ROLE OF MUTINATIONAL COMPANIES IN INDIA

CHAPTER-1

INTRODUCTION

1.1 INTRODUCTION TO MNCs

A multinational corporation (MNC) or enterprise (MNE),is a corporation or an enterprise that

manages production or delivers services in more than one country. It can also be referred to

as an international corporation.

Such a company is even known as international company or corporation. As defined by I. L.

O. or the International Labour Organization, a M. N. C. is one, which has its operational

headquarters based in one country with several other operating branches in different other

countries. The country where the head quarter is located is called the home country whereas,

the other countries with operational branches are called the host countries. Apart from

playing an important role in globalization and international relations, these multinational

companies even have notable influence in a country's economy as well as the world economy.

The budget of some of the M. N. C.s are so high that at times they even exceed the G. D. P.

(Gross Domestic Product) of a nation. 

The first modern multinational corporation is generally thought to be the East India

Company. Many corporations have offices, branches or manufacturing plants in different

countries from where their original and main headquarters is located.

Some multinational corporations are very big, with budgets that exceed some nations'

GDPs Multinational corporations can have a powerful influence in local economies, and even

the worls economy, and play an important role in international relations  and globalisation.

There are four categories of multinational corporations: (1) a multinational, decentralized

corporation with strong home country presence, (2) a global, centralized corporation that

acquires cost advantage through centralized production wherever cheaper resources are

available, (3) an international company that builds on the parent corporation's technology or

R&D, or (4) a transnational enterprise that combines the previous three approaches.

According to UNdata, some 35,000 companies have direct investment in foreign countries,

and the largest 100 of them control about 40 percent of world trade.

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MEANING&DEFNITION OF MNCs

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. Very large

multinationals have budgets that exceed those of many small countries. 

The term ‘Multinational’ is widely used all over the world to denote large companies having

vast financial, managerial and marketing resources. MNCs are like holding companies having

its head office in one country and business activities spread within the country of origin and

other countries.

1.2 HISTORY AND EVOLUTION OF MNCs

EVOLUTION OF MNCs

Over the past hundred years, the forces driving the internationalization of companies have

changed considerably; the tradeoff between the benefits of global integration and those of

national differentiation has also shifted markedly. Hence, during different periods

international firms have adopted different strategies and different structural configurations.

Yet, these structural configurations have tended to persist. Although all companies are subject

to organizational inertia, MNCs because of their complexity face particular difficulties in

structural change. Hence, MNCs are captives of their history: their strategy-structure

configurations today reflect choices they made at the time of their international expansion.

Radical changes in strategy and structure are difficult: once an international distribution of

functions, operations, and decision-making authority has been determined, reorganization is

slow, difficult and costly—particularly when host governments become involved. Bartlett and

Ghoshal argue that the “administrative heritage” of an MNC—its configuration of assets and

capabilities, its distribution of managerial responsibilities, and its network of relationships—

is a critical determinant of its current capabilities and a key constraint upon its ability to build

new strategic capabilities.38

Bartlett and Ghoshal identify three eras in the development of the MNC (see Figure

15.7):

Early twentieth century: era of the European multinational. European companies such as

Unilever, Shell, ICI, and Philips were pioneers of multinational expansion. Because of the

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conditions at the time of internationalization—poor transportation and communications,

highly differentiated national markets—the companies created “multinational federations”:

each national subsidiary was operationally autonomous and undertook the full range of

functions, including product development, manufacturing, and marketing.

Post-Second World War: era of the American multinational. United States economic

dominance was the basis for the pre-eminence of U.S. multinationals such as GM, Ford,

IBM, Coca-Cola, Caterpillar, and Procter & Gamble. While their overseas subsidiaries were

allowed considerable autonomy, this was within the context of the dominant position of their

U.S. parent in terms of capital, new product and process technology, management

capabilities, and management systems. United States-based resources and capabilities were

their primary competitive advantages in world markets.

The 1970s and 1980s: the Japanese challenge. Japanese MNCs—Honda, Toyota, Matsushita,

NEC, and YKK—pursued global strategies from centralized domestic bases. R&D and

manufacturing were concentrated in Japan; overseas subsidiaries were responsible for sales

and distribution. Globally standardized products manufactured in large-scale plants provided

the basis for unrivalled cost and quality advantages. Over time, manufacturing and R&D

were dispersed—initially because of trade protection by consumer countries and the rising

value of the yen against other currencies.

