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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 is a
large corporation which both produces and sells goods or services in various countries. 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

Such a company is even known as international company or corporation. As defined by I. L.
O. or the International Labor Organization, a M. N. C. is one, which has its operational
headquarters based in one country with several other operating branches in different other
countries. The country where the head quarter is located is called the home country whereas;
the other countries with operational branches are called the host countries. Apart from
playing an important role in globalization and international relations, these multinational
companies even have notable influence in a country's economy as well as the world economy.
The budget of some of the M. N. C.s are so high that at times they even exceed the G. D. P.
(Gross Domestic Product) of a nation.
There is more universally accepter definition of the term multinational corporation. Different
authorities define the term differently

As ILO Report
The essential nature of the multinational enterprise lies in the fact that is managerial
Headquarters are located in one country ( home country ) while the 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 international business however large they may be, solely
by exporting or b hunting technology is not Multinational enterprises.


The United Nations
MNCs as ,Enterprises which control assets- factories, mines, sales offices and the like in two
or more countries.

The genesis of MNCs lies in transnational trading in early days conducted by the Greek,
Phoenician and Mesopotamian merchants. After the fall of the Roman Empire, trade between
nations become difficult.
When Europe and the Middle East steeped in feudalism resulting in wars between feudal
lords and church prohibited trade with Muslim States. Later on, merchants/traders of Italy
established trade who were considered the fore runners of the multinational firms.
The cities of Genoa, Venice, Florence and Pica became the supply depots of traders. Active
transnational operations flourished with the development of banks and money lending
Multinationals in the form of trading companies started in the seventeenth and eighteenth
centuries. The Hudson Bay Company, the East India Company, the French Levant Company
were the major transnational companies established in those days.
During the nineteenth century, huge foreign investment flowed from the Western Europe to
the underdeveloped countries or Asia, Africa and America. England was the leading exporter
of capital, followed by France, the Netherlands and Germany.
In the early twentieth century British Petroleum, Standard Oil, Ana Conda Copper and
International Nickel were the major MNCs investing mainly in mining and petroleum
The MNCs have attained their present dominating position in the world economy through a
long process of growth. S.A. Cockeril Steel Works established in Persia in 1815, followed by
several others such as Bayer of Germany in 1863, Nestle of Switzerland in 1967, Michelin of
France in 1853 and Lever Brothers of U.K. in 1890.

There are three phases in the growth of MNCs. The first phase lasted upto the 1st World War.
The field was captured mostly by the European Companies such as Imperial Tobacco,
Dunlop, Siemens, Philips, etc. The Growth of MNCs halted during the post-war period
between 1930-1950 on account of recessionary situation prevailing the world over in those
During the second phase, covering the decades of fifties and sixties, American MNCs such as
General Motors, Ford Motors and IBM emerged on the world scene.
The third phase of the growth of MNCs began since 1970s. This new era belonged to the
European, German and Japanese MNCs.
In recent years, MNCs have also emerged from developing countries such as India, Malaysia,
Hong Kong, Singapore, South Korea, Indonesia, etc.
Based U.N. (1993) data, the number of MNCs in 1992 had exceeded 37000 and their global
sales exceeded 5.5 U.S. dollar. American, European and Japanese companies are the world's
largest corporations.
Characteristics 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.
(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."

(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.
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 may be 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

What are the Advantages and Disadvantages of Multinational
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.
Advantages of MNC's for 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.
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
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
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.
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.
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
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

What Are the Cultural Problems Encountered by Multinational Companies?
Multinational companies face a number of different cultural problems as they move forward
in today's global marketplace. Many of those problems are internal cultural problems, but
some may of an external nature also. Given the nature of the global environment,
multinational companies will increasingly find themselves having to make decisions that are
based on cultural problems created by the global market.

o One of the main cultural challenges faced by multinational companies is the diversity of
cultural perspectives found within the organization. This can cause problems in terms of
management and policy development, because it makes it difficult for the organization to
make company-wide policy decisions without having to take into consideration the variety of

cultural viewpoints represented within the organization itself. In short, as companies move
forward in the global context, too much diversity may create problems.
2. Organizational Culture
o Along the same lines as an overabundance of diversity, multinational companies also face the
difficult task of developing a unified organizational culture from within. Because of the
different cultural perspectives represented within the organization as a whole, company
leaders generally face the difficult task of having to create a workplace culture to which all
employees can adhere. Concepts of teamwork and unity may have different meanings across
the national boundaries, making it far more tricky to develop a unified company perspective.
3. Human Resources
o Companies of a multinational variety will also face problems when it comes to human
resources operations. For instance, when it comes to recruiting, human resources managers
may find themselves having to overcome cultural barriers to find qualified candidates for
positions abroad. In some cases, management professionals may find themselves facing a
lack of qualified talent to fill important positions that require advanced degrees and training.
Finding employees at home who are qualified or willing to step in and fill such positions in a
context outside of their home country may also prove problematic. Some employees may
simply not want to serve in certain parts of the world.
o Another problem that multinational companies may face in a global environment is the ability
to develop products and market those products in a way that appeals to a wide segment of the
world's population. Companies run the risk of developing products and strategies that run
contrary to the cultural norms of the people to which they are attempting to market the
products. Multinational companies face the challenge of developing and marketing products
that have global appeal.
5. Communication and Cultural Norms
o Another significant issue faced by multinational companies is how business is conducted
across international lines. Differences in communication, for instance, make it essential to
understand cultural norms in the countries in which these companies operate. For instance,
John Hooker at Carnegie Melon University points out that some forms of communication

have implied and understood meanings that only make sense within a culture's context. This
form of "high context communication" requires knowledge of the culture and its understood

