Multinational Corporations – A Study

Dr V. Basil Hans
vhans2011@gmail.com

Kavitha B.
bolar_kavi@yahoo.co.in

ABSTRACT
The present study is about MNCs with reference to developing counties like India. The paper
traces their growth and current position, their merits and demerits and their inevitability in
the global scenario. Multinational corporations, in theory, bring in necessary technological
inputs as well as employment, and most importantly, foreign direct investment to developing
countries. However, the anti-globalisation movement of the past twenty years has questioned
whether multinationals do more harm than good. The paper calls for reform and regulation
of the MNCs to reduce their harmful effects on the economy and the ecology. It also
discusses how not regulate MNCs.
Keywords: Developing Countries, host country, MNCs, the role of MNCs

Introduction

According to an ILO Report, "The essential nature for the Multinational Enterprise lies in the
fact that its managerial headquarters are located one country (referred to for convenience as
the 'home country') while the enterprise carries out operations in several other countries (host
countries)". It means a corporation that controls production facilities in more than one
country is multinational (http://docshare.tips).

The actions of multinational corporations are strongly supported by economic liberalism and
free-market system in a globalised international society (http://www.bdo.global). According
to the economic realist view, individuals act in rational ways to maximise their self-interest
and therefore, when individuals act rationally, markets are created, and they function best in
the free market system where there is little government interference
(http://www.teamlvd.com). As a result, international wealth is maximised with the free
exchange of goods and services (Wikipedia, 2020).
Features of Multinational Corporations (MNCs):

(i) Huge Assets and Turnover:

Because of operations on a global basis, MNCs have substantial physical and financial assets.
This also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover,
many MNCs are bigger than the national economies of several countries
(http;//www.yourarticle;ibrary.com).

(ii) International Operations through a Network of Branches:

MNCs have production and marketing operations in several countries; operating through a
network of branches, subsidiaries and affiliates in host countries (https://coursehero.com).

(iii) Unity of Control:

MNCs are characterised by a unity of control. MNCs control business activities of their
branches in foreign countries through a head office located in the home country.
Managements of branches operate within the policy framework of the parent corporation.

(iv) Mighty Economic Power:

MNCs are powerful economic entities. They keep on adding to their economic power through
constant mergers and acquisitions of companies, in host countries.

(v) Advanced and Sophisticated Technology:

Generally, an MNC has at its command advanced and sophisticated technology. It employs
capital intensive technology in manufacturing and marketing.

(vi) Professional Management:

An MNC employs professionally trained managers to handle huge funds, advanced

technology and international business operations.

(vii)Aggressive Advertising and Marketing:

MNCs spend vast sums of money on advertising and marketing to secure international
business. This is, perhaps, the biggest strategy of success of MNCs. Because of this strategy,
they can sell whatever products/services, they produce/generate.
(viii) Better Quality of Products:

An MNC has to compete on the world level. It, therefore, has to pay special attention to the
quality of its products.

Origin and growth of MNCs:

Multinationals, in the form of the trading company, started in 17 th and18th centuries.

Examples include-the Hudson Say co the East India Co; the French Levant Co; etc. During
the 19th century, foreign investment flowed extensively from Western Europe to the
underdeveloped areas of Asia, Africa and America. Britain, France, the Netherlands and
Germany were the main exporters of capital.

British firms made extensive investments in India, Canada, Australia and South Africa. The
colonial powers had captive markets and raw material resources to their colonies.

During the early years of the 20 th century, multinational corporate investment was mainly in
the mining and petroleum industries. Big oil companies like British Petroleum and Standard
oil were the first multinationals in this area.

The First World War encouraged multinational investment. Due to protectionist policies,
firms replaced exports with foreign production. Gradually, manufacturing and merchandising
multinationals like Unilever Lever Brothers, Nestle, Coca Cola, Singer, Ford Motors and
various German drugs and chemical firms, began their operations on a worldwide scale.
Thus, the concept of multinational enterprise is not new. But the modern multinational
corporation is faced on more than just trading. It tries to optimise its international production
and marketing often doing so by the use of trademarks and patents.