HISTORY OF MNCs

Multinational Companies(MNCs) are large companies that operate in several countries at the

same time. The first MNCs were established in the 1920s. Many more came up in the 1950s

and 1960s as US businesses expanded world wide and Western Europe and Japan also

recovered to become powerful industrial economies. The worldwide spread of MNCs was a

notable feature of 1950s and 1960s. This was partly because high import tariffs imposed by

different governments forced MNCs to locate their manufacturing operations and become

'domestic producers' in as many countries as possible

The Dutch East India Company was the first multinational corporation in the world and the

first company to issue stock. It was also arguably the world's first

megacorporation, possessing quasi-governmental powers, including the ability to wage war,

negotiate treaties, coin money, and establish colonies.

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The first modern multinational corporation is generally thought to be the East India

Company. Many corporations have offices, branches or manufacturing plants in different

countries from where their original and main headquarters is located.

1.3 FEATURES OF MNCs

The features of MNCs are as follow

1.WORLD WIDE OPERATION

The multinational companies extend their operation to two or more countries.They establish

parent office in one country and extend branches ,subsidiary and affiliation to other countries.

2.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.

3.ADVANCED TECHNOLOGY

Multinational companies invest a huge amount of money on research and development of

latest technology. Therefore transfer advanced technology to developing countries through

subsidiaries and branches,

4.HIGH EFFICIENCY

Advanced technology are used are for multinational companies. So, manpower can give well

training which increase efficiency of manpower. Due to this cause, the multinational

companies can providelarge volume of quality products at cheaper price.

5.MONOPOLISTIC MARKET

Generally, multinational companies supply large quantities of quality products and services

in the international Page on Market they create a separate brand name and capture a large

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area of foreign market. Sometimes they even control a huge market through trade marks and

patent right.

6.PRODUCT/SERVICE ORGANIZATION

A multinational company is based on product/service which produces a mass production of

varieties of goods and services. The company consists own trade mark,patent right ,copy right

and technology for production and distribution of such goods in the international market.

7.OWNERSHIP AND CONTROL

The ownership of such company is shared by both parent company and branch companies as

per their capital investment. However parent company manages and control the operation of

its branches and subsidiary through  trade mark, technology, and patent right.

1.4 SWOT ANALYSIS OF AMUL

STRENGTHS

Low cost

Well developed Countries

Well developed infrastructure

WEAKNESS

Location is often very distant.

Lack of transportation facilities

OPPORTUNITIES

Attract new industries

Leverage government

THREATS

Government restrictions

Quotas ,Emergence of new companies, Monopoly

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1.5 CLASSIFICATION OF MNCs

On the basis of functional criterion, the MNCs are broadly grouped into:

1. Service MNCs.

2. Manufacturing MNCs.

3. Trading MNCs.

1. Service MNCs:

A service MNCs is defined as a transnational company which derives more than 50 per cent

of its revenues from services. Service MNCs are found in areas such as banking, insurance,

finance, transport, tourism, etc.

2. Manufacturing MNCs:

A manufacturing MNCs is one which derives at least 50 per cent of its revenue from

manufacturing activity. A large number of MNCs has entered into the manufacturing sector.

Out of the top 200 MNCs, 118 firms are manufacturing MNCs. They produce a variety of

goods. For example, Parry and Cadbury Fry produce Chocolates, Colgate and Palmolive

produce soaps and detergents, Ponds - cosmetic goods, Olivetti - Teleprinting equipments,

Dunlop, Good Year, Ceat-tyres and tubes.

3. Trading MNCs:

A trading MNCs is the one which derives at least 50 per cent of its revenue from trading

activity. These are the oldest form of multinationals. Trading MNCs control about 60 per cent

of the world's export trade. Tatas, Liptons, Brooke Bond, Hindujas etc. are the trading MNCs.

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1.6 ADVANTAGES AND DISADVANTAGES OF MNCs

Advantages of MNC's for the host country

MNC's help the host country in the following ways

1. The investment level, employment level, and income level of the host country increases

due to the operation of MNC's.

2. The industries of host country get latest technology from foreign countries through MNC's.

3. The host country's business also gets management expertise from MNC's.

4. The domestic traders and market intermediaries of the host country gets increased business

from the operation of MNC's.

5. MNC's break protectionalism, curb local monopolies, create competition among domestic

companies and thus enhance their competitiveness.

6. Domestic industries can make use of R and D outcomes of MNC's.

7. The host country can reduce imports and increase exports due to goods produced by

MNC's in the host country. This helps to improve balance of payment.

