multinational corporation curse or boon.doc
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INDEX
Sr. No. Subjects Covered Pages
1. INTRODUCTION OF MNC 2-8
2 REVIEW OF LITERATUER 9-10
3 ORGANISATION DESIGN AND STRUCTURE OF MNC 11-19
4 MNC IN INDIA 20-29
5 MULTINATIONAL CORPORATION CURSE OR BOON 30-35
CONCLUSIONS AND BIBLIOGRAPHY 36-37
1
Chapter 1.
MULTINATIONAL CORPORATION
INTRODUCTION:
Multinational Corporations (MNCs) are giant industrial organizations with their Headquarters
Located in one country, extending heir industrial and marketing operations in several countries
through a network of their branches or their Majority Owned Foreign Affiliates (MOFAs).
MNCs are also known by other names, like/, transnational corporations, global corporations and
international corporations, etc. A multinational corporation (MNC) or transnational
corporation (TNC), also called multinational enterprise (MNE), is a corporation or
enterprise that manages production or delivers services in more than one country. It can also be
referred to as an international corporation.
The first modern MNC is generally thought to be the Dutch East India Company, established in
1602. The key element of transnational corporations was present even back then: the Dutch East
India Company was operating in a different country than the one where it had its headquarters.
Nowadays many corporations have offices, branches or manufacturing plants in different
countries than where their original and main headquarter is located. This is the very definition
of a transnational corporation. Having multiple operation points that all respond to one
headquarter. This often results in very powerful corporations that have budgets that exceed
some national GDPs Multinational corporations can have a powerful influence in local
economies as well as the world economy play an important role in international relationship
globalization presence of such powerful players in the world economy is reason for much
controversy.
DEFINITION:
There is mo universally accepter definition of the term multinational corporation.
Different authorities define the term differently.
(1) As ILo Report says, “ The essential nature of the multinational enterprise lies in
the fact that is managerial Headquarters are located in one country ( home
country ) while the enterprise carries out operations in a number of other
countries as well (host countries)” 1
(2) Obviously, what is meant is, “A corporation that controls production facilities in
more than one country, such facilities having been acquired through the process
of foreign- direct investment. Firms that participate in international business
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however large they may be, solely by exporting or b hunting technology is not
Multinational enterprises.”
(3) The United Nations defines MNCs as, “Enterprises which control assets-
factories, mines, sales offices and the like in two or more countries.”
An enterprise operating in several countries but managed from one (home) country.
Generally, any company or group that derives
a quarter of its revenue from operations outside of its home country is considered
a multinational corporation.
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 buildson the parent corporation’s technology or
R&D
4. A transnational enterprise that combines the previous three approaches. According
to UN data, some 35,000 companies have direct investment in foreign countries, and the
largest 100 of them control about 40 percent of world trade.
1.1 GROWTH OF MNCs
The rapidity with the MNCs are growing is indicated by the fact that while according to
the world investment report 1997 there were about 45,000 MNCs with 2,80,000
overseas affiliates; according to the world investment report 2001, there were over
63,000 of them with about 8,22,000 overseas affiliates. China was host to about 3.64
lakh of the affiliates (i.e., more than 44% of the total) compared to more than 1400 in
India. The developed countries have les than 12% if these affiliates.
The possess staggering resources as would be clear from the fact that the sales of
200 top corporations in1982 were equivalent of 24.2 per cent of the world’s GDP and
have risen to 28.3 per cent of the world GDP in 1998. This shows that 200 top MNCs
now control over a quarter of the world’s economic activity. In fact the combines sales
of thee 200 MNCs estimated at &7.1 trillion in 1998 surpass the combined economies
of 182 countries. If we subtract the GDP of the big 9 economies -USA, Japan,
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Germany, France, Italy, UK, Brazil, Canada and china-from the world’s GDP, the GDP
of the remaining 182 countries of the world comes to $6.9 trillion in 1998 which is less
than the sales of the 200 top MNCs. An idea of the giant size of these MNCs can also
be had from the revelation made in a study conducted by the Washington based institute
of policy studies (IPS) that of the 100 largest economies in the world, 51 are
corporations; only 49 are countries.
The MNCs are estimated to employ directly, at home and abroad. Around73
billion people representing nearly 10 per cent of paid employment in non-agricultural
activities world wide and close to 20 per cent in the developed countries considered
alone/ in addition , the indirect employment effect of the TNC activities ate at least
equal toy hew direct effects and probably much larger. For example, the US footwear
company Nike currently employs 9000 people; while
nearly 75,000 people are employed by is independent sub- contractors located in
different countries. Based on such information, the total number of jobs associated with
TNCs world wide may have been 150 million at the beginning of the 1990s. 6
1.2 REASONS FOR THE GROWTH OF MNCs
The important reasons for the growth of multinationals are as follows:
1. Expansion of market territory: The increase in per capita income alongside
the growth of various economies and growth of GDP resulted in the rise of
living standards of the people. Due to these factors. The market territory of the
firms expended. In addition to this, the large operations of the MNCs builds up
its international image, which contributed to extend its market territory beyond
the physical boundaries of the country in which it is incorporated?
2. Market Superiorities: A number of market superiorities can ve observed in
MNCs over the domestic companies. They may be:
a. Availability of more reliable and up to date data and information:
b. They enjoy market reputation:
c. They adopt more effective advertising and salad promotion technique
and thymus they face less difficulties in marketing the products:
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d. They have efficient warehousing facilities due to lower inventory
requirement and also enjoy quick transportation
3. Financial superiorities: An MNC enjoys financial superiorities over domestic
companies. They are:
a. Huge financial resources at the disposal of the MNCs. they can turn the
environment and circumstances in their favor by utilizing these
resources:
b. They have easy access to external capital markets:
c. Because of its international regulation, thy can raise funds from
international banks and financial institutions easily.