We can witness three important phases in the growth of MNCs. they are:

1. In the first phase, which lasted until the First World War, European Companies
dominated the scene.

2. In the second phase, covering the decades of the fifties and sixties, American
multinationals such as General Motors, Ford Motors and IBM emerged of the global
scene.

3. Dominated by European, German and Japanese Multinationals.

In recent years, it is interesting to note that multinational corporation has also been produced
by developing economies like India, Malaysia Hong Kong Singapore, and South Korea etc.

At present, 90 per cent of the top multinational corporations have their headquarters in the
European Union, Japan and the United States. According to the world investment report
1997, there were some 45,000 MNCs with around 2, 80,000 affiliates. According to the world
investment report 2004, there were 61,500MNCs with over 9.25 foreign affiliates.

The MNCs account for a significant share of the world’s industrial investment, production,
employment and trade.

Types of Multinationals

There are four categories of multinationals that exist. They include:

 A decentralised corporation with a strong presence in its home country.

 A global, centralised corporation that acquires a cost advantage where cheap

resources are available.

 A global company that builds on the parent corporation’s R&D.

 A transnational enterprise that uses all three categories

(https://www.investopedia.com).

Role of MNCs. in developing economics:

The role of Multinational Corporation in developing economics is explained below.

(1)Sustaining a high level of investment:

(2)Filling in Technological gap:

(3)The exploitation of Natural Resources:

(4)Undertaking initial risk:

(5)Creating social and economic infrastructure:

(6) Filling foreign gaps:

Do MNCs help or harm developing countries?

The presence and activities of MNCs in developing countries have been a subject of
controversy in discussions on development. According to Bornstein, Gregorio, and Lee
(1998) “Governments are liberalising MNC regimes as they have come to associate MNCs
with positive effects for economic development and poverty reduction in their Countries” (p.
115). Of course, in practice, objectives to attract MNCs differ from country to country and
the impact of MNCs is not always desirable. However, economic growth and industrialisation
trigger globalized world that enables MNCs to become a useful tool for economic growth.

A trade-off of globalisation — the price of lower prices, as it were — is that domestic jobs
are susceptible to moving overseas. This suggests that it is essential for an economy to have a
mobile or flexible labour force so that fluctuations in economic temperament are not the
cause of long-term unemployment. In this regard, education and the cultivation of new skills
that correspond to emerging technologies are integral to maintaining a flexible and adaptable
workforce (Hans, 2020)

The positive impact of MNCs:

The role of MNCs varies from country to country. In some countries, it is relatively
insignificant, whereas in others it plays a vital role. The positive case stresses the Positive net
benefits of FDI. The negative case coming out of radical and dependency analyses Places the
focus on the negative impact of foreign firms. This paper focuses on both the impacts of
MNCs operation, especially in developing countries.

The descriptions of the positive impact are presented as follows:

1. Economic Growth:

MNCs can be considered as a major stimulus for economic growth in developing countries.
According to orthodox liberals, inward FDI provides external financing to compensate for
inadequate amounts of local savings and foreign aid. In general, FDI inflows are more stable
and easier to service than commercial debt or portfolio investment. In the 1990s, FDI in
developing countries accounted for average $150 billion a year. However, in 2005, net flows
of FDI to developing countries averaged around $334 billion annually, which shows a
dramatic increase of FDI in developing countries. According to the UNCTAD World
Investment Report, FDI in developing countries increased in 2010 and stood at nearly
$574 billion annually (UNCTAD, 2010).

FDI is thought to bring certain benefits to national economies. It can contribute to gross
domestic product (GDP), gross fixed capital formation and balance of payments. There have
been empirical studies indicating a positive link between higher GDP and FDI inflows. For
example, in Bangladesh, the inward FDI inflow as a percentage of gross fixed capital was
3.5%, which was attributed to lead higher GDP growth as 6.27% in 2004 (BBS 2006).
However, according to BBS (2011), the GDP growth +9 rate slightly decreased in 2010
and stood at 5.83% in Bangladesh (p. 387).

