discipline and ultimately improve the performance of

such PSU's apart from releasing huge amount of capital which could beused for accelerating

economic growth of the country. Privatization of Public Sector Undertakings is giving the

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desired results. It results in efficient use of resources whereby scarce resources like land, capital

and machinery are put to more efficient use. The economy as a whole is benefited by increase

efficiency of the units and the fiscal mess is reduced by lessening of liabilities.

Measures to be taken to ensure success of disinvestment

1. Legitimate demands of workers should not be overlooked and care must be taken that

either they are not thrown out of employment or alternate jobs are provided to them. It is

also argued that disinvestment would lead to massive unemployment which is already

high in the country

2. .Hence social implications of labour structuring should be properly studied. Scheme-of

voluntary retirement may be ac1oX.qc so that persons willing to take retirement may

lead a better life his will gamer support for Privatization.

3. Political parties of the country have been debating the sale of PSU's mainly due to the

controversy about the valuation of assets and their acquisition by companies with

doubtful credentials

4. There is opposition against the sale of profit giving establishments.

5. To make the disinvestment process a success it is essential that profit making companies

be distinguished from loss incurring companies.

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6. There must be transparency in the deals made in disinvestment. Method ofvaluation of

assets must be revealed to the public when a public undertaking is sold off. This would

eliminate suspicions of any malpractice and would fetch competitive price of assets.

7. The proceeds of disinvestment should be spent for social uplift..These-should not be—

utilized to me Ihe aim of disinvestment as .

The information technology industry in India

The term information technology includes computers and communication technology

along with associated software. It refers to all the devices and media used to transmit,

store and process information for use by society.With the emergence of the knowledge economy,

information is being treated as a raw material. The activities of generating, processing,

transmitting, disseminating, storing, archiving and retrieving information constitute the IT

industry.

Features

It has created a large number of new companies in a sector unheard of before 1995.

Technology parks have been set up to cater to IT firms

IT sector has emerged as the major foreign exchange earner for our country.

It has created a large number of high salary jobs

IT enabled services like back-office operation medical transcription, insurance claim

processing, data entry, content development all have large employment potential

It has transformed the banking sector in India. If other industries and the govt.follow suit,

it can transform India.

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Problems Faced

1. It requires regular investment due to the rapid changes in hardware and software

technologies.

2. Communication and networking infrastructure has to be developed.

3. Lack of computerization of govt. depts. and agencies

4. Adequate training to make job seekers more employable in IT sector

5. The IT industry insists on quality that is up to international standards, hencequality of

education in IT must be maintained.

6. Hardware prices in India are quite high

7. .Countries like the US now believe that outsourcing results in export of jobs to other

countries.

8. Even the top Indian software companies have come up with very few products that they

own. They have also not been able to market their brand names.

9. Indian software companies' face the large-scale migration of software manpowerto

western countries.

10. The software companies, with the high salaries paid to its employees, have largelypriced

themselves out of the Indian market. Expenditure in dollar terms cannot bematched by

income in rupees.

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Future prospects

Today, even though the software tasks carried out by India for the West may amount to a small

portion of the worldwide IT industry, Indian companies. And professionals are regarded as

amongst the best in the world. Software services exportsand business process outsourcing (BPO)

were responsible for India's success as a services exporter. The top companies in India in

software are TCS, Wipro, Infosys, HCL,Tech Mahindra, Patni Computer Systems, i-flex

Solutions, L&T Infotech, IBM India, arid Cognizant Technology Solutions (CTS). The IT

industry has a tremendous potential to generate foreign exchange, high quality employment and

improve productivity in the rest of the economy. As the IT industry develops, it is looking at new

ways of maintaining growth. Indian companies such as TCS, Wipro, Infosys and HCL may yet

become household names around the world. A lot needs to be done to have IT in the hands of

hundreds of millions of people. A concrete program has to be made so that in some time frame,

say 10 years, IT is looked upon by a large section of people as liberating, rather than as yet

another technology that pushes them into the category of have-nots. Fresh opportunities in IT

include Cloud computing is the single most important factor that could impact IT in the

next few years. IT is now beginning to be widely used in monitoring and reducing energy

consumption. It is being increasingly used in traffic management. Shifting to cloud computing

would need data security Countries are trying to use networked information systems to run their

cities. The US healthcare system which is the largest in the world is trying to reduce costs and

provide advanced care with the help of IT. Energy companies in the US are installing smart

meters which will enable customers to see and control the energy usage of each appliance.

