Unit-5 Multinational Corporation

Multinational Corporation In a report of the International Labour Organisation (ILO), it is

observed that, "the essential of the MNC lies in the fact that its managerial headquarters are
located in one country (home country), while the enterprise carries out operations in a number of
the other countries (host countries)."

A "multinational corporation" is also referred to as an international, transactional or global

corporation. Actually, for an enlarging business firm, multinational is a beginning step, as it
gradually becomes transnational and then turns into a global corporation. For, transnational
corporation represents a stage where in, the ownership and control of the concerned organization
crosses the national boundaries.

“A multinational corporation owns and manages business in two or more countries.”

Following are the main features of MNCs:

Location: MNCs have their headquarters in home countries and have their operational divisions
spread across foreign countries to minimize the cost.

Capital Assets: Major portion of the capital assets of the parent company is owned by the
citizens of the company's home country.

Board of Directors: Majority of the members of the Board of Directors are citizens of the home
country.

Mode of Transfer: The MNC has considerable freedom in selecting the financial channel
through which funds or profits or both are moved, e.g., parents and trademarks can be sold
outright or transferred in return through contractual binding on royalty payments

Value for Money: By shifting profits from high-tax to low-tax nations, MNCs can reduce their
global tax payments. In addition, they can transfer funds among their various units, which allow
them to circumvent currency controls and other regulations and to tap previously inaccessible
investment and financing opportunities.

Flexibility: Some to the internationally generated claims require a fixed payments schedule;
other can be accelerated or delayed. MNCs can extend trade credit to their other subsidiaries
through open account terms, say from 90 to 180 days. This gives a major leverage to financial
status. In addition, the timing for payment of fees and royalties may be modified when all parties
to the agreement are related.

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Goal of MNC’S

Following are the goals of MNC and their subsidiaries:

1. To expand the business beyond the boundaries of the home country, where they were
originally established.
2. Minimize the cost of production, especially the labour cost.
3. Capture the lucrative foreign market against international competitors.
4. Avail the competitive advantage internationally.
5. Achieve greater efficiency by producing in local markets and then exporting the products.
6. Make the diversification intentionally effective so that a steady growth of business could
be achieved.
7. To safeguard the company's interest in order to get behind the tariff walls.
8. Make the best use of technological advantages by setting up production facilities abroad.
9. Establish an international corporate image.
10. Counter the regulatory measures in the parent country.
11. Manufacture in those countries where it finds the greatest competitive advantage.
12. Buy-sell anywhere in the world to take advantage of the most favorable price for the
company.
13. Achieve greater sales.
14. Hold risks within reasonable limits concerning profits.
15. Maximization of shareholders’ wealth.
16. Maximize the return on equity.
17. Maintain control of important decisions.
18. Encounter fewer barriers in host countries.
19. Technical improvement in production.

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Defenders of MNC

1) Research and Development Activities :

Developing countries lack in research and development areas. Expenditure on research and
development is essential for the promotion of technology. Multinational corporations have
greater capability for research and development activities in comparison to national companies.
Multinationals survive in the international market through their advanced research and
development activities.

2) Far-reaching effects on the economic, social and political conditions of the host country :

Multinational corporations provide a number of benefits to the host country in the form of :

a) Economic growth;

b) increased profits ;

c) Developing of new products;

d) Reduced operational costs;

e) Reduced labour costs;

f) Changing social and political structure, etc.

Thus, it helps in the exploitation of resources of host countries for their own economic
advancement.

3) Product Innovation:

Multinational corporations have research and development departments engaged in the task of
developing new products, diversification in the product line, etc. Their production opportunities
are far greater as compared to national companies.

4) Marketing Superiority:

Multinational corporations enjoy market reputations and face less difficulties in selling their
products by adopting effective advertising and sales-promotion techniques.

5) Financial Superiority:

Multinational corporations generate funds in one country and use such funds in another country.
They have huge financial resources at their disposal as compared to national companies.
Moreover, multinational corporations have easier access to external capital markets.

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6) Technological Superiority:

Multinational corporations can participate in the industrial development programmes of

underdeveloped countries because of their technological superiority. They can produce goods
having international standards and quality specifications by adopting the latest technology.
Generally, multinationals transfers technology through joint venture projects.

7) Potential Source of Capital and Advanced Technology:

Economically backward countries invite multinational corporations as a potential source of

capital and advanced technology to generate economic growth and to create employment
opportunities.

8) Expansion of Market Territory:

Multinational corporations enjoy extension of activities beyond the geographical boundaries of

their countries. Multinational corporations can enhance their international image by expanding
their operations activities.

9) Creating Employment Opportunities:

Increase in the scale of operations results in more job opportunities. The entry of multinational
corporations helps in creating employment opportunities in production and marketing activities.

10) Lower Cost of Production:

Multinational corporations carry on operations on a large-scale, which ensure economics

in material, labour and overhead costs.

Critics of Multinational Corporation

1) Disregard of National Priorities:

MNCs disregard the national priorities of the host country. They invest only in most profitable
sectors e.g. consumer goods.

2) Obsolete Technology:

There is always a danger that a multinational may provide back-dated technology.

3) Excessive Remittance:

A large amount of financial resources flow out from the host country by way of payment
of dividend royalty, technical fees, interest, profits etc. to the foreign investors. Thus, if affects
the foreign exchange reserves and balance of payments of host countries adversely.

