UNIT 2
THE ROLE OF TRANSNATIONAL
LESSON 11
THE ROLE OF TRANSNATIONAL
CORPORATIONS IN A GLOBAL MARKET
Learning objectives: -
• To understand the concept of multi-national corporations.
• To understand how the working of multi-national
enterprises effect the economy of different countries, where
they go and operate and how they operate and enter into
foreign markets.
• As a student you should be aware that there being a lot of
inflow of multinationals in India since our economy was
liberalized in 1990-91 by then Finance minister
Dr.Manmohan Singh, every sector is flooded with
multinationals and with new adding every day. Therefore this
is an integral part of the economic growth. This concept is
prevelat not only in India but through out the world.
The dynamics of the business environment fostered by the
drastic political changes in the erstwhile communist and socialist
countries and the economic liberalisation across the world has
enormously expanded the opportunities for the multinational
corporations, also known by such names as international
corporation, transnational corporation, global corporation (or
firm, company or enterprise) etc.
The rapidity with which the MNCs are growing is indicated by
the fact that while according to the World Investment Report
1997 there were about 45000 MNCs with some 280,000
affiliates, according to the World Investment Report 2001 there
were over 63,000 of them with about 822,000 affiliates. Only
less than 12 per cent of these affiliates were in the developed
countries. China was host to about 3.64 lakh of the affiliates
(i.e., more than 44 percent of the total) compared to more than
1400 in India
The MNCs account for a significant share of the world’s
industrial investment, production, employment and trade.
The Prowess of MNCs
International production by transnational. Corporations
(TNCs), now numbering some 63,000 parent firms with
around 800,000 foreign affiliates and a plethora of inter firm
arrangements, spans virtually all countries and economic
activities, rendering it a formidable force in today’s world
economy.
The worlds top 100 (non-financial) TNCs based almost
exclusively in developed countries. Are the principal drivers of
international production. The $2 trillion in assets of their
foreign affiliates accounted for about one eighth of the total
assets of all foreign affiliates worldwide in 1998. the foreign
affiliates of the top 100 TNCs employ over 6 million persons,
and their foreign sales are of the order of $2 trillion. They are
concentrated mainly in electronics and electrical equipment,
automobiles, petroleum, chemicals and pharmaceuticals.
Despite the prominence of the top 100, the universe of TNCs
is quite diverse, and includes a growing number of small and
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CORPORATIONS IN A GLOBAL MARKET
medium-size enterprises, TNCs from countries in central and
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Eastern Europe that have only recently begun to engage in
international production, and large TNCs based in the develop-
ing world. Although less transnational overall than the world’s
top 100 TNCs, some of the developing country TNCs are
quote sizeable-witness, for example, the size of the foreign
assets ($8 billion) of petroleos de Venezuela, the largest TNC
from the developing world and the only developing country
firm to appear in the top 100 list.
Evidence on the expansion of international production over
the past two decades abounds. Gross product associated with
international production and foreign affiliate sales worldwide,
two measures of international production, increased faster than
global GDP and global exports, respectively. Sales of foreign
affiliates worldwide ($14 trillion in 1999, $3 trillion in 1980) are
not nearly twice as high as global exports and the gross product
associated with international production is about one tenth of
global GDP, compared with one twentieth in 1982.
And the number of transnational parent firms in 15 developed
home countries increased from some 7,000 at the end of the
1960s to some 40,000 at the end of the 1990s
Although the multinational corporation took birth in the early
1860’s it was after the Second World War that multinationals
have grown rapidly. In the early days, the United States was the
home of most of the MNCs. Now there are a large number of
Japanese and European multinational. In the list of the 10 or
20 largest MNCs, Japan has the largest number. Multinationals
have been emerging from the developing countries too. South
Korea has, for example, well known MNCs like Samsung,
Hyundai, LG and Daewoo.
MNCs of the US are more focused, i.e., they confine their
business to one industry or product category; In fact, several
American MNCs which attempted diversification, mostly by the
acquisitions route, reverted to focus, after bitter experiences with
the diversification. Compared with the US MNCs, most
European companies have a much broader product line.
Japanese companies, generally, have product lines that are much
too broad. Of the top ten corporation in the US, only one
(Gene.’”1 Electric) is a classic conglomerate; while in Japan eight
are conglomerates and only two are not (Toyota Motor and
Nippon Telegraph & Telephone). Similarly, the Korean
corporations are far too diversified. Recent trends indicate that
the diversified corporations have many odds against them and
the focus strategy is more successful.
Definition and Meaning
As the concept of multi nationality has several dimensions,
there is no single universally agreed definition of the term
multinational corporation, 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
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 (referred to for convenience as the (“home country”) while the
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enterprise carries out operations in a number of other countries
as well (“host countries”). Obviously, what is meant is “a
corporation that controls production facilities in more than one
country, such facilities having been acquired through the process
of foreign direct investment. Firms that participate in interna-
tional business, however large they may be, solely by exporting
or by licensing technology are not multination enterprises.”
Among the various other benchmarks sometimes used to
define ‘multinationality’ are that the company in question must:
• Produce (rather than just distribute) abroad as well as in the
headquarters country
• Operate in a certain minimum number, of nations (six for
example)
• Derive some minimum percentage of its income from
foreign operations (e.g., 25 per cent)
• Have a certain minimum ratio of foreign to total number of
employees, or of foreign total value of assets
• Possess a management team with geocentric orientations
• Directly control foreign investments (as opposed simply to
holding shares in foreign companies).
The definitions of the terms transnational corporation (used to
mean the same thing as MNC and similar terms) foreign
affiliate, subsidiary and branch given in the UN’s World
Investment Report are as follows.
Transnational Corporations are incorporated or unincorporated
enterprises comprising parent enterprises and their foreign
affiliates. A parent enterprise is deemed as an enterprise that
controls assets of other entities in countries other than its
home country, usually by owning a certain equity capital state.
An equity capital stake of 10 per cent or more of the ordinary
shares or voting power for an incorporated enterprise, or its
equivalent for an unincorporated enterprise, is normally
considered as a threshold for the control of assets (In some
countries such as Germany and United Kingdom, the threshold
is a stake of 20 per cent or more.)
