Chapter 1

A. Meaning of MNC
A large commercial organization with affiliates operating companies in a number of different
countries. A typically one normally functions with a headquarters that is based in one country,
while other facilities are based in locations in other countries. In some circles, this type of
corporation is referred to as a multinational enterprise (MNE) or a transnational corporation
(TNC).
Many authorities, scholars, and authors have variously defined multinational companies from
different perspectives. Some of these definitions are meticulously written below:
“A multinational enterprise (MNE) is a company that is headquartered in one country but has
operations in one or more other countries.” - Alan M. Rugman, Simon Collinson
According to Fred Luthans and Jonathan P. Doh “A firm having operations in more than one
country, international sales, and a nationality mix among managers and owners”.
According Drucker (1974), The multinational company grew from the emergence of a genuine
world market demand transcending national, cultural and ideological boundaries, due to the
information explosion.
In the words of Hodgetts and Luthans (1997), multinational companies are firms having
operations in more than one country, international sales, and nationality mix of managers and
owners.
Going by all these definitions highlighted above, it could be asserted that they all took a
multinational company and defined it from structural, functional and geographical perspectives
and from the point of scope covered geographically.

B. The Nature of Multinational Enterprises

Not all businesses can be called a multinational corporation. There are certain features that must
be met for them to be named as such. The following are the characteristics of multinational
corporations:
One characteristic of MNEs is that their affiliates must be responsive to a number of important
environmental forces, including competitors, customers, suppliers, financial institutions, and
government. In some cases, the same forces are at work in both the home and host-country
environments. For example, many of General Motors’ competitors in the US market are the same
as those in Europe: BMW, Ford, DaimlerChrysler, Honda, and Volkswagen, among others.
Similarly, MNEs often use the same suppliers overseas that they employ domestically, and it is
common to find home country- based suppliers following their MNE customer to other
geographic locales in order to provide the same types of services worldwide. In other cases,

Page 1 of 14
 Chapter 1

however, these same environmental factors can be very different on each of the markets in which
the firm operates.
A second characteristic of an MNE is that it draws on a common pool of resources, including
assets, patents, trademarks, information, and human resources. Because the affiliates are all part
of the same company; they have access to assets that are often not available to outsiders. For
example, both Ford and General Motors compete vigorously in Europe and many of the design
and styling changes developed for their European cars have now been introduced in US models.
The flow of information and technology between European and US affiliates has led to success
in the worldwide market for many MNEs. Similarly, if an affiliate needs expansion funds, an MNE
will often help out by working with the affiliate to raise the money. If a loan is needed, the affiliate
is likely to find many financial institutions that are willing to provide the money because the MNE
will back the loan.
A third characteristic of an MNE is that it links together the affiliates and business partners with
a common strategic vision. Simply put, all of the firms with whom the MNE works fit into the
company’s overall plan of what it wants to do and how it intends to go about implementing this
strategy. General Motors (GM) is a good example. The auto giant has announced that it is now
going to rely heavily on partnerships to help it grow.4 GM realizes that no auto maker has all of
the resources for achieving leadership in every region of the world or in every product segment.
As a result, the company has formed a manufacturing partnership with Toyota to conduct research
and development on fuel cell and gas-electric hybrid vehicles. GM also has created an alliance with
Fuji Heavy Industries and its Subaru brand that allows GM to benefit from Fuji’s strengths in
small sport utility vehicles, continuously variable transmissions, and all-wheel-drive systems and,
in turn, gives Fuji access to GM’s vehicle platforms and other important manufacturing
technologies. These types of arrangements are part of GM’s new strategic vision—one that is not
limited just to building cars. Today the company is looking into ways of providing customers with
other auto-related services as seen by its Onstar communications program with wireless phone
service that allows drivers to be in constant contact with someone who can give them information
and assistance.
There are some major characteristics of Multinational Corporations-
Create maximum operation: The multinational companies are extended to many countries.
People can grasp the opportunity. People can join the multinational companies according to their
capabilities. Manpower can be well utilized in the multinational companies.
Very high assets and turnover: To become a multinational corporation, the business must be
large and must own a huge amount of assets, both physical and financial. The company’s targets
are so high that they are also able to make substantial profits.
Transfer of technology: these multinational companies are establishing with hug capital and
advanced technology. It also transfers the technology in the host countries that can be used for
production.