6. Etiquette and Customs
o Multinational companies also have to have representatives and leaders who know how to
avoid violating or ignoring cultural practices and customs in business meetings. For instance,
sending a woman to conduct business negotiations in the Middle East might be offensive to
some Middle Eastern businessmen who typically don't socialize in public with women. In
some Asian cultures, bowing, rather than shaking hands, is a more acceptable form of
greeting. Other etiquette concerns can include eating customs in business dinners, bringing
and giving gifts when appropriate, differences in body language and dress and even methods
of negotiation
Market imperfections
It may seem strange that a corporation can decide to do business in a different country, where
it does not know the laws, local customs or business practices. Why is it not more efficient to
combine assets of value overseas with local factors of production at lower costs by renting or
selling them to local investors?
One reason is that the use of the market for coordinating the behaviour of agents located in
different countries is less efficient than coordinating them by a multinational enterprise as an
institution. The additional costs caused by the entrance in foreign markets are of less interest
for the local enterprise. According to Hymer, Kindleberger and Caves, the existence of
MNCs is reasoned by structural market imperfections for final products. In Hymer's example,
there are considered two firms as monopolists in their own market and isolated from
competition by transportation costs and other tariff and non-tariff barriers. If these costs
decrease, both are forced to competition; which will reduce their profits. The firms can
maximize their joint income by a merger or acquisition, which will lower the competition in
the shared market. Due to the transformation of two separated companies into one MNE the
pecuniary externalities are going to be internalized. However, this does not mean that there is
an improvement for the society.

This could also be the case if there are few substitutes or limited licenses in a foreign market.
The consolidation is often established by acquisition, merger or the vertical integration of the
potential licensee into overseas manufacturing. This makes it easy for the MNE to enforce
price discrimination schemes in various countries. Therefore Hymer considered the
emergence of multinational firms as "an (negative) instrument for restraining competition
between firms of different nations".
Market imperfections had been considered by Hymer as structural and caused by the
deviations from perfect competition in the final product markets. Further reasons are
originated from the control of proprietary technology and distribution systems, scale
economies, privileged access to inputs and product differentiation. In the absence of these
factors, market are fully efficient. The transaction costs theories of MNEs had been
developed simultaneously and independently by McManus (1972), Buckley & Casson (1976)
Brown (1976) and Hennart (1977, 1982). All these authors claimed that market imperfections
are inherent conditions in markets and MNEs are institutions that try to bypass these
imperfections. The imperfections in markets are natural as the neoclassical assumptions like
full knowledge and enforcement do not exist in real markets.
International power
1. Tax competition
Multinational corporations have played an important role in globalization. Countries and
sometimes subnational regions must compete against one another for the establishment of
MNC facilities, and the subsequent tax revenue, employment, and economic activity. To
compete, countries and regional political districts sometimes offer incentives to MNCs such
as tax breaks, pledges of governmental assistance or improved infrastructure, or lax
environmental and labor standards enforcement. This process of becoming more attractive to
foreign investment can be characterized as a race to the bottom, a push towards greater
autonomy for corporate bodies, or both.
However, some scholars for instance the Columbia economist Jagdish Bhagwati, have argued
that multinationals are engaged in a 'race to the top.' While multinationals certainly regard a
low tax burden or low labor costs as an element of comparative advantage, there is no
evidence to suggest that MNCs deliberately avail themselves of lax environmental regulation

