multinational companies (3)

7/28/2019 Multinational Companies (3)

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INTRODUCTION

Multinational companies are the enterprises or organizations that manage

production or offer services in more than one country. India has been the home to a

number of multinational companies. Indeed, since the financial liberalization in the

country in 1991, the number of multinational companies in India has increased

noticeably. Although majority of the multinational companies in India are from the

U.S., however one can also find companies from other countries as well.

Multinational companies in India are taking their toll on family businesses. They

are not only destroying the household economies for small business people but also

leading to the cultural uniformity of the global brands in the market place in India.

There are many reasons why the multinational companies are coming down to

India.

India has got a huge market. It has also got one of the fastest growing economies in

the world. Besides, the policy of the government towards FDI has also played the

most important role in attracting the multinational companies in India. For quite a

long time, India had a restrictive policy in terms of foreign direct investment. As a

result, there was lesser number of companies that showed interest in investing in

Indian market. However, the scenario changed during the economic

liberalization of the country, especially later 1991

.


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Government, nowadays, makes constant efforts to attract foreign investments by

relaxing several of its policies. As a result, a number of multinational companies

have shown interest in the Indian market.

Meaning-Multinational companies are those enterprises whose

management,ownership and controls are spread in more than one foreign country.

DEFINITION-According to an ILO report,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 a number of other

countries as well.


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LIST OF MULTINATIONAL COMPANIES IN INDIA

The list of multinational companies in India is ever-growing as a number of MNCs

are coming down to this country now and then. Following are some of the major

multinational companies operating their businesses in India:

List of Major MNCs in India

British Petroleum

Vodafone

Ford Motors

LG

Samsung

Hyundai

Accenture

Reebok

Skoda Motors

ABN Amro Bank


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WHY IS INDIA ATTRACTING THE MULTINATIONAL COMPANIES?

India is one of the fastest growing economies of our times. The country has a huge

market for goods and services due to its vast population and consumer power. The

policy of the government towards foreign direct investment contributed immensely

to attracting the multinational corporations to India. In the past, before the boom of

foreign investments, India had strict policy of terms in FDI. Thus, there were fewer

companies interested in investing in India until in the year 1991 when the policy

was changed to start attracting FDI. More and more companies find their way to

India now and then. Some of the notable multinational companies that are currently

operating in India include British Petroleum, LG, Skoda Motors, Hyundai,

Samsung, Vodafone, Ford Motors, Reebok and Accenture among others.

A multinational corporation (MNC) or multinational enterprise (MNE) is a

corporation that is registered in more than one country or that has operations in

more than one country. It can also be referred to as an international corporation.

They play an important role in globalization. The first multinational corporation

was the Dutch East India Company, founded March 20, 1602.

Strategies

Corporations may make a foreign direct investment. Foreign direct investment is

direct investment into one country by a company in production located in another

country either by buying a company in the country or by expanding operations ofan existing business in the country.


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A subsidiary or daughter company is a company that is completely or partly owned

and wholly controlled by another company that owns more than half of the

subsidiary's stock.

A corporation may choose to locate in a special economic zone, which is a

geographical region that has economic and other laws that are more free-market-

oriented than a country's typical or national laws.


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COMMUNICATION BETWEEN DIFFERENT CULTURES

Multinational corporations need to deal with different cultures of their employees,

partners, suppliers and customers.

Cross-cultural communication (frequently referred to as intercultural

communication) is a field of study that looks at how people from differing cultural

backgrounds communicate, in similar and different ways among themselves, and

how they end eavour to communicate across cultures.

Intercultural competence is the ability of successful communication with people of

other cultures. A person who is interculturally competent captures and understands,in interaction with people from foreign cultures, their specific concepts in

perception, thinking, feeling and acting. Earlier experiences are considered, free

from prejudices; there is an interest and motivation to continue learning.

CONFLICT OF LAWS

Conflict of laws is a set of procedural rules that determines which legal system and

which jurisdiction's applies to a given dispute.

The term conflict of laws itself originates from situations where the ultimate

outcome of a legal dispute depended upon which law applied, and the common law

courts manner of resolving the conflict between those laws. In civil law, lawyers

and legal scholars refer to conflict of laws as private international law. Privateinternational law has no real connection with public international law, and is

instead a feature of local law which varies from country to country.