A Foreign Affiliate is an incorporated or unincorporated
enterprise in which an investor, who is resident in another
economy, owns a stake that permits a lasting interest in the
management of that enterprise (an equity stake of 10 per cent
for an incorporated enterprise or its equivalent for an unincor-
porated enterprise. In the World Investment Report, subsidiary
enterprise, a. subsidiary enterprise, associate enterprise and
branches are all referred to as foreign affiliates.
A Subsidiary is an incorporated enterprise m the host country in
which another entity directly owns more than a half of the
shareholders voting power and has the right to appoint or
remove a majority of the members of the administrative.,
management or supervisory body.
An Associate is an incorporated enterprise in the host country in
which an investor owns a total of at least 10 per cent, but not
more than a half, of the shareholders’ voting power.
A Branch is a wholly or jointly owned unincorporated enterprise
in the host country which is one of the following: (i) a perma-
nent establishment or office of the foreign Investor; (ii) an
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unincorporated partnership or joint venture between the
foreign direct investor and one or more third parties; (iii) land,
structures (except structures owned by government entities),
and/or immovable equipment and objects directly owned by a
foreign resident; (iv) mobile equipment such as ships, aircraft,
gas or oil-drilling rigs operating within a country other than that
of the foreign investor for at least one year,
As the World Investment Report 1999 observes, transnational
corporations (TNCs) establish, under the common governance
of their headquarters, international production systems in
which factors of production move, to a greater or lesser extent,
among units located in different countries. These systems
increasingly cover a variety’ of activities, ranging from research
and development (R&D) to manufacturing to service functions
such as accounting, advertising, marketing and training,
dispersed over host-country locations and integrated to produce
final goods or services. They are also increasingly being estab-
lished, especially in developed countries, through mergers
between existing firms from different countries or the acquisi-
tion of existing enterprises in countries by firms from others.
Once internationally dispersed production units under com-
mon governance are established, mobile and location bound
factors of production to which a TNC has access in home and
host countries (and sometimes even third countries) are
combined in each unit in ways and for production that contrib-
ute the most to the firm’s economic and strategic objectives.
From the perspective of factor use - as distinct from that of
location as host or home country for enterprises engaged in
international production - all of the production that takes place
in these TNC production systems (in parent firms or home
country units as well as foreign affiliates of host country units)
constitutes international production.
Organisational Models
Terms such as International Corporation, Multinational
Corporation, transnational corporation and global corporation
are often used as synonyms. However, several multinationals
have evolved into certain advanced stage of transnational
organization and operations that it becomes necessary to draw
some distinction between these terms.
However, the interpretations of these terms given by different
authors are nor some. Sometimes the differences arise form the
differences in the context.
With reference to the configuration of resources and responsi-
bilities, patent subsidiary relationship, and the mentality
towards the overseas operations the salient characteristics of
these corporations pointed out by Bartlett and Ghoshal are
highlighted below. Some of these descriptions are at variance
with those given by come other authors. The following account,
however is very useful in understanding the distinctive features
of these different types of organizations. In other sections of
this book these terms are used interchangeably.
Multinational Corporation: This was the type of the
corporation popular when many European companies interna-
tionalized during the pre-war (1920s and 1930s) when the trade
barriers were very high. According to Bartlett and Ghoshal, the
multinational organization is defined by the following character-
istics: a decentralized federation of assets and responsibilities a
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management process defined by simple financial control
systems overlaid on informal personal coordination, and a
dominant strategic mentality that viewed the company’s
worldwide operations as a portfolio of national businesses. In
a multination organization, the decisions, obviously be
decentralized.
International Organisation Model: This organization
structure was predominant in the case of the America compa-
nies which internationalized in the early postwar years.
In international organisation, the structural configuration of
which is described as coordinated federation, many assists
resources, responsibilities and decisions are decentralized but
controlled from the headquarters. The overseas operations are
regarded essentially as appendages to a central domestic
corporation. In this model, the headquarters transfers knowl-
edge and expertise to overseas environment that were less
advanced in technology of market development. While local
subsidiaries are often fre to adapt the new products of strate-
gies, their dependence on the parent company for new products,
processes, or ideas dictated a great deal more coordination and
control by the headquarters than in the classical multinational
organisation.
Global Organisational Model: The Japanese companies which
internationalized since the mid 1960s through the 1970s and
1980s adopted global organisation model. The global configu-
ration is based on centralization of assets, resource and
responsibilities; overseas operations are used to reach foreign
markets in order to build global scale. The role of local subsid-
iaries is to assemble and sell products and to implement plans
and policies developed at headquarters. Compared with
subsidiaries in multination of international organizations, they
have much less freedom to create new products or strategies or
even to modify existing ones.
In the global model, management treats overseas operation as
delivery pipelines to a unified global market, is described as a
centralized hub.
The rapid decline in tariffs, coupled with dramatic improvement
in transportation and communication of this period made a
truly export based strategy feasible The global organisation
model, where authority and decision making are centralized and
subsidiaries are used basically as implementing agencies, is
describes as a centralized hub.
Transnational: The transnational organisation and model
seeks to eliminate some of the drawbacks of the other models.
It endeavors to achieve global competitiveness through, inter
alia, multinational flexibility and worldwide learning. In a
transnational, the specialised resources and capabilities are
dispersed among the various operating units globally. These
units are interdependent and integrated and have large flows of
components, products, resources, people and information
among them. An important feature of the transnational,
therefore, is the complex process of coordination and coopera-
tion in an environment of decision-making.
Dominance of MNCs
The global liberalisation has paved the way for fast expansion
and growth of the MNCs. The value added of all foreign
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affiliates of MNCs as a percentage of world GDP increased
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from about 5 per cent in the beginning of the 1980a ro nearly 7
per cent at the end of the 1990s.