8. Level of industrial and economic development increases due to the growth of MNC's in the

host country.

Advantages of MNC's for the home country

MNC's home country has the following advantages.

1. MNC's create opportunities for marketing the products produced in the home country

throughout the world.

2. They create employment opportunities to the people of home country both at home and

abroad.

3. It gives a boost to the industrial activities of home country.

4. MNC's help to maintain favourable balance of payment of the home country in the long

run.

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5. Home country can also get the benefit of foreign culture brought by MNC's.

Disadvantages of MNC's for the host country

1. MNC's may transfer technology which has become outdated in the home country.

2. As MNC's do not operate within the national autonomy, they may pose a threat to the

economic and political sovereignty of host countries.

3. MNC's may kill the domestic industry by monpolising the host country's market.

4. In order to make profit, MNC's may use natural resources of the home country indiscriminately and cause depletion of the resources.

5. A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty.

Disadvantages of MNC's for the home country

1. MNC's transfer the capital from the home country to various host countries causing unfavourable balance of payment.

2. MNC's may not create employment opportunities to the people of home country if it adopts geocentric approach.

3. As investments in foreign countries is more profitable, MNC's may neglect the home countries industrial and economic development.

MNCs is Applicability to particular business

MNC's is suitable in the following cases.

1. Where the Government wants to avail of foreign technology and foreign capital e.g. Maruti

Udyog Limited, Hind lever, Philips, HP, Honeywell etc.

2. Where it is desirable in the national interest to increase employment opportunities in the

country e.g., Hindustan Lever.

3. Where foreign management expertise is needed e.g. Honeywell, Samsung, LG Electronics

etc.

4. Where it is desirable to diversify activities into untapped and priority areas like core and

infrastructure industries, e.g. ITC is more acceptable to Indians L&T etc.

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5. Pharmaceutical industries e.g. Glaxo, Bayer etc.

MNCs can be classified on the basis of several criteria, such as function, control, investment,

origin, turnover, products, etc.

1.7 THE ORGANIZATIONAL STRUCTURE OF

MULTINATIONAL COMPANIES

Multinational corporate structure

Horizontally integrated multinational corporations manage production establishments located

in different countries to produce the same or similar products. (example: McDonald's )

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. (example: Adidas )

Diversified multinational corporations manage production establishments located in different

countries that are neither horizontally nor vertically nor straight, nor non-straight integrated.

(example: Hilton Hotels )

Multinational companies, especially smaller ones, face more organizational challenges than

companies operating in only one national market. They have to maintain functional

organizational units, but they have to fulfill these functions in different ways, depending on

where the business in operating. The essential challenge is to create differentiated

organizational units responsible for the foreign markets while coordinating operations across

the whole company.

Functional

A functionally organized multinational company uses corporate functions as the basis for its

organizational structure. Production, human resources, design and customer service are

typical functional units. If a functionally organized company has a centralized structure, all

operations are based in the home country and individual employees have responsibilities for

different national markets. This type of organization is efficient and effective for companies

that are too small to have overseas subsidiaries. Larger companies can have this type of

organization, but in a decentralized form, where foreign employees carry out some of the

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work in their own countries. In this case, companies have to pay special attention to

coordinating activities.

Geographic

A common form of organizational structure for larger companies and businesses that require

a presence in the foreign markets is one that's based in geography. In addition to the home

office or headquarters, semi-independent operations are established in the countries where the

company is active. For larger corporations, these can take the form of subsidiaries, while

smaller companies can have something as simple as an agent or a small office. This structure

affords flexibility; the head office can transfer responsibilities abroad if required by local

conditions and if the foreign operation is competent, but it can also take over local operations

if needed.

International Division

One way multinational companies can accommodate foreign operations without disrupting

the organization in their home market is to create an international division. This structure is

suited to larger corporations, but it is also effective for smaller companies that have an

established home market and a rapidly growing international business. It leaves the company

free to maintain the focus on its home market in its main organization while leaving the

international division free to adapt to the foreign markets in which it is active.

Matrix

A matrix organizational structure combines the efficiency of the functionally organized

company with the flexibility of extensive local operations. Foreign workers report to local

managers for questions about their work, while they report to the head office for all other

functions. The home organization retains control of disciplinary matters, pay and promotions,

while the employees carry out the work according to local requirements. This is a suitable

organizational form for smaller companies active in only one or two foreign markets, but it is

mainly used by larger corporations who have extensive foreign operations.