Global spending on software required for such smart grids is expected to be billions of dollars.

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The media and entertainment sector, currently witnessing a wave of digitization, will create

enormous amount of work for IT firms.

Role of mnc

 Role of MNC’s According to an ILO repot, “the essential nature of multinational enterprises

liesin the fact that its managerial headquarters are located in one country (homecountry) while

enterprises carries out operations in number of other countries as well. (host countries).

Dominance of MNC’s Through liberalization there has been expansion & growth of MNC’s.

The GDP has increased from about 5% in beginning of 1980’s to nearly 7% at end of1990’s. The

MNC’s are estimated to employ directly, at home and abroad around73 billion people. For

example, the US footwear company Nike currently employees 9000 people, while nearly 75,000

people are employed by its independent sub-contractors located in different countries. Merits of

MNC’s The important arguments in favour of MNC’s are given below:-MNC’s help the host

countries in following ways:-

1) MNC’s help to increases the investment level & thereby the income &employment in host

country.

2) The transnational corporations have become vehicles for the transfer technology, especially to

developing countries.

3) They also kind a managerial revolution in host countries through professional management

and employment of highly sophisticated management techniques.

4) The MNCs enable that host countries to increases their exports & decreases their import

requirements

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

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6) MNC’s provide and efficient means of integrating national economies.

7) The enormous resources of multinational enterprises enable them to have every efficient

research & development systems. Thus, they make acommendable contribution to inventions &

innovations.

8) MNC’s also stimulate domestic enterprise because to support their own operations, the

MNC’s may encourage & assist domestic suppliers.

9) MNC’s help to increase competition & break domestic monopolies.

Demerits:-

1) MNC’s may destroy competition & acquire monopoly powers.

2) The transfer pricing enables MNC’s to avoid taxes by manipulating prices onintra-company

transactions

3) Through their power and flexibility , MNC’s can evade national economic autonomy &

control, and their activities may be inimical to national income interests of particular countries.

4) MNCs retard growth of employment in home country.

5) MNCs technology is designed for world-wide Profit maximization, not the development needs

of poor countries. In general, it is asserted, the imported technologies are not adopted to

(a) Consumption needs

(b) size of domesticmarkets

(c) resource availabilities

(d) stage of development of many of developing countries. Multinationals in India

Comparatively very little foreign investment has taken place in India due to several reasons,

some multinationals, Coca Cola and IBM, even left India in late1970s as the government

conditions were unacceptable to them. A Common criticism against MNC’s is that they tend to

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invest in low priority &high profit sectors in developing countries, ignoring national priorities.

However high technology and heavy investment sectors of national importance & export sectors.

Firms which had been established non-priority areas prior to implementation of this policy have,

however been allowed to continue in those sectors. It is not a right approach to estimate the net

impact of multinationals on foreign exchange reserves by taking net foreign exchange outflow or

inflow. If a multinational is operating in an import substitution industry, the net effect in foreign

exchange reserves could be favorable even if there is net foreign exchange outflow of company.