Page 2 of 14
 Chapter 1

Marketing superiority: it is large organization which has international name and fame. It has
good network world wide for distribution of goods.
High efficiency: these organizations operate their business with efficiency. They use advanced
technology. They also involve keenly in research works. They used many trained people that helps
in the production of quality goods.
Multiple currencies: Multinational companies deal in currencies of several countries. The risk is
high because of changing values of currencies in host countries.
Centralized Control: MNCs have their branches in different countries. These branches are
monitored, controlled and managed by centralized offices or the headquarters usually located in
the home countries.
Professional management: MNCs hire qualified, professional, and skilled people. They make all
possible efforts to keep their employees updated by ensuring proper training on a regular basis.
International operation: MNCs establish their branches, plants, and offices in more than one
country. They operate through a network of branches, subsidiaries and affiliates in host countries.
For example, Coca Cola, Apple, etc.
Sophisticated Technology: MNCs adapt to the latest trends and follow advanced technology to
supply world class products. They use capital-intensive technology and innovative techniques of
production.
Forceful marketing and advertising: One of the most effective survival strategies of
multinational corporations is spending a huge amount of money on marketing and advertising. It
is how they are able to sell every product or brand they make.

C. Why firms become Multinational Enterprises

Companies become MNEs for a number of reasons. One is to diversify themselves against
the risks and uncertainties of the domestic business cycle. By setting up operations in
another country, multinationals can often diminish the negative effects of economic swings in the
home country. This is a form of international diversification, and it has been widely used by
Japanese MNEs, for example, which have found that, while their home economy has been in an
economic slump since the 1990s, their US operations have done quite well.
A second reason is to tap the growing world market for goods and services. For example,
many MNEs have targeted the United States because of its large population and high per capita
income. It is the world’s single largest market in terms of gross domestic product. And since
Americans have both a desire for new goods and services and the money to buy them, the United
States can be an ideal market. MNEs are also targeting China. Although per capita gross domestic
product is not very high, the country’s large population and growing economy make it very

Page 3 of 14
 Chapter 1

attractive to multinationals. In 2001, China entered the World Trade Organization, and this
acceptance of international rules made China more attractive for MNEs.
Firms also become MNEs in response to increased foreign competition and a desire to
protect their home market share. Using a “follow the competitor” strategy, a growing number
of MNEs now set up operations in the home countries of their major competitors.
This approach serves a dual purpose: (1) it takes away business from their competitors by offering
customers other choices, and (2) it lets competitors know that, if they attack the MNE’s home
market, they will face a similar response. This strategy of staking out global market shares is
particularly important when MNEs want to communicate the conditions under which they will
retaliate.
A fourth reason why companies become an MNE is to reduce costs. By setting up operations
close to the foreign customer, these firms can eliminate transportation expenses, avoid the
overhead associated with having intermediaries handle the product, respond more accurately and
rapidly to customer needs, and take advantage of local resources. This process, known as
“internalization” of control within the MNE, can help to reduce overall costs.
A fifth reason is to overcome protective devices such as tariff and non-tariff barriers by
serving a foreign market from within. The EU provides an excellent example. Firms outside
the EU are subject to tariffs on goods exported to EU countries. Firms producing the goods
within the EU, however, can transport them to any other country in the bloc without paying
tariffs. The same is now occurring in North America, thanks to the North American Free Trade
Agreement (NAFTA), which has eliminated tariffs among Canada, the United States, and Mexico.
A sixth reason for becoming an MNE is to take advantage of technological expertise by
manufacturing goods directly (by FDI) rather than allowing others to do it under a license.
Although the benefits of a licensing agreement are obvious, in recent years some MNEs have
concluded that it is unwise to give another firm access to proprietary information such as patents,
trademarks, or technological expertise, and they have allowed current licensing agreements to
lapse. This has allowed them to reclaim their exclusive rights and then to manufacture and directly
sell the products in overseas markets.
D. The Advantages of Multinational Organizations
Multinational businesses and non-profit organizations have numerous advantages. In some
instances, the advantages are excellent for the business and the regions in which they operate. In
others, the multinational arguably has an unfair advantage and over local businesses and have a
net negative impact. The business model is controversial, and is subject to scrutiny on a global
scale.
Cheap Labor Force
Multinational organizations have the ability to source labor cheaply. The ability to operate in
multiple different companies builds in the ability to capitalize on cheap labor markets. The