or poor labour standards. As Bhagwati has pointed out, MNC profits are tied to operational
efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to tailor
production processes in all of their operations in conformity to those jurisdictions where they
operate (which will almost always include one or more of the US, Japan or EU) that has the
most rigorous standards. As for labor costs, while MNCs clearly pay workers in, e.g.
Vietnam, much less than they would in the US (though it is worth noting that higher
American productivitylinked to technologymeans that any comparison is tricky, since in
America the same company would probably hire far fewer people and automate whatever
process they performed in Vietnam with manual labour), it is also the case that they tend to
pay a premium of between 10% and 100% on local labor rates. Finally, depending on the
nature of the MNC, investment in any country reflects a desire for a long-term return. Costs
associated with establishing plant, training workers, etc., can be very high; once established
in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as,
e.g., expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory
purchase of unnecessary 'licenses,' etc. Thus, both the negotiating power of MNCs and the
supposed 'race to the bottom' may be overstated, while the substantial benefits that MNCs
bring (tax revenues aside) are often understated
2.Market withdrawal
Because of their size, multinationals can have a significant impact on government policy,
primarily through the threat of market withdrawal. For example, in an effort to reduce health
care costs, some countries have tried to force pharmaceutical companies to license their
patented drugs to local competitors for a very low fee, thereby artificially lowering the price.
When faced with that threat, multinational pharmaceutical firms have simply withdrawn from
the market, which often leads to limited availability of advanced drugs. In these cases,
governments have been forced to back down from their efforts. Similar corporate and
government confrontations have occurred when governments tried to force MNCs to make
their intellectual property public in an effort to gain technology for local entrepreneurs. When
companies are faced with the option of losing a core competitive technological advantage or
withdrawing from a national market, they may choose the latter. This withdrawal often
causes governments to change policy. Countries that have been the most successful in this
type of confrontation with multinational corporations are large countries such as United
States and Brazil

which have viable indigenous market competitors.

Multinational corporate lobbying is directed at a range of business concerns, from tariff
structures to environmental regulations. There is no unified multinational perspective on any
of these issues. Companies that have invested heavily in pollution control mechanisms may
lobby for very tough environmental standards in an effort to force non-compliant competitors
into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries.
For every tariff category that one multinational wants to have reduced, there is another
multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a
company's imported components will vary, so some firms favor tighter import restrictions,
while others favor looser ones. Says Ely Oliveira, Manager Director of the MCT/IR: This is
very serious and is very hard and takes a lot of work for the
Multinational corporations such as Wal-mart and McDonald's benefit from government
zoning laws, to create barriers to entry.
Many industries such as General Electric and Boeing lobby the government to receive
subsidies to preserve their monopoly.
Many multinational corporations hold patents to prevent competitors from arising. For
example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on
equipment and infrastructure and Microsoft benefits from software patents. The
pharmaceutical companies lobby international agreements to enforce patent laws on others.

What are the management functions in Multinational
1. Planning in the MNC
Planning involves analyses of international and external environment to find out the
strengths, weaknesses, opportunities and threats. After conducting the SWOT analysis, the
management sets the objectives. It is very difficult to analyse the external environment. This

is because the world markets, are changing continuously.

Even large MNCs find it difficult to compete in the world markets. Therefore, they form
Global Strategic Partnerships (GSPs) with local companies. Due to GSPs, planning becomes
easier. That is because the managers of the local branches have full knowledge about the
local environment. Some MNCs use consultants to study the external environment of foreign

2. Organising in the MNC
Organisation is a structure, which helps to achieve corporate objectives.
A MNC can select an organisation structure from the following options:-
1. A MNC may appoint one Vice-President for all its foreign branches. He will control
all the foreign branches from the MNC's head office.
2. A MNC may use geographic structures. It may appoint a head in every single country
or region in which it operates. For e.g. A manager may be appointed as a Head for the
Asian region or for India; another manager may be in-charge of the European region,
3. A MNC may also organise the structure on the basis of production lines. For eg. One
manager may be in charge of one product. Another manager may be incharge of
another product, etc.

3. Staffing in MNC
Staffing involves selecting the right man for the right job. It also includes manpower
planning, promotion, transfers, training and development, compensation, etc.
Staffing function of an international business is very important, especially while appointing
the top-level managers. The top-level managers must be competent and committed persons.
A MNC has three options to select managers :-
1. Managers from the home country who are working in the headquarters of the MNC.
These managers know about the MNC's policies and operations.

2. Managers from the host-country can be selected to manage the operations in that
country. These managers know their countries environment, i.e. culture, legal,
educational, political, etc. This environmental knowledge is very important for the
success of the MNC.
3. Managers from a third country who have worked in the MNC's parent headquarters,
or experienced managers from some other MNC, can be selected.

The MNC must select the right managers to manage the international business. They must
consider factors, such as compensation, labour laws of the host country, level of competence
of the managers in the host country, etc.

4. Leading in the MNC
Leading is the process of influencing the subordinates to perform willingly towards group
objectives. Leading involves motivating and communicating. Managers must have effective
leadership qualities.
Leading and motivating employees require an understanding of employees and their cultural
environment. For eg., Participative management may work well in democratic countries, but
it may confuse the employees in a country having a dictator.
Communication is a problem for MNCs because they do business in countries where different
languages are spoken. However, their communication problems can be solved by having local

5. Controlling in MNC
Controlling involves monitoring actual performance and taking corrective measures, to
correct deviations, if any.
Controlling is a bit difficult in international business due to certain reasons:-
1. Revenues, costs, and profits are measured in different currencies.
2. The ratios between currencies are subject to foreign exchange fluctuations.
3. Accounting practices and financial reporting differ from country to country.