2. Export-based Industrialisation:

Building export capacity is very important for developing countries if they want to benefit
fully from international trade and investment opportunities. Therefore, the government
must seek to develop a regulatory framework that could assist local and
regional areas in designing and implementing active policies for building export
competitiveness

3 Capital Formations:

Capital represents an essential economic asset in developing countries. A significant benefit

of MNCs is their injection of capital into a developing country, bringing financial resources
otherwise unavailable through their capital and access to international capital markets. An
important share of the total capital flow to developing countries comes from MNCs’
investments; estimations vary from 14.9% to 51.5% of the total flows to developing
countries (UNCTAD, 1994; p. 409). Studies show that foreign multinationals are indeed
more productive, pay higher wages and are more export intensive than local firms
(Markusen, 1995). MNCs contribute important foreign exchange earnings through their trade
effect of generating exports. By producing goods for export, the balance of payments of the
developing countries enhances the economic growth, becoming a more attractive prospect for
further investment as well as contributing to the growing role of developing countries in
world trade.

4. Technology/R&D:
Technology development and work processes improvement differ greatly in developing
countries, and even in some cases between regions. For example, Bangkok or the South of
Thailand is more developed than in some Northern areas. MNCs contribute greatly in
providing the foundation for technological development. A vital resource gap filled by the
MNCs, as proponents say, is technology. The desire to obtain modern technology is perhaps
the most important attraction of foreign investment for developing countries. MNCs allow
developing states to profit from the sophisticated research and development carried out by the
multinationals. They make available technology that would otherwise be out of the reach of
developing countries (Spero & Hart, 2010). MNCs train local staff, stimulate local
technological activities and transfer technology throughout the local economy. Accordingly,
technology improves the quality of production and encourages development.

5. Cleaner Environment:

FDI through MNCs may help increase the level of the overall domestic environment. MNCs
are more likely to produce a cleaner rather than a more despoiled natural environment. MNCs
from developed countries, preferring to have a single set of rules for all competitors, may
consequently prefer that developing countries have environmental standards similar to those
in the developed countries (Garcia, 2000). Also, MNCs tend to bring their higher pollution
control and energy-efficiency standards with other countries when setting up operations
overseas. It can be evident from a study on 300 Indonesian enterprises conducted in 1996. In
this study, comparison of the pollution levels in waste streams confirmed that the enterprises
that had foreign Ownership had superior performance compared to the private and state-
owned firms (GEMI, 2006).

6. Poverty Alleviation:

MNCs are the key to poverty reduction. Multinational corporations encourage people to
produce a certain product, and these products make the workers’ life improved. For
example, the Daimler Chrysler project in Brazil. Daimler Benz, in 1991, looked for ways to
use renewable natural fibres in its automobiles. For the Brazilians, life changed dramatically
for the better; children were able to attend school, health facilities have improved, and people
are more active in local politics. The liberals believe that industrialisation through MNCs
combined with a free
The market economy has allowed many previously agrarian-based economies to grow out of
poverty. "The international operation of these corporations is consistent with liberalism but is
directly counter to the doctrine of economic nationalism and the views of countries
committed to socialism and state intervention in the economy” (Gilpin, 1987: 248).

7. Employment Generation:

MNCs play a role in creating new kind of jobs and therefore can contribute to employment
generation and the increase in quality of life of the employees in developing countries. Those
who argue for MNCs state that MNCs generate employment worldwide. Of the 73 million
jobs created through MNCs, only 12 million are located in developing countries amounting
to 2% or 3% of the world's workforce. MNCs account for one-fifth of all paid
employment in non-agricultural sectors and creates a large number of jobs in the
manufacturing industries, especially where technology is concerned (UNRISD, 2010).
Besides, MNCs have a positive impact on the welfare of the employees. Supporters say that
the creation of jobs, the provision of new and better products, and programs to improve
health, housing and education for employees and local communities improve the standard of
living in the developing countries.