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1.8 ROLE OF MNCs

Role of MNC’s According to an ILO report, “the essential nature of multinational enterprises

lies in the fact that its managerial headquarters are located in one country (home country)

while enterprises carries out operations in number of other countries as well. (host

countries).Domivance of MNC’s Through liberalization there has been expansion & growth

of MNC’s.

The GDP has increased from about 5% in beginning of 1980’s to nearly 7% at end of1990’s.

The MNC’s are estimated to employ directly, at home and abroad around73 billion people.

For example, the US footwear company Nike currently employees 9000 people, while nearly

75,000 people are employed by its independent sub-contractors located in different countries.

Modern MNCs are desperately seeking many ways to ensure their own survival. They no

longer can survive considering only their own and their national interests, but they need to be

good citizens in their host countries as well. They have to receive full support from the

engineering community and customers in order to be successful. Hence they are establishing

better engineering and science relationships in local communities. Strategic alliances in

business and technological development are a step forward. R&D cooperation between Japan

and the United States and further with all nations throughout the world should aim to solve

global environmental problems such as acid rain, global warming, and preserving the rain

forests, as well as developing a cure for AIDS, an epidemic that continues to grow rapidly on

a global scale.1

In industrially advanced countries, the people demand highly sophisticated information

products since their societies are rapidly becoming highly-information oriented societies. The

application software of such products is very much dependent on local culture and is very

difficult for engineers from different cultures to develop. Such software has to be developed

by local engineers with knowledge of the market. This trend is not limited to information

1. Role of MNC’s According to an ILO report, “the essential nature of multinational enterprises

lies in the fact that its managerial headquarters are located in one country (home country)

while enterprises carries out operations in number of other countries as well. (host

countries).Domivance of MNC’s Through liberalization there has been expansion & growth

of MNC’s. The GDP has increased from about 5% in beginning of 1980’s to nearly 7% at end

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of1990’s. The MNC’s are estimated to employ directly, at home and abroad around73 billion

people. For example, the US footwear company Nike currently employees 9000 people,

while nearly 75,000 people are employed by its independent sub-contractors located in

different countries .Merits of MNC’s The important arguments in favour of MNC’s are given

below:-MNC’s help the host countries in following ways:-1) MNC’s help to increases the

investment level & thereby the income &employment in host country.2) The transnational

corporations have become vehicles for the transfer technology, especially to developing

countries.3) They also kind a managerial revolution in host countries through professional

management and employment of highly sophisticated management techniques.4) The MNCs

enable that host countries to increases their exports & decreases their import requirements.5)

They work to equalize cost of factors of production around the world.6) MNC’s provide and

efficient means of integrating national economies.7) The enormous resources of multinational

enterprises enable them to have very efficient research & development systems. Thus, they

make a commendable contribution to inventions & innovations.8) MNC’s also stimulate

domestic enterprise because to support their own operations, the MNC’s may encourage &

assist domestic suppliers.

2. 9) MNC’s help to increase competition & break domestic monopolies. Demerits:-1) MNC’s

may destroy competition & acquire monopoly powers.2) The transfer pricing enables MNC’s

to avoid taxes by manipulating prices on intra-company transactions.3) Through their power

and flexibility , MNC’s can evade national economic autonomy & control, and their activities

may be inimical to national income interests of particular countries.4) MNCs retard growth of

employment in home country.5) MNCs technology is designed for world-wide Profit

maximization, not the development needs of poor countries. In general, it is asserted, the

imported technologies are not adopted to (a) Consumption needs (b) size of domestic markets

(c) resource availabilities (d) stage of development of many of developing countries.

Multinationals in India Comparatively very little foreign investment has taken place in India

due to several reasons, some multinationals, Coca Cola and IBM, even left India in late1970s

as the government conditions were unacceptable to them .A Common criticism against

MNC’s is that they tend to invest in low priority &high profit sectors in developing countries,

ignoring national priorities. However high technology and heavy investment sectors of

national importance & export sectors. Firms which had been established non-priority areas

prior to implementation of this policy have, however been allowed to continue in those

sectors.It is not a right approach to estimate the net impact of multinationals on foreign

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exchange reserves by taking net foreign exchange outflow or inflow. If a multinational is

operating in an import substitution industry, the net effect in foreign exchange reserves could

be favorable even if there is net foreign exchange outflow of company

Let us discuss the arguments for and against the operation of MNCs in

Development of underdeveloped countries.

Arguments for MNCs(The positive role): The MNCs play an important role in the

economic development of underdeveloped countries.