The rapidity with the MNCs are growing is indicated by the fact that while according to the
world investment report 1997
there were about 45,000 MNCs with 2,80,000 overseas affiliates; according to the
world investment report 2001,
there were over 63,000 of them with about 8,22,000 overseas affiliates. China was host to
about 3.64 lakh of the affiliates (i.e., more than 44% of the total) compared to more than 1400
in India. The developed countries have less than 12% if these affiliates
The possess staggering resources as would be clear from the fact that the sales of 200 top
corporations in1982 were equivalent of 24.2 per cent of the worlds GDP and have risen to
28.3 per cent of the world GDP in 1998. This shows that 200 top MNCs now control over a
quarter of the worlds economic activity. In fact the combines sales of thee 200 MNCs
estimated at &7.1 trillion in 1998 surpass the combined economies of 182 countries. If we
subtract the GDP of the big 9 economies -USA, Japan, Germany, France, Italy, UK, Brazil,
Canada and china-from the worlds GDP, the GDP of the remaining 182 countries of the
world comes to $6.9 trillion in 1998 which is less than the sales of the 200 top MNCs. An
idea of the giant size of these MNCs can also be had from the revelation made in a study
conducted by the Washington based institute of policy studies (IPS) that of the 100 largest
economies in the world, 51 are corporations; only 49 are countries.
The MNCs are estimated to employ directly, at home and abroad. Around73 billion
people representing nearly 10 per cent of paid employment in non-agricultural activities
world wide and close to 20 per cent in the developed countries considered alone/ in addition ,
the indirect employment effect of the TNC activities ate at least equal toy hew direct effects
and probably much larger. For example, the US footwear company Nike currently employs
9000 people; while
nearly 75,000 people are employed by is independent sub- contractors located in different
countries. Based on such information, the total number of jobs associated with TNCs world
wide may have been 150 million at the beginning of the 1990s. 6
1. Expansion of market territory: The increase in per capita income alongside the growth
of various economies and growth of GDP resulted in the rise of living standards of the
people. Due to these factors. The market territory of the firms expended. In addition
to this, the large operations of the MNCs builds up its international image, which

contributed to extend its market territory beyond the physical boundaries of the
country in which it is incorporated?

2. Market Superiorities: A number of market superiorities can ve observed in MNCs
over the domestic companies. They may be:
a. Availability of more reliable and up to date data and information:
b. They enjoy market reputation:
c. They adopt more effective advertising and salad promotion technique and
thymus they face less difficulties in marketing the products:
d. They have efficient warehousing facilities due to lower inventory requirement
and also enjoy quick transportation

3. Financial superiorities: An MNC enjoys financial superiorities over domestic
companies. They are:
a. Huge financial resources at the disposal of the MNCs. they can turn the
environment and circumstances in their favor by utilizing these resources:
b. They have easy access to external capital markets:
c. Because of its international regulation, thy can raise funds from international
banks and financial institutions easily.

4. Technological superiorities: Expansion or growth of MNCs is dot to the technological
backwardness of underdeveloped contraries. Infect MNCs are rich in technology.
Thee rich financial resources of the MNCs enable them to invest on R$ D and develop
the advanced technology. There are certain reasons due to which the developing
countries regard the transfer of technology from the MNCs. These reasons are:
a. Lack of industrialization and insufficient resources:
b. Local manpower , capital, etc. cannot be optimally utilized by the developing
countries on their own:
c. Developing countries are unable to import raw materials, capital equipment,
technology, etc: on their own due to paucity of resources:
d. The developing countries also lack in marketing the products due to
e. Lack in exploiting mineral and nature of its own.

5. Product innovation: Advanced R$D departments enable MNCs to develop new
products and superior designs of their products. Developing and underdeveloped
countries suffer from limitation in this regard. Therefore, they invite MNCs to their

Multinational corporations are important factors in the processes of globalization. National
and local governments often compete against one another to attract MNC facilities, with the
expectation of increased tax revenue, employment, and economic activity. To compete,
political powers 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
Criticism of Multinational companies
Anti-corporate advocates criticize multinational corporations for entering countries that have
low human rights or environmental standards. 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
Enabled by Internet based communication tools, a new breed of multinational companies is
growing in numbers. These multinationals start operating in different countries from the very
early stages. These companies are being called micro-multinationals. What differentiates
micro-multinationals from the large MNCs is the fact that they are small businesses. Some of
these micro-multinationals, particularly software development companies, have been hiring
employees in multiple countries from the beginning of the Internet era. But more and more
micro-multinationals are actively starting to market their products and services in various
countries. Internet tools like Google, Yahoo, MSN, Ebay and Amazon make it easier for the
micro-multinationals to reach potential customers in other countries.

Service sector micro-multinationals, like Facebook, Alibaba etc. started as dispersed virtual
businesses with employees, clients and resources located in various countries. Their rapid
growth is a direct result of being able to use the internet, cheaper telephony and lower
traveling costs to create unique business opportunities.
Low cost SaaS (Software As A Service) suites make it easier for these companies to operate
without a physical office.