Page 4 of 14
 Chapter 1

multinational footprint is clear in countries with abundant labor forces willing to operate at a lower
cost. This maximizes profit margins and can also deliver goods to markets at a lower cost. For the
local economy, the arrival of a multinational signals a supply of jobs to depressed areas, potentially
stimulating the local economies. The downside to the labor advantage is the potential for abusive
labor practices. Regions with cheap, abundant labor are also often poorly regulated and the
multinational can execute abusive labor practices.
Access to Lower Tax Rates
The multinational business model has a central brand/corporate office but each arm of the
business has some autonomy and independence as well. This makes it possible to run independent
arms of the business in areas with lower tax rates and tax shelters. Intentionally locating
manufacturing facilities in countries with cheap labor and low import/export costs gives the
multinational a major advantage.

Access to Much Larger Markets

The multinational business model has access to a much larger market than a national model.
Organizations working under this model can essentially open their doors anywhere that has
potential for returns. Entering new markets and expanding the reach of a single brand creates a
global brand influence. The multinational model means that each arm will operate under a
consistent brand, but can alter the product offering in response to local cultures. For example, a
fast food chain will use consistent branding, but the menu adapts to cultural tastes. The business
model makes it possible access a huge market, while maximizing potential within each individual
market.
Independent Locations Mitigate Risk
The autonomy of each arm in a multinational structure mitigates risk. Power and capital are
distributed across individual locations, and each is responsible for returns. Each location is
independent and therefore expendable, if returns are not accomplished. The flexibility provided
by the distribution of power and capital acts as an advantage for multinational organizations. It
looks like a chess board, where pieces are added or removed, based on performance and return to
the head office.
Multinational corporations are often responsible for today’s best practices
Most multinational corporates rely on merchants and distributors for their goods and services.
Some even use these third-party entities to create additional sales opportunities. Because of their
global presence and overall sizes, these organizations use leverage with their associates to produce
a required action for each customer. If the vendor fails to do so, then the multinational corporation
can move to a different supplier immediately. This practice directly eliminates some distribution
businesses overseas with a single decision, which is why this structure creates competences of
scale that keep prices down while still ensuring reasonably excellent product quality.

Page 5 of 14
 Chapter 1

The world has more cultural awareness because of multinational corporations

When an organization decides to expand to a foreign market, then they are presented with brand-
new sociological certainties. Multinational companies are amazingly diverse, giving them
additional power because of this diversity. The current marketplace requires agencies to know
what the pain points of the local market are before it becomes possible to create products or
services for them. When each person expands their reasoning to include new viewpoints, the
planet becomes a healthier place because of that action. These organizations provide a resolute
influence on cross-culture information when this advantage becomes a prime preference for them.
Multinational companies focus on consistency for the consumer
Multinational companies work from centralized structures. That means there is a fundamental
expectation that every asset will look and function as every other item does. Even though a
company in China serves different products than one in Canada, the core ethics and values of the
corporation are still displayed for all to see.
You’ll see similar designs, ordering procedures, and best practices implemented at all managed
locations for a multinational company. Customers believe in these institutions because they realize
what the value proposition is before they ever spend any money with that brand. This advantage
works the same way for every business which excels because of their status in different markets.
Diversification becomes possible because of multinational corporations
Most populations, developing nations, and marketplaces depend on a set of core products for
their survival. Most of the items tend to link up with agriculture-based industries, such as farming.
Multinational companies offer these economies more variety in product and price choice, which
creates another layer of diversity for the local consumer. This advantage reduces their reliance on
materials that often have volatile pricing structures due to their supply and demand levels
frequently changing – sometimes daily.
Multinational companies offer employment opportunities at the local level
Although multinational companies route command decisions through a centralized office at their
domestic headquarters, all of them need to have boots on the ground in each local market. Because
over 70% of the jobs people hold in the world today are tied to the agricultural industry, these
companies can transform an economy quickly by providing new tools, educational resources, and
financing that can shift the standard of living for the entire economy.
It’s the “rising tide lifts all boats” analogy, but then put into practice in real life. This advantage is
helping some developing countries to triple their GDP over the past 10 years. With more
multinational companies entering new markets all over the world, it will not take long for there to
be more developed than developing nations.

