BCom 1st Year Multinational Corporations in India Notes Study Material
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BCom 1st Year Multinational Corporations in India Notes Study Material
ABOUT MULTINATIONAL COMPANIES
A multinational company or corporation (MNC) is a company that manages its operations, production, or service delivery ‘from’ and ‘to’ more than one country. In other words, Multinational Corporations (MNCs) Transnational Corporation (TNC), or Multinational Enterprise (MNE) is a business unit that operates simultaneously in different countries of the world. In some cases, the manufacturing unit may be in one country, while the marketing and investment may be in other countries.
In other cases, all the business operations are carried out in different countries, with strategic headquarters in any part of the world. The MNCs are huge business organizations that extend their business operations beyond the country of origin through a network of industries and marketing operations. A few examples of MNCs are Sony of Japan, IBM of the USA, Siemens of Germany, Videocon, ITC of India, etc. There are over 40,000 MNCs with over 2,50,000 overseas affiliates. The top 300 MNCs control over 25 percent of the world economy.
DEFINITIONS OF MULTINATIONAL CORPORATIONS
Some important definitions of MNCs are:
“The essential nature of multinational enterprises lies in the fact that its managerial headquarter are located in one country (home country) while the enterprise carries out operations in a number of other countries as well (host countries).” -ILO Report
“MNCs may be defined as an enterprise which controls assets-factories, mines, sales offices and the like in two or more countries.” – United Nations
Multinational corporations engaged in organizational activities “By crossing national borders to acquire resources or to sell products these firms become involved in international business.” –C.L. Bovee, J.V. Thill, and P Dovel
Leonard Gomes also defined MNCs as “a corporation that controls production facilities in more than one country and such facilities having been acquired through the process of foreign direct investment. Firms that participate in international business, however large, they may be, solely by exporting or by licensing technology are not multinational enterprises.”
CHARACTERISTICS OF MULTINATIONAL CORPORATIONS
MNCs will always look out for opportunities. They carry out risk analysis and send their personnel to learn and understand the business climate. They develop expertise in understanding the culture, politics, economy, and legal aspects of the country that they are planning to enter.
Some of the characteristics of MNCs are:
(i) Multi-domestic Management: Under this approach a company operating in several countries allows its local units to act independently and does not coordinate its international operations on a global basis. In each country, the local organization is self-contained and acts much like a separate domestic business.
(ii) Giant Size: MNCs are large in size and exercise a great degree of economic dominance. The assets and sales of MNCs run into billions of dollars and they also earn supernormal profits. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(iii) Host Country: Under this approach, organizations conduct their business activities outside the home countries and the head office or headquarter is located or based in the home country. The host country is supposed to provide all legal and other environmental frameworks for MNCs.
(iv) Direct Investment: MNCs acquire an ownership interest in the overseas company or invest in production and marketing facilities in another country called a host country. Through foreign direct investment MNCs can take active participation in the management and formulate policies for execution in the home country as well as in the host countries. Through direct investment, MNCs develop their business outfits in host countries. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(v) Professional Management Team: MNCs employ a team of professionals to operate and control worldwide operations. It employs trained managers to handle advanced technology, transactions of huge funds, and international business operations. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(vi) Mode of Transfer: The MNC has considerable freedom in selecting the financial channel through which funds or profits or both are moved, e.g., patents and trademarks can be sold outright or transferred in return through the contractual binding on royalty payments.
Similarly, the MNC can move profits and cash from one unit to another by adjusting transfer prices on intercompany sales and purchases of goods and services. MNCs can use these various channels, singly or in combination, to transfer funds internationally, depending on the specific circumstances encountered. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(vii) Value for Money: By shifting profits from high-tax to low-tax nations, MNCs can reduce their global tax payments. In addition, they can transfer funds among their various units, which allows them to circumvent currency controls and other regulations and tap previously inaccessible investment and financing opportunities. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(viii) Flexibility: Some of the internationally generated claims require a fixed payment schedule, while others can be accelerated or delayed. MNCs can extend trade credit to their other subsidiaries through open account terms, say from 90 to 180 days. This gives major leverage to financial status. In addition, the timing for payment of fees and royalties may be modified when all parties to the agreement are agreed. (BCom 1st Year Multinational Corporations in India Notes Study Material)
REASONS FOR THE GROWTH OF MNCS
(i) Non-Transferable Knowledge: It is often possible for an MNC to sell its knowledge in the form of patent rights and to license foreign producers. This relieves the MNC of the need to make a foreign direct investment. However, sometimes an MNC that has a Production Process or Product Patent can make a larger profit by carrying out the production in a foreign country itself. The reason for this is that some kinds of knowledge cannot be sold and are the result of years of experience. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(ii) Exploiting Reputations: In some situations, MNCs invest to exploit their reputation rather than protect their reputation. This motive is of particular importance in the case of foreign direct investment by banks because in the banking business an international reputation can attract deposits.