4. Technological superiorities: Expansion or growth of MNCs is dot to the
technological backwardness of underdeveloped contraries. Infect MNCs are rich
in technology. Thee rich financial resources of the MNCs enable them to invest
on R$ D and develop the advanced technology. There are certain reasons due to
which the developing countries regard the transfer of technology from the
MNCs. These reasons are:
a. Lack of industrialization and insufficient resources:
b. Local manpower , capital, etc. cannot be optimally utilized by the
developing countries on their own:
c. Developing countries are unable to import raw materials, capital
equipment, technology, etc: on their own due to paucity of resources:
d. The developing countries also lack in marketing the products due to
competition:
e. Lack in exploiting mineral and nature of its own.
5. Product innovation: Advanced R$D departments enable MNCs to develop new
products and superior designs of their products. Developing and underdeveloped
countries suffer from limitation in this regard. Therefore, they invite MNCs to
their countries.
5
1.3 FEATURES OF MULTINATIONAL CORPORATIONS:
Main feature of MNCs are as follow:
1. Giant size: MNCs are of giant size. Their assets, sales and profits run into
multi-core. For instance, the biggest multinational corporation, ITT of US has
708 branchless in 67 countries which are spread over.6 continents. Another
multinational corporation of USA, namely general motors which has assets
worth more than 9,000 core dollars. According to one estimate made by experts
of UNO, total sale proceeds of 350 multinational corporation was $2,500 million
and they provided employment to 2.5 core person. They had their subsidiaries
number more than 23,000. Their contribution to GNP of capitalist countries was
about 40 per cent. Their sale proceeds were more than the GNP of many
countries.
2. International operations: activities of MNCs are sprees over many countries.
Their parent corporation is located in one country and their subsidiaries are
scattered in many countries of the world. Parent company may have 51 per cent
to 100 per cent shares in the subsidiaries. Parent Corporation has full control
over subsidiaries.
3. Transfer of resources: Parent Corporation easily transfers its resources,
technique, managerial ability, raw materials and finished products to
subsidiaries companies.
4. Varies activities: MNCs perform varies functions. One of their functions is
concerned with services. These corporations transfer capital and techniques.
Regarding knowledge of sales of goods, foreign trade, packing, etc. they provide
research and development services. Other activities are related to production of
petroleum, etc. in order to make available these services and products, they
function both as production and buyers. Historically, MNCs had initially
development activities related to the production of minerals and raw materials.
Along with it they also invested their capital in plantation and agricultural
activities for purposes of export. These days, MNCs are mainly engaged in the
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development of industries, of their total investment 28 per cent in industries, 40
per cent in petroleum and 9 per cent in minerals.
5. Oligopolistic Market: MNCs produce those goods which have small number of
producers or sellers. In other words where oligopolistic marketer condition
prevail.
6. Consequently these conditions have control over the prices of the products. By
fixing high prices they earn mode profits and prevent the entry of mew firms in
the market.
7. Spontaneous evolution: generally, there is spontaneous evolution of
multinational corporations. There is mo need of any pre-planning. Many forms
gradually assume international character. Several factures contribute to the
development of MNCs, e.g., difference in wage rate in different countries,
favorable trade conditioned etc.
8. Multinational ownership: citizens of many countries have their share in the
capital of multinational corporations. Their shares are bought and sold at
international level.
9. Multinational management: MNCs are managed at international level. Their
managing board is composed of nationals of several countries.
1. 4 Facts about Multinational Corporations
1. The Oldest Multinational Corporation
The first multinational corporation was established in 1602 as the Dutch East India
Company. This chartered company was established by the Netherlands, who granted the
body the right to establish colonial projects in Asia. The powers of the company were
far reaching, since the Dutch had no real presence in Asia at the time. The company was
responsible for law and order, coining money, governing parts of the territory,
negotiating treaties, and even making war and peace.
2. Global Presence
As of the publication date, multinational corporations have a significant global
presence, with 52 MNCs ranking in the top 100 largest economies in the world. These
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international giants have sales that range between $51 billion and $247 billion annually.
The trade presence of these corporations is also massive: over 70 percent of
international trade is done by the top 500 MNCs. So, while the largest MNCs are
concentrated in terms of ownership and workforce -- they make up under one percent of
the global work force -- they direct a significant amount of global finance.
3. Governments and MNCs
Governments throughout the world routinely support MNCs in a number of ways,
including through financial incentives such as low tax rates and financial transfers. In
the United States, 95 percent of MNCs paid less than five percent in incomes taxes --
and between 1996 and 2000, 60 percent paid no federal taxes at all. Food corporations
and farmers are a regularly subsidized group, and in 2005, $283 billion was transferred
to agricultural corporations -- most to MNCs -- by the world's most developed nations.
4. Role in Alleviating Child Labor
Multinational corporations play a role in international development, including
improving the welfare of individuals in lesser developed nations. Between 1980 and
1998, child labor rates throughout the world fell by seven percent, from 20 to 13.
Locations with poor multinational corporate coverage saw higher child labor rates than
those with MNC coverage. Multinational corporations argue that their presence
increases local wealth and helps to free children from the burden of premature labor.
8
Chapter 2 Review of Literatuer
Tax notices to multinational companies such as Shell, Vodafone and Nokia worry
investors
TNN Feb 14, 2013,
NEW DELHI: A spate of high-profile tax demands on several multinational companies
(MNCs) such as Shell, Nokia and Vodafone has the potential to hurt sentiment and experts
said investors are hoping that the Budget will have some steps to ensure fair dispute
resolution.
It is not only companies which are being targeted, even individual taxpayers have come
under the taxman's scrutiny. Several taxpayers have been served notices despite disputes
being settled. The tax department, which is facing slowing revenues, has unleashed
several demand in the past few weeks, attracting strong criticism and the firms have
vowed to challenge the notices.