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The three branches of conflict of laws are

Jurisdictionwhether the forum court has the power to resolve the dispute at hand

Choice of lawthe law which is being applied to resolve the dispute

Foreign judgments the ability to recognize and enforce a judgment from an

external forum within the jurisdiction of the adjudicating forum

Globalization

Multinational corporations are important factors in the processes of globalization.

National and local governments often compete against one another to attract MNCfacilities, with the expectation of increased tax revenue, employment, and

economic activity. To compete, political entities may offer MNCs incentives such

as tax breaks, pledges of governmental assistance or subsidized infrastructure, or

lax environmental and labor regulations. These ways of attracting foreign

investment may be criticized as a race to the bottom, a push towards greater

autonomy for corporations, or both. MNCs play an important role in developing

the economies of developing countries like investing in these countries provide

market to the MNC but provide employment, choice of multi goods etc.

On the other hand, economist Jagdish Bhagwati has argued that in countries with

comparatively low labor costs and weak environmental and social protection,

multinationals actually bring about a 'race to the top.' While multinationals will

certainly see a low tax burden or low labor costs as an element of comparative

advantage, Bhagwati disputes the existence of evidence suggesting that MNCs

deliberately avail themselves of lax environmental regulation or poor labor

standards. As Bhagwati has pointed out, MNC profits are tied to operational

efficiency, which includes a high degree of standardisation. Thus, MNCs are likely


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to adapt production processes in many of their operations to conform to the

standards of the most rigorous jurisdiction in which they operate (this tends to be

either the USA, Japan, or the EU). As for labor costs, while MNCs clearly pay

workers in developing countries far below levels in countries where labor

productivity is high (and accordingly, will adopt more labor-intensive production

processes), they also tend to pay a premium over local labor rates of 10 to 100

percent.[8] Finally, depending on the nature of the MNC, investment in any

country reflects a desire for a medium- to long-term return, as establishing plant,

training workers, etc., can be costly. Once established in a jurisdiction, therefore,

MNCs are potentially vulnerable to arbitrary government intervention such as

expropriation, sudden contract renegotiation, the arbitrary withdrawal or

compulsory purchase of licenses, etc. Thus, both the negotiating power of MNCs

and the 'race to the bottom' critique may be overstated, while understating the

benefits (besides tax revenue) of MNCs becoming established in a jurisdiction.


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TRANSNATIONAL CORPORATIONS

A Transnational Corporation (TNC) differs from a traditional MNC in that it does

not identify itself with one national home. Whilst traditional MNCs are national

companies with foreign subsidiaries,[9] TNCs spread out their operations in many

countries sustaining high levels of local responsiveness.[10] An example of a TNC

is Nestl who employ senior executives from many countries and try to make

decisions from a global perspective rather than from one centralized

headquarters.[11] However, the terms TNC and MNC are often used

interchangeably.

CRITICISM OF MULTINATIONALS

Main articles: Anti-globalization and Anti-corporate activism

Anti-corporate advocates criticize multinational corporations for entering countries

that have low human rights or environmental standards.[12] They claim that

multinationals give rise to huge merged conglomerations that reduce competition

and free enterprise, raise capital in host countries but export the profits, exploit

countries for their natural resources, limit workers' wages, erode traditional

cultures, and challenge national sovereignty.


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FEATURES OF MULTINATIONAL CORPORATIONS (MNCS)

The multinational corporations have certain characteristics which may be discussed

below :

(1) Giant Size :

The most important feature of these MNCs is their gigantic size. Their assets and

sales run into billions of dollars and they also make supernormal profits. According

to one definition an MNC is one with a sales turnover of f 100 million. The MNCs

are also super powerful organisations. In 1971 out of the top ninety producers of

wealth, as many as 29 were MNCs, and the rest, nations. Besides the operations,

most of these multinationals are spread in a vast number of countries. For instance,

in 1973 out of a total of (,000 firms identified nearly 45 per cent had affiliates in

more than 20 countries.