If goodwill is established the bank can expand and build a strong customer base. Quality service to a large number of customers is bound to ensure success. This probably explains the tremendous growth of foreign banks such as Citibank, Grind-lays, and Standard Chartered in India.
(iii) Protecting Reputations: Normally, products develop a good or bad name, which transcends international boundaries. It would be very difficult for an MNC to protect in reputation if a foreign licensee does an inferior job. Therefore, MNCs prefer to invest in a country rather than licensing and transfer expertise, to ensure the maintenance of their good name.
(iv) Protecting Secrecy: MNCs prefer direct investment, rather than granting a license to a foreign company if protecting the secrecy of the product is important. While it may be true that a license will take precautions to protect patent rights, it is equally true that it may be less conscientious than the original owner of the patent. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(v) Availability of Capital: The fact that MNCs have access to capital markets has been advocated as another reason why firms themselves moved abroad. A firm operating in only one country does not have the same access to cheaper funds as a larger firm. However, this argument, which has been put forward for the growth of MNCs has been rejected by many critics.
(vi) Product Life Cycle Hypothesis: It has been argued that opportunities for further gains at home eventually dry up. To maintain the growth of profits, a corporation must venture abroad where markets are not so well penetrated and where there is perhaps less competition.
This hypothesis perfectly explains the growth of American MNCs in other countries where they can fully exploit all the stages of the life cycle of a product. A prime example would be Gillette, which has revolutionized the shaving systems industry. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(vii) Avoiding Tariffs and Quotas: MNCs prefer to invest directly in a country in order to avoid import tariffs and quotas that the firm may have to face if it produces the goods at home and ships them. For example, a number of foreign automobile and truck producers opened plants in the US to avoid restrictions on-selling foreign-made cars. Automobile giants like Fiat, Volkswagen, Honda, and Mazda are entering different countries not with products but with technology and money. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(viii) Strategic FDI: The strategic motive for making investments has been advocated as another reason for the growth of MNCs. MNCs enter foreign markets to protect their market share when this is being threatened by the potential entry of indigenous firms or multinationals from other countries. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(ix) Symbiotic Relationships: Some firms have followed clients who have made direct investments. This is especially true in the case of accountancy and consulting firms. Large US accounting firms, which know the parent companies’ special needs and practices have opened offices in countries where their clients have opened subsidiaries. (BCom 1st Year Multinational Corporations in India Notes Study Material)
These US accounting firms have an advantage over local firms because of their knowledge of the parent company and because the client may prefer to engage only one firm in order to reduce the number of people with access to sensitive information. Templeton, Goldman Sachs, Earnest, and Young are moving with their clients even to small countries like Sri Lanka, Panama, and Mauritius.
MULTINATIONAL CORPORATIONS IN INDIA
MNCs have been operating in India even prior to Independence, like Singer, Parry, Philips, Uni-Lever, Proctor, and Gamble. They either operated in the form of subsidiaries or entered into collaboration with Indian companies involving the sale of technology as well as the use of foreign brand names for the final products. The entry of MNCs into India was controlled by existing industrial policy statements, MRTP Act and FERA. In the pre-reform period, the operations of MNCs in India were restricted.
Apart from playing an important role in globalization and international relations, these multinational companies even have a notable influence on a country’s economy. As far as India is concerned, a number of multinational companies have shown interest in the Indian market. It is obvious that foreign companies come and settle in India to earn profit.
As India has a wide market for different and new goods and services due to its increasing population and varying consumer taste, MNCs find it a resourceful nation. Besides that, India’s foreign directive policies, labour competitive market, market competition, and macroeconomic stability are some of the key factors that magnetize MNCs toward India.
In turn, India also derives a lot of benefits from MNCs -such as a higher level of investment, reduction in the technological gap, optimum utilization of natural resources, reduction in foreign exchange gap, and boost to basic economic structure. But roses do not come without thorns.
So there are certain disadvantages of having MNCs in a developing country like India as competition with SMSI, increased pollution and environmental hazards, improper diffusion of profits and Forex imbalance, slow decision-making, and sometimes economic distress. But these don’t overcome the gains of having MNCs. (BCom 1st Year Multinational Corporations in India Notes Study Material)
In India, a large number of MNCs are operating. So, here we have compiled a list of the top 10 MNCs in India:
- Microsoft Corporation
- Nokia Corporation
- Nestle 4. Coca Cola
- Procter and Gamble
- International Business Machines (IBM)
- PepsiCo 8. Sun Pharmaceutical
- Sony Corporation 10. Citigroup
NEW INDUSTRIAL POLICY, 1991 AND MULTINATIONAL CORPORATION
The New Industrial Policy, of 1991 removed the restrictions of entry to MNCs through various concessions. The amendment of FERA in 1993 provided a further concession to MNCs in India. At present MNCs in India can:
(i) Increase foreign equity up to 51 percent by remittances in foreign exchange in specified high-priority areas. Subsequently, MNCs are free to own a majority share in equity in most products. (BCom 1st Year Multinational Corporations in India Notes Study Material)
(ii) Borrow money or accept deposits without the permission of the Reserve Bank of India.