Page 6 of 14
 Chapter 1

The import-export market is present because of multinational corporations

The issue of economic development in undeveloped nations occurs because there is an overall
lack of resource access to these countries. What is available to the average customer in the U.S. is
quite distinct when compared to what is accessible in a country like Sudan. There are even
differences between markets like Canada and South Africa to manage.
When multinational corporations build a presence in the developing world, their capital inflows
help each country to develop better access to the import-export market. This advantage gives each
marketplace better access to valuable goods, creates more opportunities for trade, and it ultimately
raises the standard of living for the entire economy.
Capital inflows occur because of the presence of multinational corporations
Most multinational companies have their headquarters in the developed world, which means
Europe, the U.S., or Japan for most organizations. These companies rely on the resources of those
mature marketplaces to maintain the diversity of their revenue streams because it is cheaper to
develop production assets outside of their domestic market.
These agencies must move into the developing world to earn profits through the investments that
they make there to maintain the value of their overall portfolio. Multinational companies are a
leading source of capital inflows to the developing world because they build manufacturing
centers, investing in workforce training, and support institutions of learning to advance their
productive capacity in foreign markets.
E. Disadvantages of Multinational Corporations
Multinational corporations can use their structure to form monopolistic markets
Most countries treat the assets of a multinational corporation as an independent structure, like a
transnational company, instead of looking at the hierarchy of the business for what it tends to be.
This disadvantage allows each firm to have more flexibility in how they handle the local
marketplace with their presence. Global monopolies do not currently exist, by firms like Alphabet,
Illumina, and Broadridge all manage a 50% share or more of their industry.
When these structures are present and treated in this way, then the benefits of scale allow the
multinational corporation to price everyone out of the market. There might still be local
competition, but the average consumer will work with the cheapest offer whenever if provides a
similar amount of value for them.
Multinational corporations can cause harm to the environment
Most developing countries do not have the same level of regulation and oversight that the
developed world maintains to protect the environment. When these firms decide to do business
in the international market, they are subject to local laws – not the ones that govern their domestic
headquarters – when working to obtain raw materials.

Page 7 of 14
 Chapter 1

Smaller, less developed governments often trade an increase in revenues for access to their natural
resources. The lower standards create better pricing structures for each customer, but it also
creates environmental damage that could have future generations paying the price for today’s
decisions. Some nations even trade in recycled materials and trash, which can place even more
stress on local resources.
Profits often go back to the multinational company instead of staying in the local market
Multinational corporations might provide job opportunities in each local market, but they also
funnel out many of the profits back to their centralized office. Some might see this as a return on
their infrastructure and educational investments, but it can also be a decision that further weakens
an already underperforming government or economy. When you compare how much goes into
foreign markets with what comes out of them, the difference is usually minimal and can sometimes
be a negative return.
Nothing stops a multinational company from importing their skilled labor
There are even times when a multinational corporation will not hire local workers, opting instead
to import positions from the centralized office to get things up and running. This process will still
provide contributions to the local economy and provide a handful of jobs that fall outside of this
disadvantage, but it tends to benefit the company and the workers more than the local community.
The best jobs, especially the ones which become available in a developing country, are therefore
given to someone who may not even live in the local community. That means their wages will not
have the same economic impact that they would have if a local employee was in that position.
Multinational corporations remove raw materials from the local economy
Although infrastructure benefits do occur when a multinational corporation moves into a
developing country, the construction efforts are usually meant to benefit the business and not the
local market. Roads and bridges are built to access raw materials, distribute goods, and manage
processes more than they are to improve the livelihood of those living in the region. Once all of
the goods are removed, then the agency might decide to abandon the project, leaving the
government with no way to manage the situation.
“Multinational corporations and a market economy have transformed human beings into
instruments of making money,” said Satish Kumar. “Human beings should be the end, and money
should be the means to the end.”
It creates a dependency on the business that can be unhealthy for an economy.
Because a multinational corporation can control a majority of the decisions that people make
thanks to the size and scope of their structure, their presence can create dependencies that are
unhealthy for the local marketplace. Consumers might think that they have choices when
shopping, but the reality of their situation is that one company is pulling all of the strings of their
transaction. That’s why Zbigniew Brzezinski said that the people, governments, and economies
of each country must serve the needs of this entity.