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4) Creation of Monopoly:

A multinational company extends oligopolistic practices in the host country by acquiring big
business houses. A multinational company does everything possible to eliminate any actual or
potential competition. After eliminating the competition, a multinational company starts
exploiting consumers by raising prices and lowering the quality of products.

5) Restrictive Clauses:

Due to their strong bargaining power, MNCs introduce restrictive clause in collaboration
agreement e.g. technology cannot be passed on to third parties etc.

6) Threat to National Sovereignty:

Due to huge capital resources and technical power, a multinational company has a tendency to
influence the decisions of the government of host countries. There is always a danger to the
independence of host countries.

7) Own Culture:

MNCs usually vitiate the cultural heritage of host country promoting their own culture. For
example, MNCs have encouraged the consumption of soft drinks etc.

8) Depletion of Natural Resources:

MNCs exploit the resources of the host country to maximize their global profits and not to
maximize the welfare of the host country. MNCs also cause rapid depletion of some of the non-
renewable natural resources in host countries.

MNCs in India

Most of the MNCs in India had originally entered the Indian market during the colonial era.
During the post-independence era, the actual number of MNCs; who entered was small. The
entry was generally made through collaboration with Indian big business. At the end of 1990,
there were 469 foreign companies in India. In addition, there are many Indian companies with
foreign equity participation. Several Indian outfits of MNCs like Ponds, Johnson and Johnson,
Lipton, Brooke-Bond, Colgate-Palmolive etc., are tin low technology consumer goods sector.
Hindustan Lever, while popular in low tech consumer sector, has diversified into a high
technology and export oriented sectors. Table 8 presents India's top seven MNCs among the
World's 500 largest MNCs in 2015. Role of MNCs in India There is to distinction between an
MNC and a domestic company in India. The policy regarding MNC is the same as for foreign
private capital in India. MNCs are specifically covered under Foreign Exchange Management
Act (FEMA).

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The role of MNCs operating in India is discussed below:

1. Profit Maximisation Most of the private companies including MNCs have profit
maximization as the most important objective. However, MNCs are expected to operate fairly
and behave like a corporate citizen.

2. International Network of Marketing India expects the MNCs to increase their exports and earn
foreign exchange for India. But most of the MNCs transfer the foreign exchange to their parent
country, just in the name of imports from their home country.

3. Diversification Policy India expects the MNCs to diversify their activities into the untapped
areas and the priority areas like core industry and infrastructure industry. But majority of the
MNCs diversify into the more profitable areas. Eg: Indian Tobacco Company ventured into hotel
industry.

4. Concentration in Consumer Goods Most of the MNCs entered Indian consumer market like
HLL due to the high profitability rather than capital goods market which is less profitable.

5. Techniques to achieve Public Acceptability MNCs adopt a number of techniques to get the
acceptability of the people of the country wherever they operate. For example, products of
Lipton Unilever Company are more acceptable to most of the Indians.

Most of the MNCs try to project themselves as it they were completely identified with the Indian
culture and Indian economic policies. They also claim that they have acquired Indian nationality.
It is criticized that MNCs in India use all these techniques to improve their business.

6. Existence of modern and sophisticated technology As stated earlier, maximization of global

profits is one of the major objectives of MNCs. MNCs develop modern and sophisticated
technology in order to produce the products of high quality and lowest cost of production. They
bring the technology to the developing world, but they do not provide the latest technology to the
domestic companies of the Third World.

The Indian Government requested MNCs to provide their technology to Indian companies even
before the economic liberalization in 1991 through joint ventures. But MNCs in India normally
carry-out their business on their own rather than collaborating with the Indian normally carry-out
their business on their own rather than collaborating with the Indian business houses.

Thus, MNCs forced India to depend on them for latest technology. In view of this experience,
MNCs should be allowed to invest in India through joint ventures or technical collaboration with
the Indian companies.

7. Business, but not social justice MNCs is in business but not in social service. MNCs allocate
their investments according to market demand in order to maximize their profits. Wide gap
between the rich and poor has been one of the characteristics of India since long back.

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Therefore, a section of the Indian economy enjoy higher standard of living. MNCs in India have
been concentrating only on this section in designing the product, pricing and services. MNCs
normally do not produce the products to cater to the needs of poor section. They leave the poor
section to the local business. Thus, the more profitable business is grabbed by MNCs and they
left the less profitable business to the local markets.

8. Unconcern towards social responsibilities and business ethics. It is also criticized that MNCs
try to maximize their profits and do not think of discharging their responsibilities towards Indian
society. Further, it is criticized that MNCs exploit the Indian natural resources indiscriminately,
export the products from India to other countries and transfer the proceeds of sales to their home
countries.

In addition, it is criticized that MNCs price the products exclusively based on business principles
like supply and demand for products rather than the social considerations.

9. Cultural Erosion Indian culture with regard to dressing patterns, eating habits, building and
maintaining the relations, etc., are quite distinct from the rest of the world. But, it is widely
criticized that the MNCs activities with regard to type of the products (mainly cigarettes, liquor,
beverages like coke etc.,), advertisements and the like, erode the Indian culture.

10. Unconcern for environmental pollution and ecological balance .It is widely criticized that
MNCs in India did not invest in environmental polluting controlling equipments as they
normally do in their home country.

This in turn resulted in environmental pollution in a number of instances in the country. Bhopal
gas tragedy an also failure in paying due compensation to the victims is an example.

Further, it is criticized that the MNCs in India are also unconcerned in maintain ecological
balance in the country. However, MNCs contribute to some extent for the growth of Indian
economy, industry and business. These criticisms forced MNCs to Indianise their operations.

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