(2) International Operation :

A Fundamental feature of a multinational corporation is that in such a corporation,control resides in the hands of a single institution. But its interests and operations

sprawl across national boundaries. The Pepsi Cola company of the U.S operates in

114 countries. An MNC operates through a parent corporation in the home

country. It may assume the form or a subsidiary in the host country. If it is a

branch, it acts for the parent corporation without any local capital or management

assistance. If it is a subsidiary, the majority control is still exercised by the foreign

parent company, although it is " incorporated in the host country. The foreign

control may range anywhere between the minimum of 51 per cent to the full, 100

per cent. An MNC thus combines ownership with control. The branches and

subsidiaries of MNCs operate under the unified control of the parent company.


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(3) Oligopolistic Structure :

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

to assume awesome power. This coupled with its giant size makes it oligopolistic

in character. So it enjoys a huge amount of profit. This oligopolistic structure has

been the cause of a number of evils of the multinational corporations.

(4) Spontaneous Evolution :

One thing to be observed in the case of the MNCs is that they have usually grown

in a spontaneous and unconscious manner. Very often they developed through

"Creeping incrementalism." Many firms become multinationals by accident.

Sometimes a firm established a subsidiary abroad due to wage differentials and

better opportunity prevailing in the host country.

(5) Collective Transfer of Resources :

An MNC facilitates multilateral transfer of resources Usually this transfer takes

place in the form of a "package" which includes technical know-how, equipment's

and machinery, materials, finished products, managerial services, and soon,

"MNCs are composed of a complex of widely varied modern technology ranging

from production and marketing to management and financing. B.N. Ganguly has

remarked in the case of an MNG "resources are transferred, but not traded in,

according to the traditional norms and practices of international trade."


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(6) American dominance :

Another important feature of the world of multinationals is the American

dominance. In 1971, out of the top 25 MNCs, as many as 18 were of U.S. origin. In

that year the U.S. held 52 per cent of the total stock of direct foreign private

investment. The U.E. has assumed more of the role of a foreign investor than the

traditional exporter of home products.

(7) Operations in several countries:

These corporations operate in a number of countries.The parent corporation is in

home country and production and marketing activities are carried on in a number

of host countries.These corporations operate through subsidiaries or branches set

up in different countries.

(8) Centralised Management:

The management of MNCs is centralized.The plans and policies are framed in the

parent country and subsidiaries and branches in host countries only implement

them.The MNCs have controlling equities in subsidiary companies and implement

their main policies everywhere

(9) Professional Management:

Since multinationals have large financial resources at their command,they appointprofessional managers to undertake various activities.The specialists in the fields

of finance,production,marketing etc.are appointed to look after various functions.


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SIGNIFICANCE OF MULTINATIONAL CORPORATIONS (MNCS):

The multinational corporations today have a revolutionary effect on the

international economic system. It is so because the growth of international

transactions of the multinationals has affected the more traditional forms of capital

flows and international trade for many economies. Today they constitute a

powerful force in the world economy.

The value of the products sold by the MNCs in 1971 was more than $ 500 billion

which was about one-fifth of the GNP of the entire world, excepting that of

socialist economies. In the host countries, the volume of their production was

about $ 330 billion. The present growth rate of their output in the host countries is

a spectacular 10 per cent per annum which is almost double the growth rate of the

world GNP.

In the field of international trade and international finance, the multinational firms

have come to exercise enormous power. In early seventies the MNCs accounted for

about one-eighth of all international trade- From the nature of their growth it maybe presumed that in the early eighties their share will rise to one-fourth.

Among the developing countries only India had an annual income twice that of

General Motors, which is the biggest multinational corporation. Otherwise the

annual income of the other less developed countries is much less than that of the

giant MNCs. By their sheer size the MNGs can disrupt the economies of the less

developed countries, and may even threaten their political sovereignty.


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We may comprehend the relative economic power of the MNCs vis-a-visthe

nation-states by ranking them together according to gross annual sales and gross

national product respectively. As Lester R. Brown has shown, out of 100 entries in

the merged list 56 were nation-states and as many as 44 were MNCs.

According to one estimate by early eighties some 300 large MNCs will come to

control 75 per cent of the world's manufacturing assets.


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METHODS OF OPERATIONS

1.Franchising

In this form, multinational corporation grants firms in foreign countries the right to

use its trade marks, patents, brand names etc. The firms get the right or licence to

operate their business as per the terms and conditions of franchise agreement. They

pay royalty or licence fee to multinational corporations. In case the firm holding

franchise violate the terms and conditions of the agreement, the licence may be

cancelled. This system is popular for products which enjoy good demand in host

countries.