The economic clout of the MNCs is indicated by the fact that
the GDP of the countries is smaller than the value of the
annual sales turnover of the multinational giants. The value of
the annual sales of the largest manufacturing multinational,
General Motors, in 1996 was about $ 178 billion. Only a very
small number of developing countries like India, China, Brazil,
Russia, Argentina, Indonesia and Republic of Korea had had
GDP which was higher than this figure. There were also several
developed countries whose value of GDP was less than this. It
may be noted that in 1997, the two largest manufacturing
MNCs, general Motors and Ford had a combined turnover of
$302 billion while the GDP of India was $360 billion. The total
sales of the three largest automobile firms of the world (GM,
ford and Toyota) far exceed the value of GDP of India.
With sales totaling $183.3 billion in 2000, General Motors,
which maintained the No. 1 position in terms of sales for a very
long time, has fallen behind Exxon Mobil Corporation’s 232.7
billion and Wal-Mart stores.
The MNCs are estimated to employ directly, at home and
abroad, around 73 billion people representing nearly 10 per cent
of paid employment in non-agricultural activities world-world
and close to 20 percent in the developed countries considered
alone. In addition, the indirect employment effect of the TNC
activities are at least equal to the direct effects and probably
munch larger. For example, the US footwear company Nike
currently employs 9000 people, while nearly 75,000 people are
employed by its independent sub-contractors located in
different countries. Based in such information, the total
number of jobs associated with TNCs worldwide may have
been 150 million at the beginning of the 1990s.
In 1998, foreign affiliates of MNCs employed over 350 million
people. The greater part of the increase of employment in
foreign affiliates in recent years has taken place in developing
countries. A considerable share of the increase was concentrated
in East and South East Asia, in particular in China, and in
export processing zones in those regions and elsewhere.
Employment in the foreign affiliates in China, increase from 4.8
million in 1991 to 17.5 million in 1997.
Mncs and International Trade
Peter Drucker remarks that multinational and expanding world
trade are two sides of the same coin. He points out that the
period of the most rapid growth of the multination-the fifties
and sixties – was the period of most rapid growth of multina-
tional trade. Indeed, during this period the world trading
economy grew faster - at an annual rate of 15 per cent or so in
most years - than even the fastest growing domestic economy,
that of Japan.?
It is, estimated that between one-fourth and one third of
manufactured goods now moving in world trade are being
shipped from One branch to another of the MNCs; that is,
they are intracompany shipments; The sale of foreign subsidiar-
ies in the host countries in which they are located are three to
four times as large as total world exports.
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 There was a very significant increase in the export intensity (i.e..
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the percentage of exports to total sales) of the foreign affiliates
of many MNCs. The export intensity of foreign affiliates of US
MNCs, for example, increased from less than 20 per cent in the
mid sixties to over 40 per cent in the early 1990sYor all econo-
mies; it doubled from about 20 to 40 percent in the case Of
developed economies; jumped from about six to 22 per cent in
the case of the Latin American affiliates and from 23 to 64 per
cent for developing Asia. The average export intensity of all the
affiliates has, however, remained between 2l-24per cent for a
long time. In the case of India, however, it has very low. More
than 40 per cent of the total exports of China is done by MNC
affiliates. The export contribution of foreign affiliates in China:
is far larger than the total exports of India.
Apart from trade in commodities, other transactions also take
place extensively between the different parts of these enterprises
- for example, the granting of loans, the licensing of technology
and the provision of services. In all such transactions, transfer
prices may be settled which are different from the price which
would have been the case between independent parties operat-
ing at arm’s length. Such differences may reflect the legitimate
concerns of the companies, but are also capable of being used
in order to shift profits from high to low tax countries or to get
around exchange or price controls or customs duties. As the
Brandt Commission observes, the ability of multinationals to
manipulate financial flows by the use of artificial transfer prices
is bound to re a matter of concern to Governments. The
monitoring and-control of transfer prices involves inter-
governmental cooperation and measures to secure due
disclosure of relevant information by companies. This is
necessary to make effective tax laws covering transfer prices
which exist in many countries. Intra-firm trade also opens up
the possibility for corporations to impose restrictive business
practices within their own organisation; they can limit the
exports of their affiliates; allocate their markets between nations
or restrict the use of their technology or that developed by their
affiliates. Such practices, although best pursued in the best
business interests of the companies, may conflict with the
developmental objectives and national interests of host
countries.
Merits of MNCs
As the preface to the ILO report on Multinational Enterprises
and Social Policy observes, ‘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, nation
at or international, cannot adequately control, a law to them-
selves with no reasonable concept, the public interest or social
policy can accept.”
The important arguments in favour of and against the MNCs
are mentioned below: MNCs, it is claimed, help the host
countries in the following ways:
1. MNCs help increase the investment level and thereby the
income and employment in host country.
2. The transnational corporations have become vehicles for the
transfer technology, especially to the developing countries.
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3. They also kindle a managerial revolution in the host
countries through professional management and the
employment of highly sophisticated management
techniques.
4. The MNCs enable the host countries to increase their exports
and decrease their import requirements.
5. They work to equalise the cost of factors of production
around the world.
6. MNCs provide an efficient means of integrating national
economies.
7. The enormous resources of the multinational enterprises
enable them to have very efficient research and development
systems. Thus, they make a commendable contribution to
inventions and innovations.
8. MNCs also stimulate domestic enterprise because to support
their own operations, the MNCs may encourage and assist
domestic suppliers.
9. MNCs help increase competition and break domestic
monopolies.
Demerits
MNCs have, however, been subject to a number of criticisms,
like those mentioned below.
1. As Leonard Gomes points out, the MNC’s technology is
designed for world-wide profit maximisation, not the
development needs of poor countries, in particular
employment needs and relative factor scarcities in these
countries. In general, it is asserted, the imported technologies
are not adapted to (a) the consumption needs, (b) the size
of domestic markets (c) resource availabilities, and (d) stage
of development of many of the LDCs
2. Through their power and flexibility, MNCs can evade or
undermine national economic autonomy and control, and
their activities may be inimical to the national interests of
particular countries.
3. MNCs may destroy competition and acquire monopoly
powers.
4. The tremendous power of the global corporations poses the
risk that they may threaten the sovereignty of the nations in
which they do business. On Political involvement, MNCs
‘have been accused on occasion of: supporting repressive
regimes; paying bribes to secure political influence; not
respecting human rights; paying protection money to
terrorist groups; and, destabilizing national governments of
which they do not approve.
