MULTINATIONAL

CORPORATIONS
AND INDIA
 Multinational corporations (MNCs) play a large and growing role in shaping
our world, both economically and politically. 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.
 MNCs play an important role in developing the economies of developing countries
like investing in these countries provide not only market to the MNCs but
also provide employment, choice of multi goods etc. to the consumers. MNCs
account for over half of the industrial output of the world. The names of some of
the largest MNCs include Wal-mart, General Motors, Exxon-Mobil, Mitsubishi, and
Siemens.
MULTINATIONAL ENTERPRISES / MULTINATIONAL CORPORATIONS
Meaning and Definition

 International business describes bussines or operations of firms having interests in

multiple countries. Such firms are called multinational corporations (MNCs). Some
of the as well known MNCs include fast food companies like McDonald’s and Yum
Brands, vehicle manufacturers such as General Motors and Toyota, consumer
electronics companies like Samsung, LG and Sony, and energy companies such as
Exxon Mobil and BP. Most of the largest corporations operate in multiple national
markets.
 The term ‘multinational’ consists of two different words, multi and national. The
prefix multi here means many while the word national refers to nations or
countries.
 Therefore, a multinational company may be defined as a company that operates in
several countries. Such a company has factories, branches or offices in more than
one country.
 According to the United Nations Commission on Transnational Corporations,
a transnational corporation is a corporation which operates, in addition to
the country in which it is incorporated, in one or more countries.
 Definition of Multinational Corporation – MNC is a corporation that has its facilities
and other assets in at least one country other than its home country. Such
companies have offices and/or factories in different countries and usually have a
centralized head office where they co-ordinate global management.
 The operations of a Multinational Corporation (MNC) extend beyond the country in
which it is incorporated. Its headquarters are located in one country (home
country) and in addition it carries on business in other countries (host country).
 For example, Coca Cola Corporation has its headquarters in the U.S.A. and it has
branches/ subsidiaries in several countries.
 A multinational corporation controls production and marketing facilities in
more than one country.
 Firms that participate in international business, however, large they may be, solely
by exporting or by licensing technology are not multinational corporations. Nearly
all major multinationals are American, Japanese or Western European, such
as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW.
 The terms ‘multinational corporation’, international corporation’, transnational
corporation’, and ‘global corporation’ are often used interchangeably. But
some experts make a distinction between these terms.
The salient features of multinational corporations are as follows:
(i)Giant Size: The assets and sales of a multinational are quite large. The sales
turnover of some MNCs exceed the Gross National Product of several developing
countries. For example, the physical assets of International Business Machines
(IBM) exceed $ 8 billion dollars.
(ii)International Operations: A multinational corporation has production, marketing
and other facilities in several countries. It operations through a network of subsidiaries,
branches and affiliates in host countries. It operates through a network of subsidiaries,
branches and affiliates in host countries. It owns and controls assets in foreign
countries. For example, ITI has about 800 subsidiaries in more than 70 countries.
(iii)Centralized Control: A multinational corporation has its headquarters in the home
country. It exercises control over all branches and subsidiaries. The local managements
of branches and subsidiaries operate within the policy framework of the parent
corporation.
(iv)Oligopolistic Power: Multinational corporations are generally oligopolistic in
nature. Due to their giant size they occupy a dominant position in the market. They also
take over other firms to acquire a huge economic power. For example, Hindustan Lever
Limited acquired Tata Oils Mills.
(v)Sophisticated Technology: Generally, a multinational corporation has at its
command advanced technology so as to provide world class products and services. It
employs capital intensive technology not only in manufacturing but in marketing and
other areas of business
(vi)Professional Management: In order to integrate and manage worldwide
operations, a multinational corporation employs professional skills. It employs
professionally trained managers to handle advanced technology, huge funds and
international business operations.
(vii)International Market: On account of its vast resources and superior
marketing skills, a multinational corporation has vast access to international markets.
Therefore, it is able to sell whatever product/ service it produces in different countries.
(viii) Multiple objectives: Multinational corporations make investments in different
countries with the following aims:
–to take advantage of tax benefits in host countries or to circumvent tariff barriers;
– to exploit the natural resources of the host country;
– to take advantage of Government concessions in host countries
– to mitigate the impact of regulations in the home country;
–to reduce costs of production by making use of cheap labour and lower
transportation expenses in host countries;
– to gain dominance in foreign markets;
– to expand activities vertically.
(i) Franchising : In this form, a multinational corporation grants firms in foreign
countries the right (franchise) to use its trade marks, brand names, patents, technology,
etc. The firms getting the right or license operate as per the terms and conditions of the
franchise agreement. They pay a periodical royalty or license fee to the multinational
corporation. In case the firm, holding franchise violate the terms of the agreement, the
license may be cancelled. This system is popular for products which enjoy good demand
in host countries.
(ii)Branches : A multinational corporation may open branches in different countries.
These branches work under the direction and control of the head office.
The headquarters lay down policy guideline to be followed by the branches. Every
branch follows the laws and regulations of the country in which it is located.
Multinationals find it easiest to operate through branches.
(iii)Subsidiaries : A multinational corporation may establish wholly owned subsidiaries
in foreign countries. In case of partly owned subsidiaries people in the host country also
own shares. The multinational controls the Board of Directors of the subsidiary
company and the subsidiary follows the policies laid down by the parent company.
The holding company undertakes responsibility for the management and working of the
subsidiaries. Subsidiaries are considered to be more profitable than franchising. A
multinational can expand its business operations through subsidiaries all over the
world.
(iv) Joint Ventures : In this system, a multinational corporation establishes a company
in a foreign company in partnership with a local firm for manufacturing or marketing
some product. The multinational and foreign firms share the ownership and control of
the business. Generally, the multinational provides the technical know-how
and managerial expertise whereas day-to-day management is left to the local partner.
For example, in Maruti Udyog, the Government of India and Suzuki of Japan have
jointly supplied the capital and are sharing profits. Suzuki supplies advanced
technology and day-to-day management lies mainly with people nominated by the
Government of India. The multinational corporation contributes capital for the joint
venture and shares profits as per the agreement.
(v) Turn-key Projects:
 In this method, the multinational corporation undertakes a project in a
foreign country. The multinational constructs and operates an industrial