2.Branches

In this system multinational corporation opens branches in different countries.

These branches work under the direction and control of head office. The

headquarters frames policies to be followed by the branches. Every branch follows

laws and regulations of the head office and host countries. In this way

multinational companies operate through branches.

3. Subsidiaries

A multinational corporation may establish wholly owned subsidiaries m foreigncountries. In case of partly owned subsidiaries people in the host countries also

own shares. The subsidiaries in foreign countries follow the polices laid down by

holding company (Parent company). A multinational company can expand its

business operations though subsidiaries all over the world.


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4. Joint Venture

In this system a multinational corporation establishes a company in foreign country

in partnership with local firms. The multinational and foreign firm share the

ownership and control of the business. Generally, the multinational provides

technology and managerial skill and the day to day management is left to the local

partner. For example, in Maruti Udyog the Government of India and Suzuki of

Japan have jointly supplied capital. Suzuki supplies technology and the day to day

management lies with the Government of India.

5.Turn Key Projects

In this method, the multinational corporation undertakes a project in foreign

country. The multinational constructs and operates the industrial plant by itself. It

provides training to the staff in the operation of plant.

It may also guarantee the quality and quantity of production over a long period of

time.


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ADVANTAGES OF MNC'S FOR THE HOST COUNTRY

Multinational Corporations no doubt, carryout business with the ultimate object of

profit making like any other domestic company. According to ILO report "for

some, the multinational companies are an invaluable dynamic force and instrument

for wider distribution of capital, technology and employment; for others they are

monsters which our present institutions, national or international, cannot

adequately control, a law to themselves with no reasonable concept, the public

interest or social policy can accept. MNC's directly and indirectly help both the

home country and the host country.

MNC's help the host country in the following ways

1. The investment level, employment level, and income level of the host country

increases due to the operation of MNC's.

2. The industries of host country get latest technology from foreign countries

through MNC's.

3. The host country's business also gets management expertise from MNC's.

4. The domestic traders and market intermediaries of the host country gets

increased business from the operation of MNC's.

5. MNC's break protectionalism, curb local monopolies, create competition among

domestic companies and thus enhance their competitiveness.

6. Domestic industries can make use of R and D outcomes of MNC's.


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7. The host country can reduce imports and increase exports due to goods produced

by MNC's in the host country. This helps to improve balance of payment.

8. Level of industrial and economic development increases due to the growth of

MNC's in the host country.

Advantages of MNC's for the home country

MNC's home country has the following advantages.

1. MNC's create opportunities for marketing the products produced in the home

country throughout the world.

2. They create employment opportunities to the people of home country both at

home and abroad.

3. It gives a boost to the industrial activities of home country.

4. MNC's help to maintain favourable balance of payment of the home country in

the long run.

5. Home country can also get the benefit of foreign culture brought by MNC's.

Disadvantages of MNC's for the host country

1. MNC's may transfer technology which has become outdated in the home

country.

2. As MNC's do not operate within the national autonomy, they may pose a threat

to the economic and political sovereignty of host countries.

3. MNC's may kill the domestic industry by monpolising the host country's market.


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4. In order to make profit, MNC's may use natural resources of the home country

indiscriminately and cause depletion of the resources.

5. A large sums of money flows to foreign countries in terms of payments towards

profits, dividends and royalty.

Disadvantages of MNC's for the home country

1. MNC's transfer the capital from the home country to various host countries

causing unfavourable balance of payment.

2. MNC's may not create employment opportunities to the people of home country

if it adopts geocentric approach.

3. As investments in foreign countries is more profitable, MNC's may neglect the

home countries industrial and economic development.


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APPLICABILITY TO PARTICULAR BUSINESS

MNC's is suitable in the following cases.

1. Where the Government wants to avail of foreign technology and foreign capital

e.g. Maruti Udyog Limited, Hind lever, Philips, HP, Honeywell etc.

2. Where it is desirable in the national interest to increase employment

opportunities in the country e.g., Hindustan Lever.

3. Where foreign management expertise is needed e.g. Honeywell, Samsung, LG

Electronics etc.

4. Where it is desirable to diversify activities into untapped and priority areas like

core and infrastructure industries, e.g. ITC is more acceptable to Indians L&T etc.