5. MNCs retard growth of employment in the home country.
6. The transnational corporations cause fast depletion of some
of the non-renewable natural resources in the host country.
They have also been accused of the following environmental
problems: polluting the environment; not paying
compensation for the environmental damages; causing
harmful changes in the local living conditions; and, paying
little regard to the risks of accidents causing major
environmental catastrophes.
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7. The transfer pricing enables MNCs to avoid taxes by
manipulating prices on intra-company transactions.
8. The MNCs have been criticized for their business strategies
and practices in the host countries. They undermine local
cultures and traditions, change the consumption habits for
their benefit against the long term interests of the local
community, promote conspicuous consumption, dump
harmful products in the developing countries etc.
Perspective
Future holds out an enormous scope for the growth of MNCs.
The changes in the economic environment in a large number of
countries indicate this. For instance, the number of bilateral
treaties that promote and/or protect FDI has increased
markedly in recent times.
A United Nation’s report described several developments that
points to a rapidly changing context for-economic growth,
along with a growing role for transnational corporations in that
process these include:
1. Increasing emphasis on market forces and a growing role for
the private sector in nearly all developing countries.
2. Rapidly changing technologies that are transforming the
nature of organisation and location of international
production.
3. The globalisation of firms and industries;
4. The rise of services to constitute the largest single sector in
the world economy; and
5. Regional economic integration, which involve both the
world’s largest economies as we: as selected developing
countries.
Code of Conduct
It is widely felt that there must be a code of conduct to guide
and regulate the MNCs.
According to the Brandt Commission, the principal elements
of an international regime for investment should include:
1. A frame-work to allow developing countries as well as
transnational corporations to benefit from direct
investments on terms contractually agreed upon. Home
countries should not restrict investment or the transfer of
technology abroad, and should desist from other restrictive
practices such as export controls or market, not restrict
current transfers such as profits, royalties and dividends, or
the repatriation of capital, so long as they are on terms which
were agreed when the investment was originally approved or
subsequently negotiated.
2. Legislation promoted and coordinated in home and host
countries, to regulate the activities of transnational
corporations in such matters as ethical behavior, disclosure
of information, restrictive business practices, cartels, anti-
competitive practices and labour standards. International
codes and guidelines are a useful step in that direction.
3. Cooperation by Governments in their tax policies to
monitor transfer pricing and to eliminate the resort to tax
havens.
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4. Fiscal and other incentives and policies towards foreign
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investment to be harmonized among host developing
countries, particularly at regional and sub-regional levels, to
avoid the undermining of the tax base and competitive
positions of host countries.
5. An international procedure for discussions and consultations
on measures affecting direct investment and the activities of
transnational corporations.
The Code of Conduct for MNCs, drawn up by the Commis-
sion on Transnational Corporations, set up by the UN’s
Economic and Social Council, required MNCs, inter alia, to:
• Respect the national sovereignty of host countries and
observe their domestic laws, regulations and administrative
practices
• Adhere to host nations’ economic goals, development
objectives and sociocultural values.
• Respect human rights
• Not interfere in internal political affairs or in
intergovernmental relations
• Not engage in corrupt practices
• Apply good practice in relation to payment of taxes,
abstention from involvement in anti competitive practices,
consumer and environmental protection and the treatment
of employees
• Disclose relevant information to host country governments.
• According to thel976 declaration of the OECD Code of
Practice on MNC operations, MNCs should contribute
positively to economic and social progress within host
nations. Its main provisions were that MNCs should:
• Contribute to host countries’ science and technology
objectives by permitting the rapid diffusion of technologies
• Not behave in manners likely to restrict competition by
abusing dominant positions or market power
• Provide full information for tax purposes
• Consult with employee representatives regarding major
changes in operations, avoid unfair discrimination in
employment and provide reasonable working conditions
• Consider the host nation’s balance of payments objectives
when taking decisions
• Regularly make public significant information on financial
and operational matters, host countries themselves should,
the Code insists, possess the absolute right to nationalise
foreign-owned assets within their frontiers, but must pay
proper compensation.
It is very interesting to note that the demands by developing
countries that the Code become legally binding were rejected by
the UN General Assembly, at the behest of economically
advanced countries.
Multinationals In India
Comparatively very little foreign investment has taken place in
India due to several reasons, as stated in the previous chapter
(like the dominant role assigned to the public sector in the
industrial policy and the restrictive Government policy towards
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 foreign investment). Some multinationals, Coca Cola and IBM,
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even left India in the late 1970s as the Government conditions
were unacceptable to them.
A common criticism against the MNCs is that they tend to
invest in the low priority and high profit sectors in the develop-
ing countries, ignoring the national priorities. However, in India
the Government policy confined the foreign investment to the
priority areas like high technology and heavy investment sectors
of national importance and export sectors. Firms which had
been established. In non-priority areas prior to the implementa-
tion of this policy have, however, been allowed to continue in
those sectors.
The controversial Foreign Exchange Regulation Act (FERA),
1973, required the forien companies in India to dilute the
foreign equity holding to 40 per cent (exceptions were allowed
in certain cases like high technology and export oriented sectors).
An often-heard criticism is that multinationals drain the foreign
exchange resources of the developing countries. However,
Aiyar’s study indicates that, contrary to the popular belief,
foreign companies are less of a drain on foreign exchange
reserves than Indian ones. He also point out that the public
sector has a higher propensity to use foreign exchange on a net
basis than multinational. In fact, the foreign exchange outgo of
the public sector alone is greater than the entire trade deficit of
the country.
It is not a right approach to estimate the net impact of multina-
tionals on the foreign exchange reserves by taking the net
foreign exchange outflow or inflow. If a multinational is
operating in an import substitution industry, the net effect on
the foreign exchange reserves could be favorable even if there is
a net foreign exchange outflow by the company.
Multinationals in several developing countries make substantial
contribution to export earnings. The performance in the case of
India has, however, been very dismal. This is attributed mostly
to the Government policy. “We have consistently followed
policies in India that discriminate against export production and
in favour of production for the local market. In this milieu it
has not made sense for the Indian private sector or public sector
to focus on exports. Naturally, it has not made for foreign
companies either. In 1947, foreign companies did not have an
anti-export image. Indeed, the most prominent ones were
engaged in the export of tea and jute manufactures. Only after
Jawaharlal Nehru decided to emphasis import-substitution at
the expense of exports did foreign (and Indian) companies
shun exports.