Experts said the government's efforts to assure investors have taken a knock with these
notices and firms are anxious about fresh developments. "The fact is that revenue
collection pressure gets translated down to officers. The high pitch assessment has
reached a level of absurdity," said Gokul Chaudhri, partner with tax consultancy firm
BMR Advisers.
"The question is how do you bring back investor confidence in this environment? There
is uncertainty in the mind of the investor community," Chaudhri said adding that all
eyes are on the budget to see whether the finance minister reassures investors and
announces an action plan for dispute resolution.
Finance minister P Chidambaram has taken several measures to assure investors about the
stability of India's tax policies after the impact of some tax proposals in 2012-13 scared
investors to the sidelines. The government has deferred implementation of the
controversial General Anti Avoidance Rules (GAAR) to 2016 and vowed to provide a
non-adversarial tax environment.
9
"At a conceptual level things are looking positive with the government
deferring GAAR and accepting recommendations of the Rangachary committee.
However, there seems to be a disparity between the policy level and the ground level
reality," said Dinesh Kanabar, deputy CEO of consulting firm KPMG.
He said a part of the problem lies in the stiff targets set for revenue officials which
translated to such steep tax demands. "The need is to expand the tax base," Kanabar
said.
Telecom giant Vodafone and Shell India have said they will challenge the tax notices,
while Finnish telecom giant Nokia has said actions of the tax authorities were
"unacceptable and inconsistent with Indian standards of fair play and governance."
"Shell India's considered view is that the transfer pricing order is based on an incorrect
interpretation of the Indian tax regulations and is bad in law as this is a capital receipt
on which income tax cannot be levied. Funding of a subsidiary through issue of shares is
common in India and globally," Shell India chairman Yasmine Hilton has said in a
statement.
"Taxing the money received by Shell India is in effect a tax on Foreign Direct
Investment (FDI), which is contrary not only to law but also to the spirit of the recent
global trip by the finance minister to attract further FDI into India," Hilton has said.
Slowing economic growth has put pressure on revenues and authorities are struggling to
keep the fiscal deficit within the targeted 5.3% of gross domestic product. Revenue
officials are under pressure to meet the tax targets set for the year.
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Chapter.3 ORGANISATION DESIGN AND STRUCTURE
OF MNCs:
Organization is the social and economic voids in which a number of persons
perform different suites in order to attain common goals. Organisations also help
individuals in attuning those personal objectives which they cannot achieve alone.
Organization is only means to an end. Organization design is the process in which roles
and relationships are analyzed to achieve specific collectively. It leads to the definition
and description of more or less formal structure.
3.1 STEPS INVOLVE IN DESIGNING STRUCTURE:
The following steps are involved in designing the organizational structure:
1. Analysis of present and future circumstances and environmental factors:
2. Planning and implementation of policies. The process of defining aims,
objective, activities and structure of and enterprise is called as organizational
analysis. It includes the analysis of following aspects:
a. External environment –economic, political and legal, etc.
b. Objectives –specific aims or targets to be achieved.
c. Overall aims and purpose of the enterprise –survival, growth, profit
maximization, wealth maximization, etc.
d. Action ships –assessment of work being done and what needs to be done.
e. Relationships –from the viewpoint of communications, i.e., top middle
and lower level.
f. Organization structure- includes grouping of activities span of
management levels etc.
g. Job structure- job design job analysis job description job specification
etc.
h. Organization climate –working atmosphere of the enterprise. Ti includes
team work and cooperation commitment communications creativity
conflict resolution participation and trust.
i. Management style –includes laissez – faire, democratic and autocratic.
11
j. Human resource –availability of human resources based on skill
knowledge etc.
k. Decisions to be taken across horizontal and veridical dimensions.
1. Vertical or tall organizations: vertical organization structure increases the
length of the organization’s hierarchy chain. In this type of organization
structure the authority and responsibility more from top to bottom in straight
lime. / Accountability flows from the lowest level to the highest level. The
centralities of authority are found in this structure.
2. Horizontal or flat organizations: when the breath of the organizations
structure increases then it refers to horizontal or flat organization. Here the
breadth of the number of hierarchy reduces and thus the authority is
comparatively more decentralized. It is suitable for small firms. Managers with
broad span of control must grant more authority to his subordinates.
3.2 APPROACHES TO ORGANISATION STRUCTURE OF MNCs:
There are fiber approaches to structure the organization. They are:
(1) Product organization structure: when in a business enterprise many types if
things are manufactured then departmentation is done on the basic of product
instead of function. Because there is a constant feat that the production of some
things and their marketing will consume much time while some other thing will
get only a little attention. Consequently
Some products will be sold it greater number while others will find little market.
To avoid
Such a situation all the functions of the enterprise ate divided on the basis of
product and distributed among different department. The held of the department
looks after all the functions concerned with that product that is purchase ale
advertisement production finance etc all these functions are performed
separately by different departments. This process has been made clear in the
following diagram:
MERITS:
a) It is possible to give equal importance to every product.
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b) Information about the profit and loss from every product is available
c) Because for every new product a separate department can be opened it is
easy to expand the concern.
d) All departments are independent units and therefore the weakness of one
department does not affect the other.
e) This system makes possible the complete development of the managers.
f) The managers get full opportunity to display their ability of competence.
g) The competition between all the product departments and their managers
bring profitable results for the concern.
h) The benefits of specialization become available.