One of the economic hope and aspirations to get out poverty and under development which
had plagued the developing world from the time immemorial is to attract foreign direct
investments (FDI) into their various economies. It therefore becomes a dream come true
when Multinational Corporations (MNCs) decide to invest in developing countries.
Currently, there are over 35,000 multinational corporations globally, controlling more than
15,000 foreign subsidiaries and accounting for about one-third of the entire world production.
The developing countries that received the most multinational investment are those perceived
to have the highest growth potential. They are generally known as the newly industrialized
countries and include Asian countries such as China, Singapore, Malaysia, Thailand and
Latin American countries such as Mexico, Brazil and Argentina. The ten biggest recipient of
foreign direct investment receive nearly 95% of the total, while all the African countries put
together receive less than 4%. The poorest 50 countries of the world between them receive
less than 2%.

Originally, most MNC investment in developing countries was in mines and plantations.
Today mining accounts for only 6% with manufacturing and services accounting for over half
and Oil & Gas for about one-third of the total. The value of the total MNC worldwide is
estimated to be more than $1.5 trillion of which approximately one-third is in the developing


Virtually many of the world largest companies such as Coca cola, Shell, IBM, Guinness
Breweries, General motors to mention a few have managed to spread their tentacles in most
parts of the world. In terms of turnover, some of them exceed the national incomes of many
smaller countries like our country, but I must hasten to add that there are also thousands of
very small specialists multinationals which are a mere fractions of the above mentioned ones,
that are also operating significantly in the global system. MNCs cover the entire spectrum of
business activity from manufacturing to extraction agricultural production, chemical
processing, service provision and finance and therefore there is no peculiar line of activity of
the multinationals.

Consequences of MNCs on developing countries

As much as MNCs investments can be significantly rewarding in developing economies, it
could produce adverse consequences for the host developing countries.


Governments in the developing countries are always on the look-out to attract Foreign Direct
Investment (FDI) and are prepared to put up considerable finance by making considerable
concessions because of employment. MNCs investment constitutes a stimulus to economic
activity and employment creation. The employment that MNCs create is both direct in the
form of people employed in the new production facility and indirect through the impact that
the MNC has on the local economy. The Ghanaian economy for example has benefited
immensely with the influx of many mining, petroleum, banking and telecommunication
companies like MTN, Vodafone, and Zain to mention but a few. This has accounted for an
increase in the domestic incomes and expenditure and hence the stimulus in domestic
business as lots of jobs had been created. The workers also gain from the technology
imported by the MNCs (technology transfer).


Taxation revenues

Taxation is also a plus in the operations of the MNCs for the domestic economy. MNCs and
domestic producers are required to pay taxes and therefore contribute to the public finances.
Giving the highly profitable nature of many MNCs, the level of tax revenue raised from this
source is mostly significant. The host countrys balance of payment position is also likely to
improve on a number of counts as a result of MNC investment. Firstly, the investment will
represent a direct flow of capital into the country and secondly, in the long term, the MNC
investment is likely to result in both import substitution and export promotion, for, goods
previously purchased as imports could now be produced locally. Despite the gains,
multinational investment may not always be beneficial either in the short or long term with
particular reference to the developing world. It is possible that jobs created in one region of a
host country by a new MNC with its superior technology and working practices may cause
businesses to fold else where and thus increase in the level of unemployment in those region.
Profits repatriation which constitutes capital flight might effectively undermine many or all of
the potential gains from multinational investment. In addition to these concerns, there are also
the following problems;


There is much uncertainties associated with the operations of MNC. They are highly dynamic
and therefore can simply close down their businesses in the foreign countries and move. This
is especially likely with older plants which would need upgrading if the MNC were to remain
or with plants that can be easily sold without much loss. If a country has a large foreign
multinational sector within the economy, it will become very vulnerable and face great
uncertainty in the long term. It may thus be force to offer the multinational perks in the form
of grants, special tax relief and other concessions in order to persuade them to remain all of
which are costly to the tax payers in the developing countries.


The fact that MNC can shift production locations not only gives them production advantages
or economic flexibility, but it enables them to exert control over their host nations. This is

particularly the case in many of the developing nations where MNCs are not only major
employers but in many cases the principal wealth creators. Thus attempts by the host state,
for example to improve workers safety and welfare or impose pollution controls may go
against the interest of the MNCs. MNC might thus oppose such measures or even threaten to
withdraw from the country if such measures are not modified or dropped, rendering those
developing economies vulnerable to serious economic fluctuations and shocks.