Although export promotion has been pursued since the Third
Plan, the highly protected domestic market and the unrealistic
exchange rate made the domestic market much more attractive
than exports. However, since the mid 1980s with the economic
liberalisation that increased domestic competition and the
steady depreciation of the rupee, exports began to become
attractive and several foreign companies and companies with
foreign participation, as well as Indian companies, have become
serious about exports. This was reflected in the acceleration of
the export growth.
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The new policy is expected to give a considerable impetus for
MNC’s investment in India. However, foreign companies find
the policy and procedural environment in India still so perplex-
ing and disgusting that a multinational, Motorola, even shifted
some of the projects, originally earmarked for India, to China
where the Government environment is much more conducive.
Since the economic liberalisation ushered in 1991, many
multinationals in different lines of business have entered the
Indian-market. A number of multinationals which were in
India prior to this have expanded their business.
Theories of The Multinational Enterprise
Transnational Strategy
Christopher Bartlett and Sumatra Ghoshal have argued that in
today’s environment, competitive conditions are so intense that
to survive in the global marketplace, firms must exploit
experience-based cost economies and location economies, they
must transfer core competencies within the firm, and they must
do all of this while paying attention to pressures for local
responsiveness. They note that in the modem multinational
enterprise, core competencies do not just reside in the home
country. Valuable skills can develop in any of the firm’s
worldwide operations. Thus, Bartlett and Ghoshal maintain
that the flow of skills and product offerings sh6uld not be all
one way, from home firm to foreign subsidiary, as in the case of
firms pursuing an international strategy. Rather; the flow
should also be from foreign subsidiary to home country, and
from foreign subsidiary to foreign subsidiary-a process they
refer to as global learning. Bartlett and Ghoshal refer to the
strategy pursued by firms that are trying to simultaneously
create value in these different ways as a transnational strategy.
A transnational strategy makes sense when a firm faces high
pressures for cost reductions, high pressures for local respon-
siveness, and where there are significant opportunities for
leveraging valuable skills within a multinational’s global
network of operations. In some ways, firms that pursue a
transnational strategy are trying to simultaneously achieve cost
and differentiation advantages. They are trying to simulta-
neously lower C and increase V. As attractive as this may sound,
the strategy is not easy to pursue. Pressures for local responsive-
ness and cost reductions place conflicting demands on a firm.
Being locally responsive raises costs. How can a firm effectively
pursue a transnational strategy? .
Some clues can be derived from the case of Caterpillar. In the
1980s, the need to compete with low-cost competitors such as
Komatsu and Hitachi of Japan forced Caterpillar to look for
greater cost economies. At the same time, variations in con-
struction practices and government regulations across countries
meant that Caterpillar had to remain responsive to local
demands. Therefore, as illustrated in Figure 4.1, Caterpillar was
confronted with significant pressures for cost reductions and for
local responsiveness.
To deal with cost pressures, Caterpillar redesigned its products
to use many identical components and invested in a few large-
scale component-manufacturing facilities, sited at favorable
locations, to fill global demand and realize scale economics.
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Figure 4.1 Cost Pressures and Pressures for Local Responsive- saving of more than $200 million. At the same time, however;

INTERNATIONAL BUSINESS MANAGEMENT

ness Facing Caterpillar due to national differences in distribution channels and brand
awareness, Unilever recognizes that it must still remain locally
responsive, even while it tries to realize economies fr6m
consolidating production and marketing at the optimal
locations. One might also argue that the MTV Networks
shifted from an international to a transnational strategy in the
1990s. Rather than creating everything in the United States,
MTV now tries to strike a balance between the need to maintain
uniformity in operating principles and the “frenetic look” of
MTV programming across its global operations and the need to
customize programming” and content to local tastes and
preferences. .
Bartlett and Ghoshal admit that building an organization that
is capable of supporting a transnational strategic posture .is a
complex and difficult task. Simultaneously trying to achieve cost
efficiencies, global learning (the leveraging of skills), and local
responsiveness places contradictory demands on an organiza-
tion. For now, it is important to note that the organizational
The firm also augmented the centralized manufacturing of problems associated with pursuing what are essentially conflict-
components with assembly plants in each of its major global ing objectives constitute a major impediment to the pursuit of
markets. At these plants, Caterpillar, added local product a transnational strategy. Firms that attempt to pursue a
features, tailoring the finished product to local needs. By transnational strategy can become bogged down in an organiza-
pursuing this strategy, Caterpillar realized many of the benefits tional morass that only leads to inefficiencies.
of global manufacturing while also responding to pressures for Also, Bartlett and Ghoshal may be overstating the case for the
local responsiveness by differentiating-its product among transnational strategy. They present the transnational strategy as
nationa1 markets. Caterpillar started to pursue this strategy in the only viable strategy. While no one doubts that in some
the early 1980s and by 1997 had doubled output per employee, industries the firm that can adopt a transnational strategy will
significantly reducing its overall cost structure. Meanwhile, have a competitive advantage, in other industries, global,
Komatsu and Hitachi, which are still wedded to a Japan-centric multidomestic, and international strategies remain viable. In the
global strategy, have seen their cost advantages evaporate and semiconductor industry, for example, pressures for local
have been steadily losing market share to Caterpillar.
Table 4.1
Unilever, once a classic multidomestic firm, has had to shift
toward more of a transnational The Advantages and Disadvantages of the Four Strategies
strategy: A rise in low-cost
competition, which increased cost Strategy Advantages Disadvantages
pressures, forced Unilever to look
for ways of rationalizing its Global Exploit Experience curve effects Lack of local responsiveness
detergent business. During the Exploit location economies
198OS, Unilever had 17 largely
self-contained detergent opera- International Transfer core competencies to Lack of local responsiveness
tions in Europe alone. The Foreign markets inability to realize location
duplication of assets and economies Failure to exploit experience
marketing was enormous.