MNCs in Rural India: At a Turning Point

Introduction

Multinational Companies are placed all over the world with subsidiaries or joint ventures to gain

a competitive advantage on other companies. A multinational company is a company with a

global strategy with production bases all over the world to achieve cost advantages through

economies of scale and low labour costs. Normally MNCs have a home country which supported

the company in the beginning and sometimes these big companies where even build by

governments to create a national champion through tax and other cost benefits. Toyota is a good

example for a MNC, which was build by the Japanese government as a national champion for the

car industry and is now the biggest automotive producer in the world. There are different reasons

for a company to go into another country, for example the home market is saturated and growth

potential is declining, other reasons are that in other countries resources like labour are cheaper

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and therefore the company could get more cost efficient. Sometimes MNCs enter into another

market because their competitors are entering the market and they do not want to loose their

competitive advantage. All these reasons are symptomatic for the development in the last 50

years, in the beginning MNCs were largely operating in the US and Europe and expanded only in

already developed countries because they found everything there what they needed (UN

Committee on Trade and Development, 2002). Infrastructure and a good labour force were

already there and the growth potential especially for American and European companies in new

markets was enormous. For the last decade MNCs changed their strategy and entered developing

countries like China and India, because of huge growth potential and lower costs. The goals of

MNCs are the same now as they were 50 years ago, to generate huge profits by driving down

costs through economies of scale and the usage of synergies between different countries.

Labour conditions

"The rules of the global economy should be aimed at improving the rights, livelihoods, security,

and opportunities of people, families and communities around the world" (International Labor

Organization, 2004

International labor standards can be seen as an equal right for women and men to work under

conditions of freedom, security and dignity. Those standards are mainly set for governments as

an agreement with employees and workers as an implement for law and social responsibility

which is international accepted. The international labor organization has developed a “work

agenda” which contains a lot of those challenges organizations have to face at the beginning.

(International Labor Organization, 2004, p. 19)

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Due to Raymond Robertson’s (Robertson, Raymond, 2007research on the impact of

globalization on working conditions in developing countries, labor conditions are divided into

wages and non-wages working conditions. Non-wages working conditions are working hours,

benefits like retirement and vacation, risk e.g. the employment insecurity and working climate.

The wages can be split into absolute wages or purchasing power (welfare) and relative wages

(The World Bank, March 2008). According to the Fair Labor association wages and benefits “are

essential to meeting employees’ basic needs. Employers shall pay employees, as a floor, at least

the minimum wage required by local law or the prevailing industry wage, whichever is higher,

and shall provide legally mandated benefits” (Fair Labor Association, 2008).

Wages

Companies such as Reebok, Nike, and Levi Strauss have exploited and are exploiting the human

labor in developing countries massively (UN Committee on Trade and Development, 2002, p. 4).

Therefore these companies are called sweatshops. For example, workers in Indonesia live under

inhumane circumstances and barely earn $39 a month for producing thousands of products worth

a few hundred dollars. Developing countries like Indonesia are booming because of massive

direct foreign investment while workers are suffering from degrading living conditions and really

low wages.

On the other side having a closer look at empirical data it gets clear that foreign-owned and

subcontracting manufacturing companies in developing countries tend to pay higher wages than

the local firms. Furthermore export oriented companies pay higher wages the non exporting

ones. In Mexico, for example, exporting firms (i.e. 80% of all sales are for export) paid wages at

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least 58 percent higher than non export oriented firms. In 2001 a study found that foreign-owned

plants, mostly MNCs, “in Indonesia paid 33 percent more for blue-collar workers and 70 percent

more for white-collar workers than locally owned firms”

Drusilla Brown, Alan Deardorff, and Robert Stern consider in their study that these wage

premiums are most likely linked to labor productivity gains resulting from foreign ownership.

Most of the time the given premiums to white-collar workers as well as foreign investment raise

wages on average but produce a greater income inequality between skilled and unskilled workers

in the host nation, the developing country.

Child Labour

There is no standard and international definition for child labor in general. A common meaning

of child labor is when children under the year of 18 are getting exploited and negatively affected

in their physical, mentally or educational development in order to work under hard conditions.

Therefore, some social scientists have the opinion that it is necessary to distinguish between

tolerable and unacceptable child work. For example children who are working a few hours a

week and getting paid for it are even learning to assume responsibility and getting more self-

contained. Unacceptable child labor as it is defined by international conventions, are soldiering

and prostitution. Child labor is an international problem that has to be eliminated by laws and

government. Child labor mainly occurs in emerging markets in developing countries. The total

number of children who are forced to work was in the year 2000 estimated by the international

labor organization (ILO) of "246 million child workers aged 5 and 17 were involved in child

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labor, of which 171 million were involved in work that by its nature is hazardous to their safety,

physical or mental health, and moral development (Unicef, 2008).