Transfer pricing

Like domestic producers, MNCs are always finding ways to reduce their tax liabilities. One
unique way that an MNC can do this is through the process know as transfer pricing. This
enables the MNC to reduce its profits in countries with high rate of profit tax, and increase
them in countries with low rates of profit tax. This can be achieved by simply manipulating
its internal pricing structure. For example, take a MNC where subsidiary A in one country
supplies materials to subsidiary B in another country. The price at which the materials are
transferred between the two subsidiaries will ultimately determine the costs and hence the
level of profit made in each country. Assume that in the country where subsidiary A is
located, the level of corporate tax is half of that of the country where subsidiary B is located.
If materials are transferred from A to B at very high prices, the Bs costs will rise and its
profitability will fall. On the other hand, As profitability will rise. The MNC clearly benefits
as more profits is taxed at a lower rather than higher rate. Had it been the other way around,
with subsidiary B facing the lower rate of tax, then the materials would be transferred at a
low price. This would increase subsidiary Bs profits and reduce As.


Many MNCs are accused of simply investing in countries to gain access to natural resources,
which are subsequently extracted in a way that is not sensitive to the environment. In the
developing nations where there is the dire need for foreign direct investments, they are
frequently prepared to allow MNCs to do this. We often put premium on the short run gains
from the MNCs presence than on the long run depletion of precious natural resources or
damage to the environment. Perhaps, we are a victim of this circumstance as a nation as far as
the mining sector of the country is concerned. Governments in the developing world often

have a very short run focus. They are concerned more with their political survival through the
ballot box rather than the long term interest of their people.

Various MNCs contribution to Indias industrial development has been a very mixed
blessing. The entries of all hues of MNCs have made the industrial development scene even
more uneven and patchy. However, the scene is changing faster than ever, and it is just a
short time before even this picture changes significantly.

Why are Multinational Companies in India?

There are a number of 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 a major 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 financial liberalization of the country,
especially after 1991. Government, nowadays, makes continuous efforts to attract foreign
investments by relaxing many of its policies. As a result, a number of multinational
companies have shown interest in Indian market


Regulation of MNCs in India
Different government agencies in India control MNCs. These agencies include: (i) the
department of company affair (ii) The Reserve Bank of India (iii) The Ministry of Industrial
Development and (iv) The ministry of finance. Control over MNCs in India is not efficient as
these agencies have no coordination among themselves. The government of India imposed
certain regulation to control MNCs. These are:
1 . Permissible period of agreement was reduced from 10 to 5 years.
2. The maximum rate of royalty was imposed in technology imports for those industries
which were allowed to import technology.
3. Those industries were moot allowed to import technology where domestic companies ate
4. Exports and other marketing restrictions were imposed.

Some regulations as stated above were imposed. However these regulations are moot
adequate and therefore MNCs be properly regulated to safeguard the interest of the country.
Following suggestions ate given to regulate them.

a. Government interference: Host country government should have its representatives on the
management of thee corporations. Interferences of the representatives of the government is
must on such matters as influence or are likely to influence the economic development of the
country. It should be made clear to the MNCs that if they do not function in the Interest of the
country they are likely to be nationalized.

b. Local ownership: Majority or 51 per cent shares of the subsidiaries of MNCs should be
held special industries of the host country.

c. Beneficial collaborations: Government should allow collaboration of MNCs for those
special industries where such collaboration is essential.

d. Research of an appropriate technology: MNCs many be compelled to spend a part of their
profit in the development of appropriate R $ D for the benefit of host country.

e. Substitution of technology: Only in the initial stages of development the imported
technology should be used. Thereafter that technology should be developed indigenously so
that the dependence on MNCs could be reduced.

f. Collaboration in heavy and basic industries: Collaboration with MNCs should be allowed
only in heavy and basic industries. Collaboration in consumer goods industry should not be
allowed as it many hamper the domestic industry.

g. Check on monopolistic tendencies: Oligopolistic or monopolistic tendencies of MNCs
should be closely watched to safeguard the interest of consumers as well as of local

Salient feature of MNCs in India:
The salient features of MNCs in India are as follows:
a. Bi-Country: Most of the MNCs functioning in India have the rheas offices in two countries
i.e. and U.S.A... Out of 171 subsidiary companies 116 had their head offices in U.K.
and 25 in U.S.A.

b. Trends of MNCs: Numbers of MNCs in India have gone down but the volume of their
assets increased considerably. In 1974, the number of MNCs in India was 575 which came
down to 350 in 1980. But their assets increased from Rs. 1741 crore to Rs. 2401 crore.
During the same period the number of subsidiaries also came down to 125 from 188.

c. Sources of capital: Large numbers of subsidiaries operating in India have mobilized their
financial resources from within India.

d. Industry wise distribution: Of all the MNCs operating in India 30 per cent are engaged in
plantation (tea) and mining. Large of their branches are also found in the field of trade
banking and services their number is relatively less in case of industries. Share of commerce
trade and finance in the total assets of these corporations is 76 per cent. Share of processing
industry and transport is 6 per cent each respectively.


e.High rate of profitability: The rate of profitability of MNCs in comparison to domestic
industry is very high. Profitability of MNCs (private) on an average was 34% whereas that of
Indian private companies was 11.5 per cent. Similarly the profitability of foreign public
limited companies was 24 per cent as again only 11 per cent in case of domestic public
limited companies.