Curve effects
Because Unilever was so frag-
mented, it could take as long as Multidomestic Customize product offerings inability to realize location
four years for the firm to and marketing in accordance economies
introduce a new product across with local responsiveness Failure to exploit experience
Europe. Now Unilever has Curve effects Failure to transfer core
integrated its European operation competencies to Foreign markets
into a single entity, with deter-
Transnational Exploit Experience curve effects Difficult to implement due to
gents being manufactured in a
Exploit location economies organizational problems
handful of cost-efficient, plants,
and standard packaging and Customize product offerings
advertising being used across and marketing in accordance
Europe. According to the firm, with local responsiveness
the result was an annual cost
Reap benefits of global learning

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11.154 113
 customization are minimal and competition is purely a cost
INTERNATIONAL BUSINESS MANAGEMENT
game, in which case a global strategy, not a transnational strategy
is optimal. This is the case in many industrial goods markets
where the product serves universal needs. On the other hand,
the argument can be made that to compete in certain consumer
goods markets, such as the automobile and consumer electron-
ics industry, a firm has to try to adopt a transnational strategy.
While a transnational strategy appears to offer the most
advantages, implementing a transnational. Strategy raises
difficult organizational issues. The appropriateness of each
strategy depends on the relative strength of pressures for cost
reductions and for local responsiveness.
Transnational Firms
Firms pursuing a transnational strategy focus on the simulta-
neous attainment of location and experience curve economies,
local responsiveness, and global learning (the multidirectional
transfer of core competencies or skills). These firms may operate
with matrix-type structures in which both product divisions
and geographic areas have significant influence. The need to
coordinate a globally dispersed value chain and to transfer core
competencies creates pressures for centralizing some operating
decisions (particularly production and R&D). At the same time,
the need to be locally responsive creates pressures for decentral-
izing other operating decisions to national operations
(particularly marketing). Consequently, these firms tend to mix
relatively high degrees of centralization for some operating
decisions with relative high degrees of decentralization for other
operating decisions.
The need for coordination is particularly high in transnational
firms. This is reflected in the use of an array of formal and
informal integrating mechanisms, including formal matrix
structures and informal management networks. The high level
of interdependence of subunits implied by such integration can
result in significant performance ambiguities, which raise the
costs of control. To reduce these, in addition to output and
bureaucratic controls, transnational firms need to cultivate a
strong culture and to establish incentives that promote
cooperation between subunits.
Environment, Strategy, Architecture, and
Performance
Underlying the scheme outlined is the notion that a “fit”
between strategy and architecture is necessary for a firm to
achieve high performance. For a firm to succeed, two conditions
must be fulfilled. First, the firm’s strategy must be consistent
with the environment in which the firm operates and noted
that in some industries a global strategy is most viable, in
others an international or transnational strategy may be most
viable, and in still others a multidomestic strategy may be most
viable (although the number of multidomestic industries is on
the decline). Second, the firm’s organization architecture must
be consistent with its strategy.
If the strategy does not fit the environment, the firm is likely to
experience significant performance problems. If the architecture
does not fit the strategy, the firm is also likely to experience
performance problems. Therefore, to survive, a firm must strive
to achieve a fit of its environment, its strategy, and its organiza-
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114
tional architecture. You will recall that we saw the importance of
this concept in the opening case. Philips NV, the Dutch
electronics firm, provides another illustration of the need for
this fit. For reasons rooted in the history of the firm, Philips
operated until recently with an organization typical of a
multidomestic enterprise in which operating decisions were
decentralized to largely autonomous foreign subsidiaries.
Historically, electronics markets were segmented from each other
by high trade barriers, so an organization consistent with a
multidomestic strategy made sense. However, by the mid-
1980s, the industry in which Philips competed had been
revolutionized by declining trade barriers, technological change,
and the emergence of low-cost Japanese competitors that
utilized a global strategy. To survive, Philips needed to adopt a
global strategy itself. The firm recognized this and tried to
adopt a global posture, but it did little to change its organiza-
tional architecture. The firm nominally adopted a matrix
structure based on worldwide product divisions and national-
areas. In reality, however, the national
Areas continued to dominate the organization, and the product
divisions had little more than an advisory role. As a result,
Philips’ architecture did not fit the strategy, and by the early
1990s Philips was losing money. It was only after four years of
wrenching change and large losses that Philips was finally able to
tilt the balance of power in its matrix toward the product
divisions. By 1995, the fruits of this effort to realign the
company’s strategy and architecture with the demands of its
operating environment were beginning to show up in im-
proved financial performance.
Organizational Change
Multinational firms periodically have to alter their architecture so
that it conforms to the changes in the environment in which
they are competing and the strategy they are pursuing. To be
profitable, Philips NV had to alter its strategy and architecture in
the 1990s so that both matched the demands of the competi-
tive environment in the electronics industry, which had shifted
from a multidomestic to a global industry. While a detailed
consideration of organizational change is beyond the scope of
this book, a few comments are warranted regarding the sources
of organization inertia and the strategies and tactics for
implementing organizational change.
Organizational Inertia
Organizations are difficult to change. Within most organiza-
tions, there are strong inertia forces. These forces come from a
number of sources. One source of inertia is the existing
distribution of power and influence within an organization.
The power and influence enjoyed by individual managers is in
part a function of their role in the organizational hierarchy, as
defined by structural position. By definition, most substantive
changes in an organization require a change in structure and, by
extension; a change in the distribution of power and influence
within the organization. Some individuals will see their power
and influence increase as a result of organizational change, and
some will see the converse. For example, in the 1990s, Philips
NV increased the roles and responsibilities of its global product
divisions and decreased the roles and responsibilities of its
foreign subsidiary companies. This meant the managers
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running the global product divisions saw their power and
influence increase, while the managers running the foreign
subsidiary companies saw their power and influence decline. As
might be expected, some managers of foreign subsidiary
companies did not like this change and resisted it, which slowed
the pace of change. Those whose power and influence are
reduced as a consequence of organizational change can be
expected to resist it, primarily by arguing that the change might
not work. To the extent that they are successful, this constitutes
a source of organizational inertia that might slow or stop
change.