Page 8 of 14
 Chapter 1

Unilever sells everything from soap to olive oil and has products selling in over 190 countries.
Coca-Cola and PepsiCo sell a combination of beverages and snacks that encompass hundreds of
different brands – sometimes competing with each other for the same shelf space. Anheuser-
Busch InBev controls a lineup of more than 200 different beer brands. Over 2 billion people use
the products from these companies on any given day.
F. Types of MNC
A multinational corporation (MNC) or multinational enterprise (MNE) or transnational
corporation (TNC) or multinational organization (MNO) is a corporation /enterprise that
manages production establishments or delivers services in at least two countries. Multinational
corporations (MNC) are often divided into three broad groups:
Horizontally integrated multinational corporations manage production establishments
located in different countries to produce the same or similar products.
Vertically integrated multinational corporations manage production establishment in certain
country/countries to produce products that serve as input to its production establishments in
other country/countries.
Diversified multinational corporations manage production establishments located in different
countries that are neither horizontally nor vertically integrated.
Very large multinationals have budgets that exceed those of many countries. Of the 100 largest
economies in the world, 51 are multinational corporations. They can have a powerful influence in
international relations, given their large economic influence in politicians ‘representative districts,
as well as their extensive financial resources available for public relations and political lobbying.
Multinationals have played an important role in globalization. Given their international reach and
mobility, prospective countries, and sometimes regions within countries, must compete with each
other to have MNCs locate their facilities (and subsequent tax revenue, employment, and
economic activity) within. To compete, countries and regional political districts offer incentives
to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or
lax environmental and labour standards. This process of becoming more attractive to foreign
investment can be characterized as a race to the bottom. There is a dispute as to which was the
first MNC.

G. Evolution of Multinational Corporation

The dynamics of international business created a great need for the evolution of Multinational
corporation. The multinational corporation is a company engaged in producing and selling goods
or services in more than one country. It normally consists of a parent company located in the
home country and few or more foreign subsidiaries. Some MNCs have more than 100 foreign
subsidiaries scattered around the world. It is the globally coordinated allocation of resources by a
single centralized management that differentiates the multinational enterprise from other firms
engaged in international business.
Page 9 of 14
 Chapter 1

MNCs make decisions about market-entry strategy; ownership of foreign operations; and
production, marketing, and financial activities with an eye to what is best for the corporation as a
whole. The true multinational corporation emphasizes group performance rather than the
performance of its individual parts. There are different types of multinational companies, such as;
Raw-Material Seekers: Raw-material seekers were the earliest multinationals and their aim was
to exploit the raw materials that could be found overseas. The modern-day counterparts of these
firms, the multinational oil and mining companies such as British Petroleum, Exxon Mobil,
International Nickel, etc.,
Market Seekers: The market seeker is the arche type of the modern multinational firm that goes
overseas to produce and sell in foreign markets. Examples include IBM, Toyota, Unilever, Coca-
Cola.
Cost Minimizers: Cost minimizers are a fairly recent category of firms doing business
internationally. These firms seek out and invest in lower-cost production sites overseas (for
example, Hong Kong, Malaysia, Taiwan, and India) to remain cost competitive both at home and
abroad.
MNCs have to follow the changes in macroeconomic factors, environmental and social issues,
and business and industry developments. These factors will all profoundly shape the corporate
landscape in the coming years. The following section deals with these trends.