8. Building Competence and Skill:

Building skills of local workers has proved to be essential to the successful transfer and
diffusion of technologies and knowledge. Foreign investment provides managerial skills and
competence that improve production. Whenever it is possible, MNCs prefer to hire local
people than the use of expatriate employees. However, the lack of an adequately skilled
workforce in developing countries presents a challenge to overcome. Low education levels of
potential employees are a particular impediment to maximising a local employee base.
Therefore, MNCs are often engaged in capacity building efforts and sometimes deliver
education and training to groups in order to help them increase production levels and to
perform work routines more efficiently. There is a recognised need to adjust approaches to
education and Training based on local conditions and local knowledge and skill levels. It
has clear benefits to engaging local-based trainers, and thus local Universities are seen by
MNCs as a good pool of competencies that will help ensure the sustainability of the
technology transferred. Universities and R&D institutions understand the local context and
possess the knowledge that is valuable to MNCs. Thus they are considered as the right
partners for conducting joint research projects for technology maintenance or improvement,
leading in some cases to new and innovative products or services (Worasinchai & Bechina,
2010)

Disadvantages of MNCs for the Host Country

 Laws – One of the major disadvantages is the strict and stringent laws applicable in
the country. MNCs are subject to more laws and regulations than other companies. It
is seen that certain countries do not allow companies to run their operations as it has
been doing in other countries, which result in a conflict within the country and results
in problems in the organization.

 Intellectual Property – Multinational companies also face issues about the

intellectual property that is not always applicable in case of purely domestic firms

 Political Risks – As the operations of the MNCs is widespread across national

boundaries of several countries, they may result in a threat to the economic and
political sovereignty of host countries.

 The loss to Local Businesses – MNCs products sometimes lead to the killing of
domestic company operations. The MNCs establishes their monopoly in the country
where they operate, thus killing the local businesses which exist in the country.

 Loss of Natural Resources – MNCs use natural resources of the home country in
order to make a huge profit which results in the depletion of the resources thus
causing a loss of natural resources for the economy

 Money flows – As MNCs operate in different countries, a large sum of money flows
to foreign countries as payment towards profit which results in less efficiency for the
host country where the MNCs operations are based.

 Transfer of capital takes place from the home country to the foreign ground, which
is unfavourable for the economy.

Case Studies of MNCs

This part discusses three case studies that reflect the positive, negative, and mixed impact of
MNCs on developing countries.
Case 1: Phillips Petroleum Company: Environmental Excellence in China -A concern of
GEMI3Phillips Petroleum Company has a long-standing tradition of protecting the
environment in areas where it has business operations. In 1997, Phillips decided to share its
environmental commitment with the people of China by developing a multi-year
environmental initiative entitled "Search for Solutions," in conjunction with the State
Environmental Protection Agency (SEPA) and non-governmental agencies from the
United States. Over five years, students from five major cities in China will take part in
activities designed not only to raise their awareness but to stimulate new ideas on ways to
protect natural resources. To support the environmental initiative, Phillips has committed
$500,000 to be distributed in five communities where Phillips operates: Beijing, Lanzhou,
Shanghai, Shenzhen, and Tianjin. Although the overall programme will be coordinated by
Phillips, the environmental protection bureaus (EPB) from each of the five cities will help
administer the activities. The funding provided:

i. Environmental awareness handbooks for high school students,

ii. Earth Vision posters,

iii. Phillips Environmental Partnership (PEP) Grants in which students actively

participate in such things as water quality testing, air sampling, and other hands-on activities,
and

iv. Children’s work/colouring books.

Additional activities will likely include field trips, environmental awareness videos, and
exchange programs with U.S. educators, and additional PEP grants. Phillips kicked off the
environmental initiative in China on Earth Day 1998 with a water quality testing programme.
Students from schools in Beijing performed water quality testing of estuaries with test kits
purchased by Phillips. Also, SEPA distributed Phillips-funded Earth Vision posters as part of
a national environmental awareness tour on World Environment Day. The “Life Engineer"
programme is another Search for Solutions activity supported with Phillips funding and
employee volunteers. Life Engineers is a special, experiential, out-of-classroom programme
that provides Chinese high schools students opportunities to learn about local environmental
conditions and contribute to community environmental projects.

In one 1998 activity in Lanzhou, more than a thousand students toured the Lanzhou
Chemical Industry Company and participated in monitoring activities. Under Phillips'
leadership, Search for Solutions has established itself as a national initiative that helps the
Global Environmental Management Initiative (GEMI) is a non-profit organisation of leading
companies dedicated to fostering environmental, health and safety excellence worldwide
through the sharing of tools and information in order for the business to help a business
achieve environmental excellence.