Another source of organizational inertia is the existing culture,
as expressed in norms and value systems. Value systems reflect
deeply held beliefs, and as such, they can be very hard to change.
If the formal and informal socialization mechanisms within an
organization have been emphasizing a consistent set of values
for a prolonged period, and if hiring, promotion, and incentive
systems have all reinforced these values, then suddenly an-
nouncing that those values are no longer appropriate and need
to be changed can produce resistance and dissonance among
employees. For example, Philips NV historically placed a very
high value on local autonomy. The changes of the 1990s
implied a reduction in the autonomy enjoyed by foreign
subsidiaries, which was counter to the established values of the
company and thus resisted.
Organizational inertia might also derive from senior managers’
preconceptions about the appropriate business model or
paradigm. When a given paradigm has worked well in the past,
managers might have trouble accepting that it is no longer
appropriate. At Philips, granting considerable autonomy to
foreign subsidiaries had worked very well in the past, allowing
local managers to tailor product and business strategy to the
conditions prevailing in a given country. Since this paradigm had
worked so well, it was difficult for many managers to under-
stand why it no longer applied. Consequently, they had
difficulty accepting a new or business model and tended to fall
back on their established paradigm and ways of doing things.
This made change difficult, for it required managers to let go of
long- held assumptions about what worked and what didn’t
work, which was something many of them couldn’t do.
Institutional constraints might also act as a source of inertia.
National regulations including local content rules and policies
pertaining to layoffs might make it difficult for a multinational
to alter its global value chain. As with Unilever a multinational
might wish to take control for manufacturing away from local
subsidiaries, transfer that control to global product divisions,
and consolidate manufacturing at a few choice locations.
However, if local content rules require some degree of local
production and if regulations regarding layoffs make it difficult
or expensive for a multinational to close operations in a country,
a multinational may find that these constraints make it very
difficult to adopt the most effective strategy and architecture.
Implementing Organizational Change
Although all organizations suffer from inertia, the complexity
and global spread of many multinationals might make it
particularly difficult for them to change their strategy and
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11.154
architecture to match new organizational realities. Yet at the
INTERNATIONAL BUSINESS MANAGEMENT
same time, the trend toward globalization in many industries
has made it more critical than ever that many multinationals do
just that. In industry after industry, declining barriers to
crossborder trade and investment have led to a change in the
nature of the competitive environment. Cost pressures have
increased, requiring multinationals to respond by streamlining
their operations to realize economic benefits associated with
location and experience curve economies and with the transfer
‘of competencies and skills within the organization. At the
same time, local responsiveness remains an important source of
differentiation. To survive in this emerging competitive
environment, multinationals must not only change their
strategy, but they must also change their architecture so that it
matches strategy in discriminating ways. The basic principles for
successful organizational change can be summarized as follows:
(1) unfreeze the organization through shock therapy, (2) move
the organization to a new state through proactive change in the
architecture, and (3) refreeze the organization in its new state.
Unfreezing the Organization
Because of inertia forces, incremental change is often no change.
Those whose power is threatened by change can too easily resist
incremental change. This leads to the big bang theory of
changer, which maintains that effective change requires taking
bold action early to “unfreeze” the established culture of an
organization and to change the distribution of power and
influence. Shock therapy to unfreeze the organization might
include the closure of plants deemed uneconomic or the
announcement of a dramatic structural reorganization. It is also
important to realize that change will not occur unless senior
managers are committed to it. Senior managers must clearly
articulate the need for change so employees understand both
why it is being pursued and the benefits that will flow from
successful change. Senior managers must also practice what they
preach and take the necessary bold steps. If employees see
senior managers preaching the need for change but not
changing their own behavior or making substantive changes in
the organization, they will soon lose faith in the change effort,
which will flounder as a result.
Moving to the New State
Once an organization has been unfrozen, it must be moved to
its new state. Movement requires taking action—closing
operations; reorganizing the structure; reassigning re-
sponsibilities; changing control, incentive, and reward systems;
redesigning processes: and letting people go who are seen as an
impediment to change. In other words, movement requires a
substantial change in the form of a multinational’s organization
architecture so that it matches the desired new strategic posture.
For movement to be successful, it must be done with sufficient
speed. Involving employees in the change effort is an excellent
way to get them to appreciate and buy into the needs for change
and to help with rapid movement. For example, a firm might
delegate substantial responsibility for designing operating
processes to lower-level employees. If enough of their recom-
mendations are then acted on, the employees will see the
consequences of their efforts and consequently buy into the
notion that change really occurring.
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 Refreezing the Organization
INTERNATIONAL BUSINESS MANAGEMENT
Refreezing the organization takes longer. It may require that a
new culture be established, while the old one is being dis-
mantled. Thus, refreezing requires that employees be socialized
into the new way of doing things. Companies will often use
management education programs to achieve this. At General
Electric, where longtime CEO Jack Welsh instituted a major
change in the culture of the company, management education
programs were used as a proactive tool to communicate new
values to organization members. On their own, however,
management education programs are not enough. Hiring
policies must be changed to reflect the new realities, with an
emphasis on hiring individuals whose own values are consis-
tent with that of the new culture the firm is trying to build.
Similarly, control and incentive systems must be consistent with
the new realities of the organization, or change will never take.
Senior management must recognize that changing culture takes
a long time. Any letup in the pressure to change may allow the
old culture to reemerge as employees fall back into familiar ways
of doing things. The communication task facing senior
managers, therefore, is a long-term endeavor that requires
managers to be relentless and persistent in their pursuit of
change. One striking feature of Jack Welsh’s two-decade tenure
at GE, for example, is that he never stopped pushing his
change agenda. It was a consistent theme of his tenure. He was
always thinking up new programs and initiatives to keep
pushing the culture of the organization along the desired
trajectory.