DEMERITS:
a) It increases expenses because of duplicity of functions in the producer
departments.
b) Resources are misused.
c) This system is suitable for the big concerns
d) There is a difficulty in exercising control at the top hierarchy
(2) Geographical organization structure: Departmentation is done on the basis of
regions or areas when the customers’ of some business concerns are not
confined to local region but are spread over a larger region. The chief reason for
such departmentation is intended to keep in minds the tastes and difficulties of
the customers which happen to differ from region to region and country to
country. If the business of a concern is spread all over the country. The business
many be divided into four regions or zones instead of controlling the business
from a single place. For example the division can be like china USA UK at the
International level. Each zone is in itself a complete business unit and for which
a separate zonal manager is appointed. The zonal managers remain in torch with
their customers and understand their problems, so they easily solve them. This
structure is also used by chain stores; power companies restaurant chains, dairy
products, banking companies, insurance companies. Etc. Under each zone
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departmentation can be done on the basis of either functions or products which
has been made clear in the following diagram:
GEOGRAPHICAL ORGANISATION STRUCTURE
MERITS:
Managing director
Headquarter managers, production, marketing,
Finance, human resources and R & D
Asia Africa Europe North America South America
Subsidiary Unit Manufacturing Sales
a) Because of the direct contact with the customers their problems can be
easily understood and solved.
b) Local competition can be easily faced.
c) Effects regional control is possible.
d) Such and organization has the benefit of local factors like the raw
material labor market etc.
14
e) Information about the local profit and loss position makes more
investment possible in the profit yielding region.
f) The competition to show good profits among the regional managers
benefits the concern
DEMERITS:
a. Some functions which can be handled more economically at the central
level become expensive at the regional level.
b. Polities cannot be implemented effectively because of the distance
between the planners and the implementers.
c. More managerial employees are required which increases expenses.
Control becomes difficult because of the distance between the head office and the
regional offices.
(3) Decentralized Business Unit Structure: Since 1920, the diversified companies
have a trend of grouping activities based on product lines. In diversified firm,
each activity is treated as aloof a business unit. Following diagram show the
decentralized line of business type of organizational structure :
15
DECENTRALISED ORGANISATION STRUCTURE
Managing Director
Headquarter managers: Production, Marketing, Finance,
Human Resources and R & D
Chief Manager Chief Manager Chief Manager
Business A Business B Business C
Product A Product B Product C Product D
Marketing Finance Production Manager Manager
Manager Manager Manager Human Resources R & D
MERITS:
a) Each unit is managed by and independent general manager with
authority to formulate and implement strategies.
b) Each unit is an-aloof profit centre.
16
c) Diversification is generally managed by decentralized decision-
making.
DEMERITS:
a) Absence of mechanism for coordinating related activities across
business unit is the major problem of this type of organization.
b) Working of general manager of each unit independently makes co-
ordination complicated task.
(4) Strategic Business Unit structure: A structure business unit is the grouping of
business subsidiaries based on some common important strategic elements. The
business can be effectively controlled, if the related business are grouped into strategic
units. As a single chief executive cannot control a number of decentralized units,
therefore, an efficient and senior executive is delegated with the authority and
responsibility for its management. Following figure presents the type of organization
structure.
Merits:
a. It reduces the span of control of the corporate headquarters.
b. Better coordination between divisions with similar missions,
products, markets and technologies become possible.
c. The optimum utilization of scare resources become possible as it
helps in allocating corporate resources to the greatest
opportunities.
d. Business units are organized on the basis of strategically relevant
method.
Demerits:
a. Corporate headquarters becomes more distant from the division.
17
b. Conflicts in strategic business unit arise as each manager wishes
to grab greater share of corporate resources.
c Corporate portfolio analyses become complicated one.
(5) Matrix Organization Structure: Under this method both the methods on the basis
of functions and on the basis of products- are used in a combined manner. First of all
the activities of a company are divided on the basis of functions and department
established. Which happen to be the permanent departments of the organization? For
example the purchase department, manufacturing department, finance department,
research and development department, etc. For example these department permanent
heads of the department are appointed who have the final authority regarding their
departments. After The establishment of these permanent departments the
departmentation on the basis of project or product is done the moment the concerns get
and order. Both functional and project managers exercise authority over organizational
activities in matrix structure. Thus personnel in this structure have two superiors via a
project manager and the functional manager at the headquarters level. The following
chart presents the matrix organizational structure.
MERITS:
(i) The company enjoys the advantages of both project and functional
type of organization structure.
(ii) On each project the number of people appointed happens to be
according to the need and remaining persons are put on the routine
functions of the concern. In this way economy in costs is affected by
making the optimum utilization of human resources.
(iii) This structure has considerable flexibility. The personal can be
transferred from one project to the depending upon the need of the
project.
(iv) Each project manager is in charge of a unit. Therefore he can be
developed as a general manager through performing general
management functions.
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(v) Under the matrix organizational structure the expansion of the
concern is easily possible because the managers can establish
department in respect of each project
DEMERITS:
(i) The principle of unity of command is violated in such an
organization because the personal receive orders both from
departmental managers and project managers.
(ii) The aims and priorities of both the types of managers are different
the project managers desire that whenever they need some services
the departmental manager should immediately make them
available. On the other hand the departmental managers wish to
maintain their time schedule in respect of every work. This causes
conflict among them.
(iii) In cash of failure the project managers blame the functional
managers and the functional managers shift the responsibility to the
project managers.
(iv) The members of the project team do not know whether they should
consult the project manager or the functional manager. Such an
ambiguous situation creates problem of communication.
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Chapter. 4 MNCs IN INDIA
Most of the MNCs in India had originally entered the Indian market during the
colonial era. The actual umber of MNCs entered in post independence ea was
small. The entry was generally made through collaboration with big Indian
business houses. For example Bajaj tempo and Telco joined hands with Daimler
Benz of West Germany: LML joined hands with Piaggio of Italy: Maruti
established joint venture with Suzuki of Japan: Cyanamid CIBA and Ciba-Geigy
jointly established new undertakings with alpha house Birla’s became the
spokesmen of Kaisers and ford
At the end of 1990, there were 469 foreign companies in India. There are many
Indian companies with foreign equity participation too. For example Indian
outfits of MNCs; like ponds Johnson and Johnson Colgate –Palmolive.
Hindustan lever etc. there are several MNCs in the pharmaceutical industry like
Glaxo, Bayer, Sandoz and Hoechst.