plant from beginning to end. The local client does not participate actively at
various stages of construction. The personnel of the corporation have
technical expertise in the concerned industry and they may train the client’s
staff in the operation of the plant. The multinational may guarantee the
quantity and quality of production over a long period of time. When the project is
complete, it is handed over to the host country. This form is used by under
developed countries to complete projects which require high technical skill and
experience. Underdeveloped countries invite multinationals to construct huge
projects involving technical and managerial expertise and huge financial
resources.
ROLE OF MULTINATIONAL CORPORATIONS
 Multinational corporations play both positive and negative roles. As a
positive force, multinationals can be a dynamic force or instrument for wider
distribution of capital, technology and employment.
 As a negative force, multinationals can be monsters beyond the control of national
governments and working against public interest.
Benefits to Host Country
Multinationals can offer the following gains to host
countries:
(i) Foreign Capital:
 Developing countries suffer from shortage of capital required for rapid
industrialization. Multinational corporations bring in much needed
capital for the development of these countries. These corporations
make direct foreign investment thereby speeding up the process
of economic development. Since liberalization, India has, for eg:
attracted foreign investment worth several billion dollars.
(ii) Advanced Technology:
 Developing countries are technologically backward. They lack
sufficient resources to carry on research and development.
Multinationals serve as vehicles for the transfer of advanced
technology to these countries. Advanced technological knowhow,
improved skills and consultancy help the developing countries to
improve the quality of products and reduce costs. Through continuous
research and development, MNCs serve as a source of inventions and
innovations.
(iii) Employment Generation:
 Multinationals create large scale employment opportunities in host
countries. They increase the investment level and thereby the
employment and income levels. Multinationals offer excellent pay scales
and career opportunities to managers, technical and clerical staff.
(iv) Foreign Exchange:
 Multinationals help the host countries to increase their exports and
reduce their dependence on imports. As a result, these
corporations enable the host economies to improve balance of payment
(v) position.
Managerial Revolution:
 Multinationals help to professionalise management in host countries.
They employ modern management techniques and trained
managers. Several concepts and techniques like corporate planning,
management by objectives and job enrichment were evolved
by multinational corporations. As carriers of knowledge and
experience, multinationals build up ‘knowledge base’ and thereby assist
the development of human resources in host countries.
(vi) Healthy Competition:
 Multinationals increase competition and thereby break domestic
monopolies. They compel the domestic companies to improve their
efficiency or withdraw from the market. For example, many Indian
companies acquired ISO-9000 quality certification due to
competition from multinational corporations after liberalization.
(vii) Growth of Domestic Firms:
 MNCs stimulate the growth of local enterprises. In order to support its
other operations, a multinational may assist domestic suppliers and
ancillary units.
(viii) Standard of Living :
 By providing superior products and services, MNCs help to improve living
standards in host countries.
(ix) World Economy:
 MNCs help to integrate national economies into a world economy. They
encourage international brotherhood and cultural exchanges through
international business.
Benefits to Home Country
Multinationals offer the following advantages to the country of their
origin :
(i) The home country can obtain raw materials and labour at comparatively
cost. lower
(ii)
It can export components and finished products and thereby market is
(iii)
widened. It can earn huge revenue by way of dividends, royalty, licensing fees,
(iv)
etc.
(v)
It can increase domestic employment due to higher scale of
operations. It can acquire technical and managerial expertise of foreign
nations.
CRITICISM OF MULTINATIONAL CORPORATIONS
1. Disregard of National Goals:
 MNCs invest in sectors that are profitable disregarding the goals
and priorities of host countries. They do very little for
underdeveloped strategic sectors and backward regions. Due to their
capital intensive technology and profit-mindedness, they create
relatively few jobs and fail to solve the basic problems like
unemployment and poverty of host nations.
2. Obsolete Technology:
 MNCs often transfer outdated technology to their collaborators in host
countries. In many cases technology transferred is unsuitable
causing waste of scarce capital. Repetitive imports of similar technology
leads to excessive royalty payments without adding to technical
knowledge in host countries. Sometimes, imported machinery remains
idle for want of repairs and maintenance facilities. MNCs have failed
to develop local skills and talents. MNCs use capital intensive
technology which may reduce jobs.
3. Excessive Remittance:
 MNCs squeeze out maximum payment from their subsidiaries/affiliates
and collaborators in the form of royalty, technical fee, dividend, etc. By
repatriating profits, MNCs put severe pressures on the foreign exchange
reserves and balance of payments of host countries.
4. Creation of Monopoly:
 MNCs join hands with big business houses and give rise to monopoly and
concentration of economic power in host countries. They kill indigenous
enterprises through strategic advantages like patents, superior
technology, etc. For example, Pearl Soft Drinks and Kwality Ice Cream Co.,
had to sell themselves to foreign MNCs in India. MNCs pose a threat to
small scale industries.
5. Restrictive Clauses:
 Due to their strong bargaining power, MNCs introduce restrictive clauses
in collaboration agreements, e.g., technology cannot be passed to third
parties, pricing of products will be by the MNC, exports from host
country will be restricted and managerial posts will be filled by parent
company. MNCs do not transfer R&D, training and other facilities to host
countries.
6. Threat to National Sovereignty:
 MNC pose a danger to the independence of host countries. These
corporations tend to interfere in the political affairs of host
nations. Some MNCs like ITI are accused of overthrowing
Governments in countries such as Chile.
7. Depletion of Natural Resources:
 MNC cause rapid depletion of some of the non-renewable natural
resources in host countries.
8. Disregard to Consumer Welfare:
 Their main objective of coming to India is to exploit the big
market available here. Most of them are in FMCG selling fast food
(junk food) with no nutritive value e.g., Pepsi Co. and Coca-Cola
selling soft drinks and snacks, Nestle, McDonald.
Issues with Multinational Corporations
1. Taxation issues: An MNC in its true sense operates with different
companies located in different countries under same management group.
They transfer finished and semi-finished goods, raw materials, spares and
services among the group companies. 40% of the international trade consists
of transfers between related business companies.
 For MNCs there are the separate tax and tariffs rates, government
regulations but they have to operate under political risk as compared to
their domestic counter parts.
 Transfer pricing helps an MNC in tax planning, avoiding exchange controls
and supporting credit status of affiliates. In many cases, there are
chanres against MNCs on the usage of transfer pricing system for
dubious activities.
 Hence, it becomes a source of conflict between the MNC and the host
government. However, the adverse effects of transfer pricing can be
checked to a great extent by regulations.
 As per one school of thought there should not be any regulation
for transfer pricing and no MNC will be compelled to adopt transfer
pricing technique.