Chinese youth become good environmental citizens through education and community
service. During the past year, strong working relationships were established with local EPBs
in the five major municipalities where Phillips has business operations. The Search for
Solutions initiative was featured as a model program in the June 30, 1998, China Daily
editorial. Search for Solutions continued to build on the successes of 1998 by continuing
three core programs in 1999, PEP grants, environmental handbooks on local
environmental conditions, and Earth Vision posters. Members of Phillips’ Health,
Environment, and Safety team join Beijing school children as they celebrate Earth Day‘98.

Case 2: The Abidjan Tragedy and Trafigura

In August 2006, disaster struck the Ivory Coast having been devastated by years of civil war,
which has been trying to recover under a fragile government established under the
supervision of ONUCI, the United Nations peace process for the Ivory Coast. A
Panamanian flagged ship unloaded a toxic waste shipment in Abidjan, have been unable to
unload the shipment in the Netherlands, reputedly because of cost implications. There have
been reports of deaths and thousands requiring treatment following the dumping on open-air
sites (Greenpeace, 2006; An African dumping ground, 2006). Missions from the World
Health Organisation and the United Nations Disaster Assessment and Coordination have been
dispatched to Abidjan. This ship was reported to have been leased to an MNC,

Refigure Ltd. It specialises in the energy and base metals markets. Refigure maintains 4data
centres in addition to the 55 trading offices in 36 countries in Europe, North, Central and
South America, Africa, Asia and Australia. Refigure had a joint venture agreement with
Emirates General Petroleum Corporation and BP Singapore PTE Limited to construct new
gasoline storage and blending facility at Jebel Ali Free Zone in UAE at a total investment of
US$ 33 million (Energy me, 2004). By entering a tripartite agreement, the state-controlled
corporation, with its 60per cent interest, was able to retain an element of control over the
project and also the employment opportunities. It has been stated by the Chairman of
Trafigura that once the project has been completed, UAE will be benefited from the
international trading opportunities created by Trafigura. However, these real benefits that
accrue to UAE, i.e., a developing country must be weighed against the disadvantages. The
environmental disaster at Abidjan gives a clear example of a developing country suffering
from the dumping of dangerous waste in an ill-equipped and unregulated economy, which led
to death, suffering and the dismissal of a fragile government. Trafigura case study shows
that, while it has brought substantial benefits to host countries, it will attempt to circumvent
regional, national or international regulations in order to realise a greater profit for its
shareholders, even at the expense of the host countries (https://gizmodo.com).

Case 3: Mixed Record: The Mexican Experience

For Mexico, FDI was the prize of the NAFTA integration process. The hope was that FDI
inflows would increase economic growth and bringing social and environmental benefits by
absorbing rural migrants - displaced from by agricultural liberalisation - into new, higher-
paying urban-based jobs, and by transferring cleaner technologies and better environmental
management practices. Internal migrants to urban areas. Between 1980 and 2000, the
population more than doubled in FDI-laden areas, while the population of Mexico as a
whole grew by less than forty per cent.

What is less clear is whether the lives of Mexico’s working and poor people have
substantially improved. According to the OECD, the swollen urban population far exceeds
the infrastructure capacity of host communities to manage sewage and waste, provide
sufficient water, and protect air quality. Wages in foreign firms are lower than the mean wage
in Mexican manufacturing as a whole--and have fallen in real terms by more than10% since
1987. Moreover, the large FDI inflows of the last decade may not be sustainable.
From the middle of 2001 through the end of 2002, foreign-owned firms retrenched 287,000
workers or one in five of all such workers . The environmental benefits of FDI have also been
elusive. A World Bank study found no correlation between foreign-ownership and firm-level
environmental performance in the Mexican industry. Instead, the key variable was the
strength of state regulation (Disrupt, Hettinger, & Wheeler, 2000).

These trends mask some "best practices" that can serve as models for a more
comprehensive sustainable investment strategy. Some foreign firms, including Dutch steel
companies and U.S. chemical firms, have offered higher wages, better working conditions
and/or better environmental standards. Some have also negotiated relationships with host
communities for public infrastructure and social services (Gentry, 1998).
CONCLUSIONS AND POLICY IMPLICATIONS

Studies over a period of years indicate that the impact of MNCs on host States is neither as
positive nor as negative. It is true that MNCs play an important role in developing
countries. They can create more employment opportunities for the huge labour force, train
them and promote the development of high-level skills. Moreover, MNCs help increases
GDP growth and capital formation, reduce poverty. However, MNCs can be guilty of
pollution or human rights abuse.