1. Filling Savings Gap: The first important contribution of MNCs is its role in filling the

resource gap between targeted or desired investment and domestically mobilized savings. For

example, to achieve a 7% growth rate of national output if the required rate of saving is 21%

but if the savings that can be domestically mobilised is only 16% then there is a ‘saving gap’

of 5%. If the country can fill this gap with foreign direct investments from the MNCs, it will

be in a better position to achieve its target rate of economic growth.

2. Filling Trade Gap: The second contribution relates to filling the foreign exchange or trade

gap. An inflow of foreign capital can reduce or even remove the deficit in the balance of

payments if the MNCs can generate a net positive flow of export earnings.

3. Filling Revenue Gap: The third important role of MNCs is filling the gap between

targeted governmental tax revenues and locally raised taxes. By taxing MNC profits, LDC

governments are able to mobilize public financial resources for development projects.

4. Filling Management/Technological Gap: Fourthly, Multinationals not only provide

financial resources but they also supply a “package” of needed resources including

management experience, entrepreneurial abilities, and technological skills. These can be

transferred to their local counterparts by means of training programs and the process of

‘learning by doing’.

Moreover, MNCs bring with them the most sophisticated technological knowledge about

production processes while transferring modern machinery and equipment to capital poor

LDCs. Such transfers of knowledge, skills, and technology are assumed to be both desirable

and productive for the recipient country.

5.Other Beneficial Roles: The MNCs also bring several other benefits to the host country.

(a) The domestic labour may benefit in the form of higher real wages.

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(b) The consumers benefits by way of lower prices and better quality products.

(c) Investments by MNCs will also induce more domestic investment. For example, ancillary

units can be set up to ‘feed’ the main industries of the MNCs

(d) MNCs expenditures on research and development(R&D), although limited is bound to

benefit the host country.

Apart from these there are indirect gains through the realization of external economies.

Arguments Against MNCs(The negative role):

 There are several arguments against MNCs which are discuss below.

1. Although MNCs provide capital, they may lower domestic savings and investment rates by

stifling competition through exclusive production agreements with the host governments.

MNCs often fail to reinvest much of their profits and also they may inhibit the expansion of

indigenous firms.

2. Although the initial impact of MNC investment is to improve the foreign exchange

position of the recipient nation, its long-run impact may reduce foreign exchange earnings on

both current and capital accounts. The current account may deteriorate as a result of

substantial importation of intermediate and capital goods while the capital account may

worsen because of the overseas repatriation of profits, interest, royalties, etc.

3. While MNCs do contribute to public revenue in the form of corporate taxes, their

contribution is considerably less than it should be as a result of liberal tax concessions,

excessive investment allowances, subsidies and tariff protection provided by the host

government.

4. The management, entrepreneurial skills, technology, and overseas contacts provided by the

MNCs may have little impact on developing local skills and resources. In fact, the

development of these local skills may be inhibited by the MNCs by stifling the growth of

indigenous entrepreneurship as a result of the MNCs dominance of local markets.

5. MNCs’ impact on development is very uneven. In many situations MNC activities

reinforce dualistic economic structures and widens income inequalities. They tend to promote

the interests of some few modern-sector workers only. They also divert resources away from

the production of consumer goods by producing luxurious goods demanded by the local

elites.

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6. MNCs typically produce inappropriate products and stimulate inappropriate consumption

patterns through advertising and their monopolistic market power. Production is done with

capital-intensive technique which is not useful for labour surplus economies. This would

aggravate the unemployment problem in the host country.

7. The behaviour pattern of MNCs reveals that they do not engage in R & D activities in

underdeveloped countries. However, these LDCs have to bear the bulk of their costs.

8. MNCs often use their economic power to influence government policies in directions

unfavorable to development. The host government has to provide them special economic and

political concessions in the form of excessive protection, lower tax, subsidized inputs, cheap

provision of factory sites. As a result, the private profits of MNCs may exceed social benefits.

9. Multinationals may damage the host countries by suppressing domestic entrepreneurship

through their superior knowledge, worldwide contacts, and advertising skills. They drive out

local competitors and inhibit the emergence of small-scale enterprises.

Reasons for the Growth of MNCs:

Favourable Impact of MNCs :

MNCs create employment opportunities in the host countries. It helps to create a pool of

managerial talent in the host country

. 2. Helps removal of monopoly and improve the quality of domestic made products.

3. Promotes exports and reduce imports by raising domestic productions.

4. Goods are made available at cheaper price due to economies of scale .

5 . Job and career opportunities at home and abroad in connection with overseas operations.