 The play of market force will decide optimal allocation of

resources. However this concept is not quite prevalent and hence, it
requires some regulation, which may be direct or indirect.

 Direct Regulation includes the measures replacing directly one particulars

transfer price by another set of prices fixed by the host government. All
the intra firm transactions are required to take place at the fixed place.
  In many developing countries, the government has fixed ceiling on the
royalty payment, but that affects adversely to MNCs. In short, it can be
said that, direct regulations is possible. Indirect regulation may be
applied in different forms, which are as follows:
–Harmonization of tax and tariff between home and host country,
– compensation for the loss of corporate tax revenues on account of transfer pricing
–Apportionment of the consolidated profit of the MNC among the relevant units on the
basis of total assets, sales and labour and capital employed.
2. Ethical issues:
 Scandals and bankruptcies in the United States at companies like Enron
and WorldCom Inc. have focused attention on the abuse of the power
entrusted to executives by shareholders, employees and customers and they
underscore the need for reforms to bolster business ethics. Corruption is not
inherent to any one society. Its reach is global. Fifteen percent of all companies
in industrialized nations have to pay bribes to win or retain business. Ethical
issues in business have become more complicated because of the global and
diversified nature of many large corporations. Managers must balance the ideal
against the need to produce a reasonable profit for the company’s
shareholders with honesty in business practices, safety in the workplace, and
larger environmental and social issues.
 3. Cultural issues:
 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.
– Diversity - 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.
–Organizational Culture - 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.
–Human Resources - 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.
–Sales - 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.
–Communication and Cultural Norms - 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 traditions.
– Etiquette and Customs - 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.