(iii) Transfer shares from one non-resident to another non-resident.
(iv) Disinvest equity at market rates on stock exchanges.
(v) Go for 100 percent foreign equity through the automatic route in Specified sectors.
(vi) Deal in immovable properties in India.
(vii) Carry on in India any activity of trading, commercial or industrial except a very small negative list.
(viii) Thus, MNCs have been placed at par with Indian Companies and would not be subjected to any special restrictions under FERA.
CHALLENGES FOR INDIAN MNCs
1. The Global Economic Slowdown: Drying up investment funds India is hit by the global recession. This is primarily visible in an increase in lay-offs in the export sector where orders have shrunk. Another important change is the difficulty of finding external financing, on which Indian multinational firms have become increasingly dependent. Tata is reported to be looking for ways of sustaining its recent acquisitions and Reliance Industries is said to be looking for takers for some of its overseas investments.
The Indian IT industry is also hit hard, with almost half its export revenues coming from the US market and in particular the financial markets, which is the epicenter of the recession. (BCom 1st Year Multinational Corporations in India Notes Study Material)
The economic slowdown may however not be such a tragedy for India as for many other countries. First, the banking system of India seems to be in reasonably good shape, and due to a semi-insulated rupee, a strong internal market, and the fall in oil prices, the Indian economy is predicted to grow by about six percent in 2009. (BCom 1st Year Multinational Corporations in India Notes Study Material)
While it is a downward revision from the earlier projected nine percent it is, of course, very good compared to many European economies. Second, a global recession can also increase the pressure on costs across the world, which would provide a business opportunity for Indian firms. (BCom 1st Year Multinational Corporations in India Notes Study Material)
2. Increasing Competition: India has become a very important destination for most global firms, and in particular in ICT. While this is good for the economy and for overall economic efficiency, it means that the earlier fairly safe home market of Indian firms now is contested. IBM, Accenture, and EDS together have 1,00,000 employees in India. (BCom 1st Year Multinational Corporations in India Notes Study Material)
This means that they are one-third as big as the big five Indian firms. As the Indian market develops it will become more competitive and less of a captive market for Indian firms. (BCom 1st Year Multinational Corporations in India Notes Study Material)
3. Talent Crisis: One result of the expansion of the Indian economy is a serious shortage of talent. This may sound paradoxical in one of the largest countries in the world, but more and more sectors are reporting difficulties in recruiting what they need. Indian IT firms are currently recruiting abroad, in Russia, the Philippines, and other places. The rapid inflow of global firms in combination with a poor supply through higher education and an unresponsive government has led to this almost crisis situation.
There is now a national mission for the up-grading of vocational schools that is planned by the central government and that will work on a joint venture basis. It is however a long time in the making. Meanwhile, there are a number of private alternatives that are developing—from the private education systems of large firms (in-house universities) to public-private partnerships where firms take over and run government-owned training centers and schools. (BCom 1st Year Multinational Corporations in India Notes Study Material)
4. Global Firms require Global Management: There are currently few Indian managers with international management experience. There is no quick fix for this situation, but there is a functioning international market. Indian industry is currently so hard up for good managers, it is as expensive or even more to recruit an Indian manager as to bring in an international expatriate to manage Indian operations. As an outcome of this shortage of management, many Indian multinational firms may have difficulties in finding replacement managers. (BCom 1st Year Multinational Corporations in India Notes Study Material)
ADVANTAGES OF MULTINATIONAL CORPORATIONS IN INDIA
Merits of MNCs are as follows:
- Raising the rate of investment
- Use of modern techniques
- Improved balance of payment
- Effective utilization resources
- Healthy competition
- Development of managerial efficiency
- Expansion of international trade activities
- Employment and career opportunities
- Source of foreign capital
- Better business environment etc.
CRITICISMS AGAINST MNCs IN INDIA
The operations of MNCs in India have been opposed on the following grounds:
(i) They are interested more in mergers and acquisitions and not in fresh projects.
(ii) They have raised a very large part of their financial resources from within the country.
(iii) They supply second-hand plants and machinery declared obsolete in their country.
(iv) They are mainly profit-oriented and have a short-term focus on quick profits. National interests and problems are generally ignored.
(v) They use expatriate management and personnel rather than competitive Indian Management.
(vi) They collect most of the capital from within the country and they have repatriated huge profits to their mother country.
(vii) They make no effort to adopt an appropriate technology suitable to the needs. Moreover, the transfer of technology proves very costly.
(viii) Once an MNC gains a foothold in a venture, it tries to increase its holding in order to become a majority shareholder.
(ix) Further, once financial liberalizations are in place and free movement is allowed, MNCs can stabilize the economy.
(x) They prefer to participate in the production of mass consumption and non-essential items. (BCom 1st Year Multinational Corporations in India Notes Study Material)
BCom 1st Year Multinational Corporations in India Notes Study Material
BCom Multinational Corporations in India Notes Study Material