H. Growth of Multinational Corporations

Multination al Corporations have been growing in number, volume, geographical spread and so
on. Though, generally and MNC consists of a parent company located in the home country and
at least five or six subsidiaries with a high degree of strategic alliance among the units, there are
MNCs which have over 150 foreign subsidiaries as well. The MNCs had a global sale in excess of
24.8 trillion which is larger than the value of global trade in 2005. About a third of world output
is contributed by the MNCs. About 100 million people are in direct employment with the MNCs,
representing 10% of world employment in nonagricultural employment. The number of MNCs
was at around 47000 in 2005 with over 2 lakh foreign subsidiaries. The top most 100 MNCs,
excluding those in banking and finance, held 6.8 trillion in 2005, of which 40% were located
outside their home country.
With liberalization of economic policy being earnestly followed by most countries of the world,
there has been enormous increase in the geographical spread of MNCs. The popularity of MNCs
can be known from the fact that most of them receive 50% or more of their revenues and profits.
Some of them are: IBM, Gillette, Colgate-Polmolive, Philips, Xerox, Hewlett-Packard, Coca-Cola
and so on. It is said that coco-cola earns more money by selling soda in Japan than it does in USA.
Exxon a American base MNC, had about 56% of its assets, 74% of its sales and 97% of its profits
abroad.

Page 10 of 14
 Chapter 1

Reasons for Growth of MNCs

There are several factors that underlie the growth of MNCs. These include, increasing factor
mobility, opening up of command economies, growth urge, and opportunities for growth, the
Bretton woods system, market capturing, raw-material availability, low-cost of production
possibilities, profit orientation and management culture.
Factor Mobility
First factor mobility is the most important of all factors that has contributed to the growths of
MNCs. During the time of the great economists like Adam Smith and David Ricardo, Cross-
border movement of good s only on the basis of comparative cost principle was envisaged. Cross-
border movement of factors of production was not envisaged. Now capital, technology, labour
and even
management just move from anywhere to anywhere. Perhaps international understanding and
economic corporation have paved the way for world-wide flow of factors of production. Technical
collaborations, overseas job market expansion and overseas management consultancy are all on
the increase. MNCs play a vital role in this factor mobility contributing to their growth. As a result
of factor mobility, instead of goods being traded across national borders, production plants are
set up in the identified markets themselves by the MNCs.
Economic Reforms
Second, the economic reforms undertaken in most of the developing and under developed
economies are another cause for the growth of MNCs. Governments of most of these countries
having become vexed with the regressed performance of their public sector and their bureaucracy
and consequent waste of precious resources resulting in poor gross domestic product growth
fueling poverty and unemployment, in order to take their economies on to the growth path have
started embarking on a programmed of economic reforms. Globalization as a part of such reforms
process, has opened their economies to international players on an equal footing with domestic
operators. Ever since the reforms process has been introduced in India, for instance, many MNCs
have started opening up their shops in the country. Pepsi, Coco-Cola etc. have set their foot in
India.
Existing multination’s have enhanced their stake in the country and some are putting up 100%
subsidiaries. For instance, P&G is putting up P&G Home Products Private Limited to make
detergents, Gillette is putting up Wilkinson India Private Limited to channelize investments into
other companies, H.P. is putting up H.P. India to develop and export software and GEC is putting
GEC India Limited to oversee the group’s expanding Indian operations. 100% ownership will
enable the parent company to retain proprietary control over technologies and products. Beside
backward integration to gain economies and shed diseconomies of scale is possible.

Page 11 of 14
 Chapter 1

Opening up of command economies

Third, opening up of command economies is a factor behind, recent growth in MNCs. China,
Russia, etc. are no longer command economies. Socialism and Communism have given way to
capitalism in their very place of origin and growth. The communist countries have opened up their
economies to competition. Since 1985, Russia introduced restructuring measures. The collapse of
political structure has hampered the transition to market economy resulting in economic
disruption. Privatization is being acceleratingly followed in Russia. A logical extension of this
privatization programme is the entry of MNCs into these lands. China is sporting excellently in
opening up its economy, as is borne out by foreign investment statistics. The Chinese reforms
process has been introduced in top-down orderly fashion. Of late, foreign investment rose
significantly and many MNCs have put up their plants in China. Some have hastened to have their
plants there, as they did not want to lag behind potential competitors.
Growth Urge
Fourth, MNCs generally have the growth impetus with them. They always look upon growth
opportunities anywhere in the globe and tr y to seize them. Strategic alliance, joint ventures, wholly
owned subsidiaries, mergers on acquisition, franchising etc. are the diverse strategies they adopt
to expand their operation globally. The motives for such expansion are securing supplies of
materials, energy and scarce raw materials.