Growing Importance of Services The World Over
In recent years, service sector has been overtaking manufacturing
sector the world over. In the US, for example, the share of
services in GDP is now more than 74 per cent, while the share
of manufacturing is less than 20 per cent. Services also account
for 79 per cent of all jobs. Also, service firms are emerging
bigger than manufacturing firms. This is reflected in the
Fortune 500 listings. Now, WalMart tops the list of Fortune
500, pushing GM down. Service firm AT&T comes fifth, Sears
ninth, insurance companies like State Farm and Prudential I2th
and 13th, respectively, and Citicorp 17th. Even within manufac-
turing companies, the share of the service component in total
revenue is rising fast. General Electric, for example, derives over
40 per cent of its revenue from services. Taking the world as a
whole, the share of services in GDP has increased from 55 per
cent to 63 per cent between 1980 and 1999.
Service Sector In India
In India too, the service sector has been emerging as the
dominant component of the economy. Agriculture and
industry are growing at a slower pace, while services are growing
more rapidly. Share of services in the country’s GDP has
increased from 36 per cent in 1980-81 to 44 percent in 1997-98.
In the latter year, the share of agriculture and industry in GDP
was just 24 and 32 percent, respectively. The share of services
was in fact, just 25 per cent in 1955-56. It increased to 40 per
cent in 1987-88 and 46 per cent 1999-2000.
It seems that the notion that the majority of the people need
only roti, kapda and makaan has to be given up. Even the poor
seem to need and be availing of several services, especially the
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116
ones like education, entertainment, information and healthcare.
The middle class and the affluent are, of course, availing of a
much larger variety of services, including dining out, and travel.
Certain types of services have been growing particularly rapidly.
Higher education service is one example. Health care is another.
Financial services is yet another. Health care has, in fact, become
the fastest growing sector of the economy, growing at a
compound rate of 26 per cent annually between 1993-2000.
Entertainment too is now among the fastest growing sectors.
Spending on hotels and restaurants has grown at a compound
rate of 18 per cent. Services backed by technology and equip-
ment, like vending machines, coffee and sandwich dispensing
machines, computerised patient history records, etc., have also
registered good growth.
Reasons for the Rapid Growth
Several factors have contributed to this big growth in services.
Economic, socio-cultural and lifestyle changes taking place over
the years, especially since the 1990s, have of course been the
No.1 factor. In the chapter on Indian consumer, we had traced
these changes. Increased affluence as well as leisure with select
segments of the population is one important aspect here.
Women going to work in large numbers is another aspect. The
advent of many new and technical products, and the new
complexities of life are two other relevant aspects. The eco-
nomic reforms and liberalisation has led to the advent and
growth of many new services. The explosion in information
technology has been another great contributor to the growth of
service businesses. In itself, IT has emerged as a mega service
business. In addition, it has supported the growth of other
service businesses.
More specifically; increased affluence has led to greater demand
for services like laundry, interior decoration, care of household
products, he. Increased affluence and leisure in combination,
has led to growth of recreation and entertainment services,
travel services, etc. The phenomenon of more and more
women going to work has led to a greater demand for services
like fast foods, creches, baby sitting, domestic help, etc. The
advent and spread of complex products such as air-condition-
ers, cars, home computers, etc., has led to a greater demand for
maintenance services. Increasing complexity of life has led to a
greater demand for advisory services in income tax, accounting
and legal matters. The growing pressure on time has resulted in
greater’ demand for services like ‘home delivery’; people do not
want to waste their time visiting shops, standing in Qs and
waiting for billing and packaging of products bought by them.
They place the order over phone and the storewala arranges
home delivery. In more recent times, tele-shopping has caught
up, especially in urban centres. As for higher education, rising
consciousness of its benefits coupled with the growing ability
to pay for it has led to an upsurge in the student population
seeking higher education, especially technical, management and
computer education. Demand for medical service has grown
rapidly on account of population growth and increased health
consciousness.
Services will grow even more rapidly in the coming years:
There are indications that in India, services will grow even more
rapidly in the coming years. Economic, social and lifestyle
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INTERNATIONAL BUSINESS MANAGEMENT

generation too will be far greater in services compared to chains and shopping malls
manufacturing. It is estimated that the service industry of
Questions:-
telecom alone can absorb an investment of Rs 150,000 crore in a
relatively short span of time. The fact that India is rich in Q1 Discuss the concept of multinationals, how they operate?
human resource is another relevant factor here. It will promote Q2. Discuss on the concept of liberalization with reference to
growth of services. Indian economy?
The fact that the service sector is full of export potential is Q3. What is a service sector, how does it help in the growth of
another relevant factor. It will contribute to a big growth in economy of a country, and how the inflow of multinationals
services. has effected the working of this sector, over a period of time?
Opening up of markets for services is an important part of the
agenda of the World Trade Organisation (WTO). India can
press for the needed changes in the dispensation and try to
maximise its services export. It need not confine itself to just
computer software but can try its hands in many other areas
with potential. India’s comparative advantage in global terms
lies not so much in manufacturing as in services. In the export
context often, people refer to harnessing India’s cheap skilled
manpower in making products for export. But, the real scope in
this regard actually lies in service export. It is quite limited as far
as manufactured products are concerned. The labour content in
most manufacturing activities is dropping steadily with the
developments in technology. In contrast, the labour content in
services is quite high.
Growth in retailing will be another major contributor to the
growth in services. Retailing has already become a major service
area in the country in recent years. India has witnessed a big

Traditional services • Public relations

• Utilities such as electricity and water • Market research
supply • Physical fitness/health clubs.
• Transport services-rail; road, air, etc. • Car rental service
• Communication services-post, • Courier service
telephone, broadcasting, telecasting, • Credit cards
etc. New generation services
• Educational services • Business services
• Legal services • Recruitment services
• Accountancy services • Computer software/solutions.
• Medical services/Hospitals • Computer maintenance
• Insurance, banking, etc. • Management consultancy
• Financial services-stock brokerage; • Technical consultancy
leasing, etc.
• Management training
• Food, leisure and recreation services-
• Technical training
restaurants, hotels
• Computer training
• Catering, fast-food joints, etc.
• Value-added telecom services
• Entertainment services-cinema and
theatre, clubs and casinos, video game • Radio paging
parlours and amusement parks, etc. • Cellular phone
• Miscellaneous services such as • Fax
maintenance and repair • E-mail
• Beauty parlours • Internet
• Distributive trade/retailing • V-sat
Modern services • Video conferencing
• Travel agency • E-commerce
• Real estate
• Advertising

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