4.1 Regulation of MNCs in India
Different government agencies in India control MNCs. These agencies
include: (i) the department of company affair (ii) The Reserve Bank of India (iii)
The Ministry of Industrial Development and (iv) The ministry of finance.
Control over MNCs in India is not efficient as these agencies have no
coordination among themselves. The government of India imposed certain
regulation to control MNCs. These are:
(i) Permissible period of agreement was reduced from 10 to
5 years.
(ii) The maximum rate of royalty was imposed in technology
imports for those industries which were allowed to import
technology.
(iii) Those industries were moot allowed to import technology
where domestic companies ate competent.
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(iv) Exports and other marketing restrictions were imposed.
Some regulations as stated above were imposed. However these regulations are moot
adequate and therefore MNCs be properly regulated to safeguard the interest of the
country. Following suggestions ate given to regulate them.
a) Government interference: Host country government should have its
representatives on the management of thee corporations. Interferences
of the representatives of the government is must on such matters as
influence or are likely to influence the economic development of the
country. It should be made clear to the MNCs that if they do not
function in the Interest of the country they are likely to be nationalized.
b) Local ownership: Majority or 51 per cent shares of the subsidiaries of
MNCs should be held special industries of the host country.
c) Beneficial collaborations: Government should allow collaboration of
MNCs for those special industries where such collaboration is
essential.
d) Research of an appropriate technology: MNCs many be compelled
to spend a part of their profit in the development of appropriate R $ D
for the benefit of host country.
e) Substitution of technology: Only in the initial stages of development
the imported technology should be used. Thereafter that technology
should be developed indigenously so that the dependence on MNCs
could be reduced.
f) Collaboration in heavy and basic industries: Collaboration with
MNCs should be allowed only in heavy and basic industries.
Collaboration in consumer goods industry should not be allowed as it
many hamper the domestic industry.
g) Check on monopolistic tendencies: Oligopolistic or monopolistic
tendencies of MNCs should be closely watched to safeguard the
interest of consumers as well as of local producers.
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4.2 Salient feature of MNCs in India:
The salient features of MNCs in India are as follows:
a. Bi-Country: Most of the MNCs functioning in India have the rheas
offices in two countries i.e. and U.S.A... Out of 171 subsidiary
companies 116 had their head offices in U.K. and 25 in U.S.A.
b. Trends of MNCs: Numbers of MNCs in India have gone down but the
volume of their assets increased considerably. In 1974, the number of
MNCs in India was 575 which came down to 350 in 1980. But their
assets increased from Rs. 1741 crore to Rs. 2401 crore. During the same
period the number of subsidiaries also came down to 125 from 188.
c. Sources of capital: Large numbers of subsidiaries operating in India
have mobilized their financial resources from within India.
d. Industry wise distribution: Of all the MNCs operating in India 30 per
cent are engaged in plantation (tea) and mining. Large of their branches
are also found in the field of trade banking and services their number is
relatively less in case of industries. Share of commerce trade and finance
in the total assets of these corporations is 76 per cent. Share of
processing industry and transport is 6 per cent each respectively.
e. High rate of profitability: The rate of profitability of MNCs in
comparison to domestic industry is very high. Profitability of MNCs
(private) on an average was 34% whereas that of Indian private
companies was 11.5 per cent. Similarly the profitability of foreign public
limited companies was 24 per cent as again only 11 per cent in case of
domestic public limited companies.
Subsidiaries: a company is called a subsidiary company if atleast 50per
cent of its paid up capital is held by another company. Presently there are
88 subsidiaries of MNCs. Out of these 83 companies the share of MNC
varies 70 to 100 per cent of their share capital.
f. Heavy remittances abroad: according to Dr.K.N.Raj, rate of
profitability on MNCs is very high. In a short period they repatriate the
22
amount of initial investment to their head office. Besides they also remit
to their parent company; large amounts by way of royalty and technical
services. For example Essoan American Petroleum Company had
remitted to its head office Rs. 83 crore as a part of profit on investment
of Rs. 30 crore in India.
g. Limited transfer of improves technology: The MNCs in India have
kept their technology a closely guarded secret. Transfer of improved
technology by MNCs to India has taken place on a very limited scale. It
is the old technologies which mostly continue to prevail in India.
h. Indianisation: MNCs have accepted the proposal of Indianisation.
According to the provision of foreign exchange management act
(FEMA), all foreign companies had to reduce their ownership to 74 per
cent or they had to reduce their share in the share capital of Indian
branches to 40 per cent. Most of the MNCs have accepted these
conditions. Many of them have already taken steps to reduce the amount
of foreign capital.
4.3 Indianisation –a myth: according to Prof. Dali s. swami, on account of the
following reasons Indianisation is a merely a myth.
1. Rate of profitability of MNCs is so large that despite the reduction of share
capital from 100 per cent to 74% there has been no fall in the amount remitted to
foreign countries from India.
2. Despite the fall of the share of foreigners in the share capital MNCs will have
the right to appoint top executives in their branches and subsidiaries, the
corporation even now appoint foreigners on senior posts.
3. Rate of taxes are now in respect of public limited company as against private
limited company
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4.4 Arguments for and against MNCs in India:
The economists differ in opinion regarding advantages and disadvantage of MNCs for
the Indian economy. Some are in favor of MNCs whereas some are against it. Before
reaching to any conclusion. It is essential to analyze the beneficial as well as harm full
effects of MNCs
I. Beneficial effects
The benefits of MNCs as follows
(i) Globalization of the economy: the MNCs provide managerial skill capital
computerized technology and other resources of world class. the mixture of
these resources with Indian labor and raw material helped increasing the
export of Indian companies.
(ii) Increase in employment: the MNCs caused increase in employment
opportunities through the multiplier effect of investment.
(iii) Growth of new industries: MNCs have also contributed in the growth
of new industries by providing them managerial skill technical know how
and working capital.