6. Encourages the world unity and all resulting in world harmony

Harmful effect of MNCs :

1. The host county is likely to lose its economic sovereignty

2. The host nation may also experience some loss of control over its own economy

3. Feeling that labour is being exploited by the MNC/ Outsourcing

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4. Lost of cultural moorings

5. The problem of Dumping Example – Chinese products are priced low in Indian market.

1.9 INFLUENCE OF MNCs

The Influence of Multi-Nationals

Multinational Companies ("MNCs") have become very large and very powerful. Some, for

example, are worth more than the entire GDP of many countries. So MNCs can have an

enormous effect, for good and for ill, on the countries they do business in, especially if those

countries are small and/or poor. This revision note examines the main areas of influence:

The Balance of Payments

MNCs import large amounts of capital in order to pay for their new business investments;

factories, offices or whatever. This surplus on the capital account creates a deficit on the

current account ie the country is importing more goods and services than it is exporting.

This lifts local standards of living until the import of capital stops for whatever reason and

then standards fall again.

If the new business is for import substitution (ie producing locally what had been imported)

then imports fall and the current account improves. If the new business is developing local

raw materials for export (eg oil exploration) then the exports of raw material also improve the

current account.

But, the MNC may need to import large amounts of technical equipment not available

locally, and this will worsen the current account. If the MNC re-invests its profits then there

is no effect on the Balance of Payments, but if it repatriates its profits, the current account

worsens. Further, the exchange market of a small country may not be well-developed, so the

attempt by a business to buy or to sell large amounts of foreign exchange will send the price

of that currency sharply up or down unless things are managed very carefully

Employment

Generally, MNCs set up new businesses which need new workers and so employment is

improved; jobs are created. However, it depends on the skills match between the new jobs

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and the local employment market. The business may set up a factory specifically designed to

suit the local employment market. But in the Middle East oil states, for example, there are

many factories producing for the local consumer markets. Sometimes the jobs are too

demanding for the locals, and sometimes the jobs are too demeaning. Either way, the result is

huge numbers of expatriate workers from India, Bangladesh, the Philippines and so on and at

the same time large local unemployment.

But, MNCs can sometimes provide devastating competition for local businesses which may

end up closing which creates unemployment. MNCs usually employ fewer workers; that is

part of their greater efficiency. The MNC may then relocate again after a period of years.

Technology transfer

An MNC invariably operates to a higher standard of managerial and technical expertise than

the local economy. Local employees can learn about these things and the local economy can

benefit from this new expertise. Even the UK can benefit, so we are not simply talking about

developing countries where technology transfer is enormously important. This will depend on

how willing the MNC is to employ and train local workers.

Social responsibility

Standards and regulations are another kind of business cost, and MNCs are always looking

for lower costs. So there is an advantage to locating in countries with few regulations. Some

poor countries are prey to corruption and bribery which means their few regulations are

ineffective. India, for example, has excellent environmental protection laws, on paper. In

practice, the inspectors are so badly paid it only costs a matter of dollars to get them to look

the other way. This opens the way for a slippage of standards below the levels considered

acceptable in the MNCs home country.

One of the most scandalous cases was in the 1980s where the US chemical business Union

Carbide tolerated very poor safety standards at a factory in Bhopal, India.. The result was an

explosion which released clouds of toxic gas and killed thousands. Many more thousands are

still alive and very ill because of this. What was particularly irresponsible was the long years

it took to force Union Carbide to accept responsibility and pay compensation. This whole

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area is a large and important are which it is impossible to cover completely. It is, for example,

one important reason why some western pressure groups are so hostile to MNCs

Government control

It is quite difficult for some governments to exercise effective control over MNCs because

they are so large and powerful. One MNC may be the dominant force in the local economy.

Even large and wealthy countries such as the UK can’t always control MNCs effectively.

They have a wide repertoire of tricks to minimise government control, especially taxes.

One favourite trick (technically illegal) is transfer pricing. MNCs often buy and sell

between different national offices of the same business, because each is a separate profit

centre. For example, the Paris office makes the product, and the Berlin office sells it. So the

Paris office has to sell to the Berlin office. There is then the question of at what price the sale

takes place. Officially, the selling price must be the market price on the day, but some

markets don’t have prices every day, and governments have a difficulty in proving what is

going on.