Child labors mainly live in developing countries and its depending of the region were most

children have to work in a country. Leading in child labor is Asia with a percentage rate of 61 %

followed by Africa 32 % and 7 % in Latin America. A lot of those children are in danger of

being hurt or even in danger to die. Reasons why child labor still takes place is as a result of

poorness and limited choices for women. One major problem of child labor is that most often the

parents of those children are unemployed or underemployed and desperate for secure

employment and income.

MNCs changing labour conditions

Positive

In the last 20 years MNCs are contributing strongly to economic growth in developing countries

through Foreign Direct Investment but also through knowledge transfer and raising productivity

in domestic competitors and suppliers. Foreign Direct Investment which is normally used as an

indicator for internationalisation of economies has grown from 10 percent of world GDP in 1990

to 25 percent in 2006 (Hijzen, Alexander, 2008).

FDI is not the only way MNCs influence economic growth and therefore labour conditions in

developing countries, due to the introduction of modern management and production methods

MNCs raise their productivity level compared to domestic competitors. Therefore higher wages

and better working conditions can be promoted by MNCs, because overall costs go down due to

higher productivity. Furthermore wages of skilled workers are more likely to increase in an

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industry with an MNC in it because of the competition for skilled labour between the MNC and

domestic competitors. As a result productivity increases in those industries and especially wages

of high skilled labour. A general figure about wages, which is given by the OECD report “Do

Multinationals Promote Better Pay and Working Conditions” is, that MNCs pay 40 percent more

than domestic competitors in developing countries. A reliable comparison is quite difficult

because single wages such as for low skilled workers might not be higher in MNCs than in local

firms. High skilled jobs are better paid by MNCs than domestic firms and therefore the

comparison of general wages is not suitable in many aspects (Hijzen, Swaim, 2008).

Besides the direct improvement of wages and working conditions MNCs could improve them by

stimulating local competitors, there are several ways MNCs can stimulate local competitors. Due

to higher productivity and lower costs MNCs have a competitive advantage over their local

competitors. As a result local competitors must improve their productivity and also working

conditions, otherwise they will loose market share to the MNC.

Negative

On the other side the appearance of MNCs in developing countries rise much controversy and

many social concerns. MNCs have a substantial amount of power that allows them to easily find

large quantities of relatively cheap labor as well as influence governments (Close, Romero,

2004). Due to the great mobility of MNCs, they have quick access to cheap labor and are

relatively free to leave a country at any time they want. Many times, the country’s economy

depends on the jobs given to its laborer by the MNC. If the MNC leaves, that country now has a

great unemployment problem where many are suddenly left stranded (Hijzen, Alexander, 2008).

Because of this fear governments of developing countries fail to enforce human and labor rights

effectively, however MNCs have been accused of infringe workers either human or labor rights.

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To stop this helplessness of the host countries many OECD countries appealed to MNCs to

respect international labor standards anywhere in the world, even if a country has no such norm.

The OECD report shows, that MNCs often adopt management style and labor conditions of their

host countries, therefore exploiting developing countries, which have not high labor standards,

due to the bargaining power of the MNC (Hijzen, Swaim, 2008). MNCs tend not to have a

certain loyalty and social responsibility towards the developing country in which they are

operating in. Therefore plants will be shut down rather in developing countries than in their

home country, because of bad publicity and pressure from the home government.

Bibliography

Internet:

http://people.f3.htw-berlin.de/Professoren/Arora/discussion_paper/

Foreign_Multinationals_in_India-Dayanand_Arora.pdf

http://117.239.73.132/bitstream/handle/123456789/1912/Prasannna%20Miss-Module

%202.PDF?sequence=2

http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4472

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