II. Harmful effects
The following are the major harmful effects of MNCs.
(i) Encouraged demonstration effects : the MNCs made heavy expenditure on
advertisement and publicity .it result in waste full expenditure whose burden
is ultimately to be borne by Indian customers
(ii) Completion with small scale industries: MNCs have entered in the
production of several such items which were exclusively reserved for small
scale industries like potato chips biscuits etc.
(iii) Providing prohibited goods: profit earning is main objective of MNCs.
To achieve this objective they do not hesitate to indulge in the production
and selling of harm full goods. Many of medicines and consumer durables
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the production of which has been prohibited in the foreign countries are
being manufactured and sold in India by MNCs.
(iv)Unfair trade practices: the MNCs also used unfair trade practices .for
instance to save the corporate tax they over in voice the imports and under
invoice the exports
(v) Fluctuation In investment: in the initial stages of their establishment the
MNCs have invested their profit in India. But after some time they started to
remit their profits to parent company by way of royalty and dividends.
(vi)Production of profitable consumer goods: the MNCs are interested only in
the profitable consumer goods. They do not prefer to invest in the production
of capital goods liker machines tools engineering etc
Thus it may be concluded the MNCs have both merits as well as demerits. Special
precautions should be undertaken to avoid demerits. in the word of M.P.Todaro, “the
critics of multination see this giant corporation not as needed agents of economic
change but more as vehicles of anti
Development.” Multinational Corporation reinforces dualistic economic structures and
accelerates domestic inequalities in to wrong product and inappropriate technologies.
4.5 Top MNCs in India
The country has got many M. N. C.s operating here. Following are names of some of
the most famous multinational companies, who have their headquarters of operational
branches based in the nation:
IBM: IBM India Private Limited, a part of IBM has been operating from this country
since the year 1992. This global company is known for invention and integration of
software, hardware as well as services, which assist forward thinking institutions,
enterprises and people, who build a smart planet. The net income of this company post
completion of the financial year end of 2010 was $14.8 billion with a net profit margin
of 14.9 %. With innovative technology and solutions, this company is making a
constant progress in India. Present in more than 200 cities, this company is making
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constant progress in global markets to maintain its leading position.
Microsoft: A subsidiary, named as Microsoft Corporation India Private Limited, of the
U. S. (United States) based Microsoft Corporation, one of the software giants has got
their headquarter in New Delhi. Starting its operation in the country from 1990, this
company has got the following business units:
Microsoft Corporation India (Pvt.) Limited (Marketing Division)
Microsoft Global Services India
Microsoft Global Technical Support Centre
Microsoft India Development Center
Microsoft IT
Microsoft Research India
The net income of Microsoft Corporation grew from $ 14, 569 million in 2009 to $ 18,
760 million in 2010. Working in close association with all the stakeholders including
the Government of India, the company is committed towards the development of the
Indian software as well as I. T. (Information Technology) industry.
Nokia Corporation: Nokia Corporation was started in the year 1865. Being one of the
leading mobile companies in India, their stylish product range includes the following:
Normal mobile handsets
Smartphone’s
Touch screen phones
Dual sim phones
Business phone
The net sales of the company increased by 4 % in the last financial year with sales of
EUR 42.4 billion as compared to 2009's EUR 41 billion. Over the past few years, this
company in India has been acquiring companies, which have got new and interesting
competencies and technologies so as to enhance their ability of creating the mobile
world. Besides new developments to fight against mineral conflicts, they are even to set
up Bridge Centers in the country for supporting re-employment. Their first onsite for
the installation of renewable power generation are already in place.
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PepsiCo: PepsiCo. Inc. entered the Indian market with the name of PepsiCo India from
the year 1989. Within a short time span of 20 years, this company has emerged as one
of the fast growing as well as largest beverage and food manufacturer. As per the annual
report of the company in the last business year, the net revenue of PepsiCo grew by 33
%. By the year 2020, this food manufacturing company intends to triple their portfolio
of enjoyable and wholesome offerings. The expansion of their Good-For-You portfolio
is believed to be assisting the company in attaining the competitive advantage of the
growing packaged nutrition market in the world, which is presently valued at $ 500
billion.
Ranbaxy Laboratories Limited: Ranbaxy Laboratories Limited, one of the biggest
pharmaceutical companies in India, started their business in the country from the year
1961. The company made its public appearance in 1973 though. Headquartered in this
nation, this international, research based, integrated pharmaceutical company is the
producer of a huge range of affordable cum quality medicines that are trusted by both
patients and healthcare professionals all over the world. In the business year 2010, the
registered global sales of the company was US $ 1, 868 Mn. Successful development of
business forms the key component of their trading strategy. Apart from overseas
acquisitions, this company is making a continuous endeavor to enter the new global
markets, which have got high potential. For this, they are offering value adding products
as well.
Reebok International Limited: This global brand is a famous name in the field of
sports as well as lifestyle products. Reebok International Limited, a subsidiary of
Adidas AG, is based in U. S. A. (United States of America) started its operation in
1890s. During the last financial year, Adidas's currency neutralized group sales
increased by 9 %. Apart from their alliance with CrossFit that is among the largest
contemporary fitness movements, in the current year, Reebok's announcement of its
partnership with artist, designer and producer Swizz Beatz reflects its long term future
growth.
Sony: Sony India is a part of the renowned brand name Sony Corporation, which
started their business operation in the year 1946 in Japan. Established in India in
November 1994, this company has captured one of the leading positions in the field of
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consumer electronics goods. By the end of the business year 2010 on 31st March, 2011,
the company showed a remarkable increase in the share related to numerous categories.
Sony India is planning to invest around INR. 150 crore for the marketing of the
activities related to ATL and BTL. As far as Bravia TVs are concerned, they are
looking forward to hold their market share of 30 %. In between the last and the current
financial year, the number of their outlets in the country increased by 1, 000.