Critics of MNCs alleged that MNCs want to reduce their production costs, seek out
developing countries with flexible environmental regulations and undertake in those
countries productive activities that exacerbate both local and global environmental
problems. Instead of adhering to either, a positive or negative overview, this perspective
recognises that the costs and benefits of FDI by MNCs will vary from country to country and
also that what constitutes costs and benefits will vary depending on the values of the
observer.

Available evidence suggests that the impacts of FDI in developing countries may be positive
or negative, depending on a variety of variables, mostly having to do with host country
policies. One study found that the impact of FDI is significantly positive in “open”
economies, and significantly negative in “closed" economies. Others have found that
positive impacts depend on the effectiveness of domestic industry policies; and on tax,
financial or macroeconomic policies. A World Bank study found that the impacts of FDI
depend on the industry, as well as host country policies. Both economic theory and recent
empirical evidence suggest that FDI has a beneficial impact on developing countries
(https://www.imf.org). Nevertheless, recent work also points to some potential risks.
Therefore, a tentative conclusion of this essay is that MNCs may promote economic
development by contributing to productivity growth and exports in developing countries.
However, the exact nature of the relationship between foreign MNCs and economies of
developing countries seem to vary between industries and countries. It is reasonable to
assume that the characteristics of the developing country's industry and policy
environment are important determinants of the net benefits of FDI. Policy
recommendations for developing countries should focus on the following issues to
improve the investment climate for all kinds of capital, domestic as well as foreign:

i) Reduction of Bureaucratic Complexity: Governments of the developing countries

should reduce the restrictions in establishing the MNCs. They should simplify the industrial
sanctioning procedure and keep free all the foreign investors from unnecessary harassment
while registration of firms is going on.

ii) Development of Infrastructure: Governments of the developing countries should

make all-out efforts to develop infrastructure facilities. Problems of gas, water, electricity,
warehouse, port, and transport should be removed.

iii) Continuation of Policies: For attracting MNCs, continuation of economic policies

despite changes in governments must be maintained in the developing countries.

iv) Avoidance of Confrontational Politics: Political consensus among political parties is

essential for establishing MNCs in developing countries. Political stability is a critical
consideration to foreign investors when they think about investing in any country.

v) Reduction of Corruption: In order to uphold their position in the world as the destination
of MNCs, developing countries should take positive initiatives to reduce massive corruption.
They should make judiciary services independent and encourage good governance as well.

vi) Improvement of Law and Order Situation: Improved law and order situations one of
the pre-conditions for MNCs sustainability.

vii) Development of Skilled Labour: Developing countries should ensure available skilled,
experienced, trained, and educated labour force to attract foreign investors in
establishing the MNCs.

viii) Stability of Macro-Economic Situation: Overall macroeconomic stability and its

continuity are also important for not only attracting MNCs but also ensures profitability
from it.

ix) Political Stability: Stability means progress. Developing countries, therefore, should be
sincere and committed to ensuring their political stability to attract MNCs within their
boundaries.
x) Foreign Exchange Reserve: Developing countries should increase the foreign exchange
reserve and keep currency value more or less stable to keep the benefits from MNCs.

References

Hans, V. Basil (2020). Multinational Corporations – A Study, NOLEGEIN A Journal

of Entrepreneurship Planning, Development and Management" (ISSN: 2581-3900)
Vol 3 Issue 1.forthcoming.

Wikipedia (2020). Multinational Corporation.

Nov 20, 2019 - A multinational corporation (MNC) has facilities and other assets in at least
one country other than its home country.

http://www.yourarticlelibrary.com/india-2/multinational-corporations/multinational-corporations-
mncs-meaning-features-and-advantages-business/69418

The Chittagong University Journal of Business Administration, Vol. 24, 2009,

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Advantages and disadvantages of MNCs | Green World Investor

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