f. Subsidiaries: a company is called a subsidiary company if atleast 50per cent of its paid up
capital is held by another company. Presently there are 88 subsidiaries of MNCs. Out of these
83 companies the share of MNC varies 70 to 100 per cent of their share capital.

g.Heavy remittances abroad: according to Dr.K.N.Raj, rate of profitability on MNCs is very
high. In a short period they repatriate the amount of initial investment to their head office.
Besides they also remit to their parent company; large amounts by way of royalty and
technical services. For example Essoan American Petroleum Company had remitted to its
head office Rs. 83 crore as a part of profit on investment of Rs. 30 crore in India.

h. Limited transfer of improves technology: The MNCs in India have kept their technology a
closely guarded secret. Transfer of improved technology by MNCs to India has taken place
on a very limited scale. It is the old technologies which mostly continue to prevail in India.

i. Indianisation: MNCs have accepted the proposal of Indianisation. According to the
provision of foreign exchange management act (FEMA), all foreign companies had to reduce
their ownership to 74 per cent or they had to reduce their share in the share capital of Indian
branches to 40 per cent. Most of the MNCs have accepted these conditions. Many of them
have already taken steps to reduce the amount of foreign capital.

Profit of MNCs in India

It is too specify that the companies come and settle in India to earn profit. A company
enlarges its jurisdiction of work beyond its native place when they get a wide scope to earn a
profit and such is the case of the MNCs that have flourished here. More over India has wide
market for different and new goods and services due to the ever increasing population and the
varying consumer taste. The government FDI policies have somehow benefited them and

drawn their attention too. The restrictive policies that stopped the company's inflow are
however withdrawn and the country has shown much interest to bring in foreign investment

Besides the foreign directive policies the labour competitive market, market competition and
the macro-economic stability are some of the key factors that magnetize the foreign MNCs

Following are the reasons why multinational companies consider India as a preferred
destination for business:

1. Huge market potential of the country
2. FDI attractiveness
3. Labour competitiveness
4. Macro-economic stability

Advantages of the growing MNCs to India

There are certain advantages that the underdeveloped countries like and the developing
countries like India derive from the foreign MNCs that establishes. They are as under:

1. Initiating a higher level of investment.
2. Reducing the technological gap
3. The natural resources are utilized in true sense.
4. The foreign exchange gap is reduced
5. Boosts up the basic economic structure


Disadvantages of the growing MNCs to India
Some of disadvantages are
1. Supplant domestic savings by destroying competition, remove local entrepreneur, unstable
industrial growth
2. Cause strain to BOP i.e. balance of payment by repetration of profits, interests, loyalities,
management fees.
3. Local professional cannot access to working strategies of MNCs
4. Mncs by introducing new technology cause technological unemployment. mncs adopt
capital intensive technique. so machine takes place of workers

MNCs and Indian Industries:
Some economists think that MNCs are helpful for Indian industrial sector they think that
Indian companies learn new technique of production and new management techniques with
the arrival of MNCs in the Indian economic scene. MNCs increase competition in the
industrial sector so when Indian companies compete with global giants they also improve in
their working. With the entrance of MNCs in India demand for skilled persons increased to a
great extent so more and more people are becoming skillful and the problem of skilled
persons is solved for Indian industries also. MNCs also bring foreign capital in the country,
which help to expand the market and Indian industries also take benefit of it.
There are some economists who have some different opinion according to them the
technology transferred by them is not useful for countries like India because MNCs use
capital intensive technique and developing countries have scarce capital and labour abundant
so the technology they transfer is of little use. The competition increased by MNCs is also
disastrous for domestic industries only few strong domestic industries have enough strength
to face the competition with global giants. As well as skilled persons are concerned MNCs
give higher salaries to the skilled persons and thus able to explore the services of the most
skilled persons and the Indian industries are still out of the services of these skilled people.
No doubt MNCs bring foreign capital in India but this capital later becomes the cause of
reimbursement of profit to the MNCs parent countries, which cause capital flight from the

MNCs and agriculture:
Indian economy is an agrarian economy; a major part of the population depends on
agriculture directly or indirectly. If we go back to past few decades Indian agriculture was
considered backward but now the time is changing and MNCs such as Mahyco-Monsanto
help in modernizing Indian agriculture. They provide modern agricultural inputs such as
HYV seeds, pesticides, fertilizers and modern agricultural equipments to the Indian farmers
and thus Indian agriculture has turned itself from subsistence level to making profits. MNCs
also encourage research activities in the field of agriculture in developing countries like India.
If we see the other part of the picture India with billion plus population, has put agriculture at
the heart of its economy and food security at the center of its agriculture policy. In
developing countries, MNCs encourage commercial farming because they need cheap raw
material. Farmers also get good amount for their crop so the result is danger of food security,
which the world is facing these days. A big number of Indian farmers are small and medium
farmers who are not able to use expensive agricultural equipments so the gap is widening
among rich and poor farmers, which is disastrous for the agriculture. Moreover MNCs are
making Indian farmers dependent on HYV seeds provided by them and thus the biodiversity
of Indian varieties are in danger.