• development of technology or brand recognition leading to global demand met through

overseas investment and
• availability of cheaper factors overseas and using the same by geographically spreading the
operations.
MNCs have technology and competitive edge. With these they easily establish brand image. Global
spread is very simple for them unless nation, states are vociferously against the entry of MNCs.
Liberalization and reforms process adopted in the third world nations have opened out vast
growth opportunities for MNCs. However, the essential element is the urge of MNCs to seek out,
undertake, and integrate manufacturing, marketing, R&D and finance opportunities on a global
scale rather than on domestic level.
Bretton woods system
Fifth, the Bretton woods organs-the world Bank and International Monetary Fund and their
subsidiaries like the International Development Association, International Finance Corporation,
Multilateral Investment Guarantee Agency and other multilateral bodies generally insist on
borrowing countries to open their economies and going for competitive bidding. This paves the
way for the growth of MNCs.

Page 12 of 14
 Chapter 1

Market potential
Sixth, there are MNCs who always have an eye on foreign markets. IBM, Valvo, Unilever etc.
come in this category. Originally American firms bought plant and equipment in Western Europe.
Later, Western Europe firms opened shops in USA. In the last part of the 20 th Century, Japanese
acquired firms in Europe and America. Now, there is camping of MNCs in the emerging world
markets like India, China, Mexico etc. Perceived restrictions on imports led to MNCs opening up
factories in foreign lands.
India and China are a great attraction as market for most MNCs at present. There is a classic
difference between US and Japanese MNCs in market capturing. US MNCs look at the up-end of
the market, while Japanese MNCs look at the unattended low-end. Low-end market has lot of
growth potential and this gives scale economies. With accumulated resource, wide mark et, and
proven process technology, Japanese MNCs are a threat to the US MNCs.
Raw Material availability
Seventh, initially most MNCs were spreading their wings globally just to tap raw-materials
available elsewhere for supporting production at the patent plant. British, French and Dutch East
India Companies are classic examples of MNCs of the raw-material seeking type. Now instead of
tapping raw-materials, the MNCs set up plants where factor markets are favorable. Because their
search for growth never is inward but always outwards. That is their culture.
Low Cost Production Possibilities
Eighth, MNCs are now driven by cost-minimization drives. They set up plants at places where
low-cost production possibilities are great. Taiwan, Hongkong and Finland are preferred by
MNCs for setting up electronic industrial units for there is cost efficiency. India, being a cheap
labour country, MNCs have started flooding into India. IBM, Ford outsource production of parts
to low-wage countries such as Mexico and by establishing assembly plants and R&D Centers in
Europe and Japan.
Risk-minimizing
Ninth, MNCs have long back realized the need for risk-minimizing. Threats from their
oligopolistic competitors are always there. Further, country-risk is always there. Meeting both the
risks is facilitated by geographical spread. By being close to market, better orientation to market
is possible and that monopolistic product differentiation is easily facilitated. Geographical spread
is risk-minimizing strategy and there is growth. Japanese Competition affects the American Auto
Industry. So, American Auto firms go out to the third world in search of strategic alliance
partnership.

Page 13 of 14
 Chapter 1

Profit Orientation
Tenth, MNCs are interested in profits. And MNCs are generally highly profitable. Profit booking
facilitates growth, diversification, modernization and R&D competitiveness. Actually, MNCs
book profits by being flexible, adaptable and quick. In today s head-on competition, the most
important factor for growth is speed. Ability to design, develop and distribute products / services
in short span of time holds the key to success.
Management culture
Eleventh, growth of MNCs is very much influenced by their management culture. MNCs generally
adopt to local conditions and the relationship between parent and subsidiaries is that of
coordinated federation. Decisions on investment financing and market are localized. But Japanese
MNCs do centralize decisions. The East-West difference is thus found. But the underlying
similarity is the basis for action. Corporate strategic planning is an essential package of MNCs
management practice whereby the MNCs scan and plan for enhanced integration and co-
ordination of their global activities.
Microsoft Corporation allows its European subsidiaries to develop local strategies to meet local
market needs. This type of autonomous adoption to fast changing local business environment has
been the main reason for the spread of MNCs. The autonomy enjoyed by subsidiaries is not to
turn into dysfunctional anarchy, for the behavior of individual managers is well shaped through
shared vision of identification with and binding commitment to the global strategy of the MNCs.
Hence the growth of MNCs.

Page 14 of 14