Tata Consultancy Services: Commonly known as T. C. S., this multinational company
is a famous name in the field of I. T. (Information Technology) services, Business
Process Outsourcing (B. P. O.) as well as business solutions. This company is a
subsidiary of the Tata Group. The first center for software researching was established
in the country in 1981 in the city of Pune. Tata Consultancy earned a growth of 8.9 %
during the latest quarter of this financial year, which ended on 30th September, 2011.
This renowned company is presently looking forward to the 10 big deals that they have
received besides the Credit Union Australia's contract as well as Government of
Karnataka's INR. 94 crore deal for a total period of 6 years. In this current business
year, they are about to employ 60, 000 people to meet their business requirement.
Vodafone: Vodafone Group Plc is an international telecommunication company, which
has got it's headquarter based in London in the United Kingdom (U. K.). Earlier known
as Vodafone Essar and Hutchison Essar, Vodafone India is among the largest operators
of mobile networking in the country. The parent company Hutchison started its business
in the year 1992 along with the Max Group, which was its business partner in India.
Much later in 2011, Vodafone Group Plc decided to buy out mobile operating business
of Essar Group, its partner. The turnover of the Vodafone Group Plc after the
completion of the last financial year grew to £ 44, 472 m from £ 41, 017 m that was the
turnover of the business year 2009.
Tata Motors Limited: The biggest automobile company in India, Tata Motors Limited,
is among the leading commercial vehicles manufacturer in the country. They are one of
the top 3 passenger vehicle manufacturers. Established in the year 1945, this company,
a part of the famous Tata Group, has got its manufacturing units located in different
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parts of the nation. Some of their well known products of the company are categorized
in the following heads:
Commercial Vehicles
Defence Security Vehicles
Homeland Security Vehicles
Passenger Vehicles
Post completion of the financial year 2010 to 2011, the global sales of the company
grew
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Chapter5. Multinational Corporations Curse or Boon
Negative Impacts of Multinational Corporations
In an era of globalization, multinational corporations are increasing in number, and
there are no shortage of opinions about their presence. Some people welcome them
since they can be good for economies, consumers and capitalism. However, they do
have a negative side as they aren't always as good for economies as they initially
appear.
1. Outsourcing
The perils of outsourcing are well documented as it has led to significant job loss in the
U.S. However, there is also another negative impact. Multinational corporations'
presence in other countries often doesn't benefit the economies of these countries as
poverty continues to rise in spite of the additional jobs that don't pay that well.
Moreover, multinational companies aren't subject to the same environmental and labor
laws as they are at home.
2. Development Gap
The development gap between the extremely wealthy and the extremely poor continues
to widen in foreign countries where multinationals conduct business. Much of this is
because capitalism, through foreign trade, tends to be exploitative of less developed
countries. Multinationals often tout the global benefits their presence provides, but the
fact remains that the gap between rich and poor has not closed.
3. Environmental Impact
Multinational corporations have a reputation for leaving a large carbon footprint when
they enter other countries with looser environmental regulations. This disregard for the
environment, whether through greenhouse gas emissions or polluting native habitats,
poses a significant negative impact from the cost of doing business. Moreover,
conducting operations on a global scale uses up resources, such as energy and fossil
fuels.
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4. Small Business
Small businesses often struggle in the shadows of multinational corporations. At best,
they are able to survive the competition, or they could be bought out. If they decline,
they run the risk of eventually going out of business, which can happen all too often
since multinationals are able to offer high volume deals and discounts that small
businesses can't match. Customers may want to support the local companies, but price
often trumps sentiment.
Boon of Multinational Corporations
1. Create wealth and jobs around the world. Inward investment by multinationals offer
much needed foreign currency for developing economies. They also create jobs and
help raise expectations of what is possible.
2. Their size and scale of operation enables them to benefit from economies of
scale enabling lower average costs and prices for consumers. This is particularly
important in industries with very high fixed costs, such as car manufacture and airlines.
3. Large profits can be used for research & development. For example, oil exploration
is costly and risky; this could only be undertaken by a large firm with significant profit
and resources. It is similar for drug manufacturers.
4. Ensure minimum standards. The success of multinationals is often because
consumers like to buy goods and services where they can rely on minimum standards.
i.e. if you visit any country you know that the Starbucks coffee shop will give
something you are fairly familiar with. It may not be the best coffee in the district, but it
won’t be the worst. People like the security of knowing what to expect.
5.1 ADVANTAGES AND DISADVANTAGES OF MNCs:
Multinational corporations have unique and empirical capacity to
increase production and distribution. Whatever they make radical charges in the
existing productions system of that country. Their superior technologies
professional approach managerial competence and quality are of paramount
importance of the country. According to the ILO Report “For some the
multinational companies are an invaluable dynamic forces and instrument for
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wider distribution of capital technology and employment for others they are
monsters which our present institutions national or international cannot
adequately control a law to themselves with no reasonable concept that the
public interest or social policy can accept”
ADVANTAGE OF MNCs TO THE HOST COUNTRY:
MNCs 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 operations of MNC in the country.
2. The ancillary and service industry of the host country increases and thus the
level of industrial and economic development increase.
3. Modern technology and managerial services are made available to enterprises
established by MNCs. It is through the medium of MNCs that technology has
been transferred to other countries.
4. Latest and sophisticated management techniques can also be obtained by the
host country form the management practice of MNCs.
5. MNCs make available marketing services especially export related marketing
research advertisement spread of marketing information storage facilities
transport packing design etc.
6. Countries where in MNCs establish their subsidiaries have more employment
opportunities.
7. Domestic industry can make use of the R& D outcome of MNCs.
8. The host country can reduce its imports due to production of those goods by
MNCs which otherwise were not available in the country.
ADVANTAGES OF MNCs TO THE HOME COUNTRY:
Home country also gets some advantages from the operations of MNCs. They
are:
1. The marketing of goods produced in the home country becomes possible
throughout the world through MNCs.