5. Pharmaceutical industries e.g. Glaxo, Bayer etc.


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IMPACT OF MNC

Industrial societies are changing at an unprecedented speed, influenced mainly byglobalisation or rather by global interdependence. They are also influenced by

technology, education, commerce, and .social networking

In the heart of these changes are businesses which have continued to grow

unhindered even in the midst of all sorts of adversities. The more they grow the

more they build immunity around them to prevent failures. As they grow, they

acquired enormous political clout and power. They go into mergers and acquisitionand some of those M&A are hostile.

They enter host countries in different ways and different strategies. Some enter by

exporting their products to test the market and to find whether their existing

products can gain sizeable market share. For such firms, they rely on export agents.

These foreign sales branches or assembly operations are established to save

transport costs because there is a limit to what foreign exports can achieve for afirm owing mainly to tariff barriers and quotas and also owing to logistics or cost

of transportation. Most of the firms are encouraged by the low wage rates and other

environmental factors.

To meet the growing demands in the foreign countries, the firm considers other

options such as licensing or foreign direct investment which are critical steps.

Some continue with export even when they have settled for the FDI option. Every

step takes strategic planning and is motivated by profit through sales growth. For

instance, a company may have reached its limits in satisfying domestic demand

and would look for new markets.


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FDI, which connotes finding a way around protective instruments in the importing

country, is one of the ways to expand. Typically, investment flows from regions of

low profit to those of anticipated high returns.

These businesses that opt for foreign production eventually grow into corporations

and into multinational and transnational corporations. The size of some

corporations is larger than the size of most developing countries.

These multinational corporations have also learnt to live peaceable with their host

governments and host communities through the concept of Corporate Social

Responsibility. They are compelled to behave by laws governing their operations

and activities.

They are, indeed, change agents. Every country needs them and to have them, the

country concerned must create an enabling environment that will attract them and

keep them. The reality of the changing world has dawned on everybody and there

is nowhere to hide.

The influence of the big businesses is so pervasive that even if you dont wantthem, you may find that sooner than later their products would find you. This is

influenced by the convergence of ideologies, tastes, technologies, free and easy

movement of people and capital, and international political cooperation. Young

people nowadays identify more with products more than with countries. Coca-Cola


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products are in every nook and cranny of the planet. The same can be said of many

other products such as Jeans, Nike, Red Bull, Power Horse, Levi and other

designers dresses and fashion accessories. Apple products like computers, iPad,

iPod, and so on are in high demand everywhere in the world. Sony playstations are

equally in high demand. Blackberry is all over and young people identify with all

their series. HP, HPCompaq, Sony, Dell and Acer Computers and their

components are all over the world and nobody really bothers where they are made

any more and who really owns them.

This phenomenon brings rise to the growing belief that traditional nation state

would inescapably lose influence over individuals. Consequently, the question

being asked is whether globalisation would bring about the end to the traditional

nation state as societies tend to use technology to connect with global partners and

achieve goals once realised at the local level.

Similarly, trade and commerce in one country have become dependent on trade and

commerce in many other states.

In all of these, Nigeria has had a good taste of multinational corporations defined

as companies that implement business strategies in production, marketing, R&D,

financing and staffing that transcend national boundaries. In other words,

multinational corporation is a parent company that engages in foreign production

through its affiliates located in several countries.


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SUMMARY:

The dependence of countries on each other for both capital and consumer goods

has created an international market.The multinational corporations of developed

countries are entering under-developed and developing countries to participate in

their business activities.

MNC plays an significant role in the growth and development of the host

country.It supplies capital to the host country.It also transfer technology which

help in production of goods and services at lower cost.MNC creates employment

opportunities for the people of host country.

Inspite of so many benefits MNC have some drawbacks also like it follows bad

business ethics to earn money.MNC are harmful for local producer because they

have money power and they dominate local producer and overtake them.they tries

to create monopoly of their product in the market.They also exploit consumer by

producing low quality product at higher prices.

After examining all the merits and demerits of MNC,it can be concluded that

MMNC plays an significant role in the growth and development of the host as

well as home country.Some regulations must be imposed by the government on the

MNC so that they are not able to exploit the consumer and are not harmful for

local producers.

multinational companies (3)

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