If, for example, German company taxes are higher than French company taxes, then the

Berlin office will pay too much for the product and make a loss. The Paris office makes a

very large profit and pays tax on this profit at the lower rate. When different governments

have completely different tax systems, with thousands of detailed rules of how tax is paid,

and deductions for this, and allowances for that, the opportunities for MNCs to employ a few

clever tax accountants and ‘cook the books’ are enormous

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ROLE OF MUTINATIONAL COMPANIES IN INDIA

CHAPTER -2

ROLE OF MNCs IN INDIA

2.1 MNCs IN INDIA

India is the home of a number of multinational companies since the country’s market was

liberalized in 1991. Initially The MNC from United States account 37% of turnover of first

20 firm operated in India Now scenario has changed a lot more enterprises from European

union like Britain, France, Netherlands, Italy, Germany, Belgium and Finland have come to

India and outsourced their work to this country Example Finnish mobile giant Nokia has their

second largest base in India MNCs in India

Why are Multinational Companies in India?

There are a number of reasons why the multinational companies are coming down to India.

India has got a huge market. It has also got one of the fastest growing economies in the

world. Besides, the policy of the government towards FDI has also played a major role in

attracting the multinational companies in India. 

For quite a long time, India had a restrictive policy in terms of foreign direct investment. As a

result, there was lesser number of companies that showed interest in investing in Indian

market. However, the scenario changed during the financial liberalization of the country,

especially after 1991. Government, nowadays, makes continuous efforts to attract foreign

investments by relaxing many of its policies. As a result, a number of multinational

companies have shown interest in Indian market. 

 Following are the reasons why multinational companies consider India as a preferred

destination for business:

Huge market potential of the country

FDI attractiveness

Labor competitiveness

Macro-economic stability

India’s vast population is increasing its purchasing power

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ROLE OF MUTINATIONAL COMPANIES IN INDIA

India is also emerging as the manufacturing and sourcing location of choice for various

industries

2.2 PROS& CONSOF MNCs IN INDIA

Pros:

Increase investment level

Transferring the technology

It increase host country exports & reduce its imports

Integrating national economy

Implement new innovations

Increase competition

Cons:

May acquire monopoly power

Underestimate local culture

Think only about profit rather than host country interest

Inflexibility in terms & conditions

Heavy use of non-renewable natural resources

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ROLE OF MUTINATIONAL COMPANIES IN INDIA

2.3 ROLE OF MNCs IN INDIA

ROLE OF MNCs IN INDIA

1.) Profit Maximisation.

2.) International Network of marketing.

3.) Diversification Policy.

4.) Concentration in Consumer goods.

5.) Location of central control offices.

6.) Techniques to achieve Public Acceptability.

7.) Existence of Modern & Sophisticated Technology.

8.) Business but not social Justice.

9.) MNCs & Process of planned Economic Development in India.

10.) Cultural Explosion.

2.4 SUCCESS FOR MNCs IN INDIA

Success for MNCs in India can be defined along 2 dimensions :

Capturing the Domestic Market Opportunity

Leveraging India’s resource base to derive additional value for the corporation

R&D / Manufacturing / Sourcing

What are the key issues in the Indian context which have hindered MNCs growth?

Global parent strategy” dictates India plans

Limitations of growth due to regulatory / legislation / IPR issues

Limited Autonomy for top MNC Managers

Sometimes bureaucratic setups have delayed decision making – sharp contrast to most Indian

entrepreneur companies

Insistence of some companies on having expats

Rigidity and insistence on evaluating India like any other market

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ROLE OF MUTINATIONAL COMPANIES IN INDIA

Not being able to recognize early enough that India is a price and quality conscious market

Limitations of following aggressive M&A options (detail next slide)

Many MNCs have got consistently caught in rounds of “parent consolidation”

100% subsidiary conundrum

Key Advantages of existence of MNCs in India ….i.e what has India really gained?

Work culture for employees

Systems

Training and Learning

Technology – especially concept of working with better technologies

Safety Health and Environmental Learnings

Culture and Ethos

Excellent training grounds for many entrepreneurs

2.5 TRENDS IN MNCs IN INDIA

1. First MNC in INDIA is EAST INDIA Co. in 1600.

2. American companies accounts for around 37% of the turnover of the top 20 firms operating

in India.

3. The scenario for 'MNC in India' has changed a lot in recent years, since more and more firms

from European Union like Britain, Italy, France, Germany, Netherlands, Finland, Belgium etc

have outsourced their work to India.

4. Finnish mobile handset manufacturing giant Nokia is the largest Multinational Corporation In

India.