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2. Employment opportunities both at home and abroad to the home country people
also increase due to large scale operations of the MNCs.
3. MNCs contribute to the favorable balance of payments for the home country in
the long-run.
4. MNCs also help in activating the industrial activity of the home country.
DISADVANTAGES OF MNCs TO THE HOST COUNTRY:
1. The main objective of the MNCs is to earn maximum profit. To achieve this
objective they invest their capital in underdeveloped countries. The reason being
that labor is very cheap in these countries. Moreover these countries provide
cheap raw materials and also profitable markets for finished goods to be sold by
developed countries. Big chucks of profits earned in underdeveloped countries
go to headquarters of MNCs. According to one estimate, 300 MNCs of America
received about $ 40 billion as profit from underdeveloped countries.
2. MNCs kill the domestic industry by monopolizing the host country’s market.
3. Development of scare resources is adversely affected by managerial abilities
technology and foreign contacts made available by MNCs. Local industry
cannot face their competition as such the same remain underdeveloped.
4. MNCs by making capital investment in the host country discourage the domestic
rate of saving in investment. Domestic investment is discouraged because it
cannot complete with MNCs.
5. Although MNCs prove helpful in improving foreign exchange situation of the
underdeveloped countries for the short-period but the y prove harmful in the
long-run.
6. Adoption of ethnocentric approach in staffing by the MNCs causes
unemployment in the host country.
7. Indiscriminate use of natural resources by MNCs may cause fast depletion of the
resources of the host county.
8. MNCs have not adhered to the goal of economic equality in the following way:
(i) Regional inequality has aggravated as MNCs set up industries in advanced
regions and not in backward regions. (ii) Income gap among people also get
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widened as MNCs pay more salaries and perks to their employees. (iii) These
corporations further accentuate rural and goods disparity. (iv) These
corporations give more importance to the production of luxury goods than the
production of mass consumption goods.
9. MNCs also influence the decision-making process of the governments of
developing countries through their financial and other resources.
10. MNCs evade their tax liability by adopting transfer pricing methods. According
to this method MNCs buy intermediate goods from their subsidiaries abroad at
high price and thus reduce their local profits.
11. MNCs also indulge in unethical and corrupt practices for their self-interest. They
do not hesitate to offer bride to highly placed officials and politicians of other
countries and oblige them to enter into such transactions which serve their
interest but are harmful to the interest of the country concerned.
12. The MNCs do not engage in R&D activities relevant to the development
countries. Their R&B efforts are relevant to advantages countries. The MNCs
transfer the technology development in advanced countries to the developing
countries through it is not conducive to their development.
DISADVANTAGE OF MNCs TO THE HOME COUNTRY
These include:
(1) The transfer of capital from the home county to various host countries by MNCs
causes unfavorable balance of payment position.
(2) Industrial and economic development of the home country in neglected as MNCs
invest the capital in more profitable countries.
(3) Foreign culture brought by MNCs may prove detrimental to the interest of the
home country.
5.2 CODE OF CONDUCT FOR MNCs
The code of conduct for MNCs drawn up by the Commission on Transnational
Corporations set up by USA Economics and social Council required MNCs to:
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(2) Respect the national sovereignty of host countries and observe their domestic
laws regulations and administrative practices.
(3) Adhere host nations economic goals development objectives and socio-
cultural values
(4) Respect human rights:
(5) Not engage in corrupt practices.
(6) Apply good practices in relation to payment of taxes abstention from
involvement in anti competitive practice consumer and environment protection
and the treatment of employees.
(7) Disclose relevant information to host country government. According to the
1976declaratin of the OECD Code of Practice of MNC operations MNCs
should contribute positively to economic a social progress within host nations.
Its main provisions were that MNCs should:
a. Contribute to host countries science and technology
objectives by permitting the rapid diffusion of
technology”
b. Not behave in manners likely to restrict competition by
abusing dominant positions or market power;
c. Provide full information for tax purposes:
d. Consider the host nation’s balance of payments objectives
when taking decisions;
e. Consult with employee representatives regarding major
changes in operations avoid unfair discrimination in
employment and provide reasonable working conditions:
f. Regularly make public significant information on
financial and operational matters. Host countries
themselves should possess the absolute right to
nationalize foreign-owned assets within their frontiers but
must pay proper compensation..
The UN general assembly has rejected the plea of developing countries to make
these codes legally binding on the behest of developed countries.
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Conclusions
Multinational corporations -- MNCs -- are also known sometimes as transnational
corporations, or TNCs. These enterprises are legal corporations that operate across
borders in at least two countries. These corporations exist throughout the world in
countries such as the United States, Canada, France, Egypt, India, China and Japan.
Multinationals is both bane and boon and it is equally bane and boon, here are some
points with which i can support my point.MNCs has made entire world a global village
they also increased inter connectivity among nations they also produced quality
products at nominal rates but you may get one doubt that we have so many good things
about MNCs but why we are calling them bane why not only boon but these have their
drawbacks too they are like native corporation crumbles under the competition of
MNCs they became national security threat and they produces no profit to the country
in which it is established except taxes remain in home country not only these there are
many more drawbacks like global warming, political influence , unethical practices.
Here are some suggestions that must be followed in every country, like strict laws
which favours the home country economic conditions, more concentration of govt. on
indigenous industries and offering financial support and taking less taxes. Some
criticisms of MNCs may be due to other issues. For example, the fact MNCs pollute is
perhaps a failure of government regulation. Also, small firms can pollute just as much.
MNCs may pay low wages by western standards but, this is arguably better than the
alternatives of not having a job at all. Also, some multinationals have responded to
concerns over standards of working conditions and have sought to improve them.
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Bibliography
1. Websites:-
www.researchpaper .com
www.openpdf.com
2. News papers:-
Times of india
Economics times
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