MNCs from social and moral viewpoint:
MNCs are not fair in their working in the developing countries. Many MNCs are not paying
their tax liability, they prefer to establish in that country where tax laws are not strict
similarly they prefer to establish in that country where environmental laws are also not much
strict and these are mainly developing countries. They even send their toxic waste in these
countries by taking advantage of loose environmental laws even the quality of their products
vary with country to country we can take the example of coca cola which is of superior
quality in USA and is of inferior in India. MNCs also responsible for misallocation of
resources in the developing countries. They provide mainly luxurious products because there
is more profit in it. Thus demand for these products increase due to demonstration effect and
this leads to misallocation of resources towards luxurious goods but the need of developing

countries is to produce more and more necessary goods because most of the people belong to
poor or middle class.

Another aspect, which judges MNCs morally, is political interference. Generally it is the
practice of MNCs to gain the economic power in developing countries and then get political
power by giving help to the politicians at the time of elections and then manipulate industrial
policies in their favor they also interfere in the important political matters of these countries
which can cause a big danger to the sovereignty of developing countries.


Foreign Collaboration in India

In India there are basically two forms of foreign collaboration. The collaboration may be either
financial collaboration or it may be technical. In case of financial collaboration the approving
authority is the Reserve Bank of India and in the case of technical collaboration the approving
authority is department of Industrial Development in the Ministry of Industry, Government of
The approach of the Government has been roughly the same since the year 1949 that is to allow
foreign direct investment on preferential basis in sectors that will be beneficial for the country.
The foreign or Indian undertakings will have to conform to the Industrial policy of the country.
Foreign investors are in all cases considered equal to their Indian partners.

The Government has enforced The Foreign Exchange Management Act 1999 (FEMA) in place
of the Foreign Exchange Regulation Act,1973 (FERA). The Old act aimed at controlling foreign
exchange whereas the new Act seeks to regulate foreign exchange.

A breach of the provisions of the old act resulted in a criminal offence with the burden of proof
lying on the guilty. However the new Act provides for only a civil remedy and for an offence
the accused cannot be arrested unless he defaults in payment of penalty for contravention.

For setting up a foreign collaboration, approval from the government under the relevant foreign
exchange laws in force and the requisite Government policy is required.

Under the Act now a foreign collaboration may be formed by a foreign company without the
necessity of forming a company with an Indian counterpart. Any Foreign collaboration which
exceeds the minimum limited set out in the automatic route requires approval from the

The Government has set up a foreign investment promotion board to encourage foreign
investment in India. Some of the functions of the Board include:
speed up clearance of proposals
to review the collaborations cleared
Earmarking and ascertaining of contacts to invest in India.

10 Best MNCs
1. Microsoft

Microsoft Corporation, an American multinational corporation is headquartered in Redmond,
Washington, United States that develops, manufactures, licenses, and supports a wide range
of products and services mostly associated with computing through its various product

2. NetApp

NetApp previously known as Network Appliance is a proprietary computer storage and data
management company headquartered in Sunnyvale, California.

3. Google

Google, an American multinational Internet and software corporation specialized in Internet
search, cloud computing, and advertising technologies is headquarters in United States. It
develops numerous Internet-based services and products, and makes profit primarily from
advertising through its Ad Words program.

4. FedEx Express

FedEx Express is a cargo airline based in Memphis, Tennessee, United States. It is
considered the world's largest airline in terms of freight tons flown and the world's fourth
largest in terms of fleet size

5. Cisco
Cisco Systems is, an American multinational corporation headquartered in San Jose,
California, United States, designs, manufactures, and sells networking equipment


6. Marriott
Marriott Corporation, a hospitality company was founded originally by J. Willard Marriott
and Frank Kimball as Hot Shoppes

7. McDonald's
McDonald's Corporation today is the world's largest chain of hamburger fast food restaurants,
serving around 68 million customers daily in 119 countries

8. Kimberly-Clark
Kimberly-Clark Corporation is an American corporation that manufactures mostly paper-
based consumer products.

9. SC Johnson
S.C. Johnson was earlier previously known as S. C. Johnson Wax is a privately held, global
manufacturer of household cleaning supplies and other consumer chemicals based in Racine,

10. Diageo
Diageo is a global alcoholic beverages company headquartered in London, United Kingdom.
It is the world's largest producer of spirits and a major producer of beer and wine.


After discussing various aspects of MNCs in developing country like India the big question
before us is whether MNCs play positive or negative role in developing countries? Generally
the governments of developing countries dont keep control on the working of MNCs, which
is major fault on their side. MNCs can be helpful for developing countries only when they are
kept under control. We should not give incentives to the MNCs only because they are coming
from some powerful advanced countries. So MNCs should face same rules and regulations as
the domestic industries of the developing countries are facing.