5. A host of automobile companies like Fiat, Ford Motors, Piaggio etc from Italy have opened

shop in India with R&D wing attached.

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ROLE OF MUTINATIONAL COMPANIES IN INDIA

6. Oil companies, Infrastructure builders from Middle East are also flocking in India to catch

the boom.

7. South Korean electronics giants Samsung and LG Electronics and small and mid-segment car

major Hyundai Motors are doing excellent business and using India as a hub for global

delivery.

8. Companies like SingTel of Singapore and Malaysian giant Salem Group are showing huge

interest for investment.

9. Also insurance companies like AIG and Max New York Life Insurance doing business in

India.

India to produce more MNCs :

Pricewaterhousecoopers(PwC) gave a report on April 30 2010 on emerging MNCs They said

India is expected to produce highest number of MNCs overtaking China as the emerging

world largest source. Over 2200 Indian Companies are likely to open operations outside the

country over next 15 years India to produce more MNCs

Liberalization & MNCs :

In India ,Liberalization measures initiated in 1991 opened up the entry of MNCs. Measures to

minimize bureaucratic control were also a part of 1991 policy. Which encouraged MNC

operating in India. Up to 51% of direct foreign equity was allowed in high priority areas

requiring heavy investment. 100% foreign equity was permitted in high priority industry. 22

Liberalization & MNCs

The amendment of Central Govt. ordinance of sept.27,1991 , facilitated the entry of new

MNCs on the one hand and expansion of the existing ones on the other. The provision

restricting the acquisition of transfer of share of MRTP undertakings in both MRTP act and

Companies act were deleted. New provisions as in section 108-A to 108-1 were included,

facilitating the transfer of shares in MRTP companies and dominant undertakings. MNCs are

now permitted to invest in India’s small scale sector

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2.6 MNCs IN INDIA

Some Indian MNC’s:Paints – Asian Paints

Auto & Components – Tata Motors, godgeg, Bharat Forge

Chemicals – Tata Chemicals, United Phosphorus

Metals – Sterlite Industries, TISCO, tata

Packaging – Essel, kingfisher

Pharmaceuticals – Ranbaxy, Wockhardt, Sun, DRL

Oil & Gas – ONGC , reliance

2.7 FUTURE OF MNCs in INDIA

Increasing international competition. Global consumer awareness. Technological

advancement. Reduction in friction among nations. World Business Community coming

together. Growing role of private sector inn developing countries.

Regional economic Integration. Increase in the number of bilateral treaties that promote

FDI has increased considerably. Privatization programmes.

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ROLE OF MUTINATIONAL COMPANIES IN INDIA

CHAPTER-3

CONCLUSION

It is the environment setup that helps a company gain its position in the market. And this

environment setup comes with the type of people working for the company. It is obvious that

there will be variety of people working within the company, the more cream a company has,

better outputs it gets. But now the question arises how would one get that best cream sort of

intakes. But the answer is equally simple, one should first clear the proper checks, standard

procedures and requirements in order to be a part of the organization and at the same time

being worthy of the job.

Although MNCs are providing more employment for the people as it includes a larger portion

under it, it also has modern techniques of business. As their market is globalized thus in many

parts across the globe, and as well as in this age of global networks they are providing a much

higher standard working environment for their employee

The Indian government sectors has a lot of advantages over the other companies, they

provide you security of your job which any other MNC would not give. And this is one of the

issues that are troubling almost every single person working in any company. A lifetime

surety of the job and work is something that every one would desire for and the Indian

Government sector is the place where you get a lifetime surety of your job. And these

companies are providing employment to lots of people in India without crossing any

boundaries any giving a chance to settle up their work.

Due to these MNC’s, competition increase and more employment opportunities are available.

Gives advantages to domestic companies thru purchasing of raw material & resources. New

company having network to expand their business

This generates the conclusion that these companies are generating tough competition for the

other companies in the international market and that is changing the mentality of the people

involved in the market which is making them do business in the Indian market. So there is no

point to the rise of the question “Whether MNCs are superior to Indian Companies or not?”

.

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ROLE OF MUTINATIONAL COMPANIES IN INDIA

CHAPTER-4

BIBLIOGRAPHY

BOOKS

BUSINESS ENVIRONMENT BY FRANCIS CHERUNILRAM

 EUROPEAN JOURNAL OF BUSINESS & MANAGEMENT( INTERNET)

WEBSITES

www.google.com

www.wikipedia.com

www.economictimes.com

www,investopedia.com

www.mapsofindia.com

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