Multinational Corporations

Contents :
  • Meaning and Definition of Multinational Corporations.
  • Objective of Multinational Corporations.
  • Advantages and Disadvantages of Multinational Corporations.
  • Problems of Multinational Corporation.
  • Performance of Multinational Corporation.

What is Multinational Corporations ? 

Multinational companies (MNCs) as is evident from their name are those companies which are having their business in more than one country, in our daily life we hear about many such companies and also use their products in our daily life. They include Ranbaxy, Wipro, Tata Motors, Asian Paints, Moser Baer, Cadbury, Coca Cola, Ponds, Sony, Flat, Samsung, etc. They are those multinational companies whose products are used in almost all the households.

Meaning of Multinational Corporations 

A multinational company is that company which is registered in one particular country but whose products are produced and sold in various other countries. They are also called Global Corporations. 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 builds on 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.

Definitions of Multinational Corporation 

ILO Report :
"The essential nature of the multinational enterprises lies in the fact that the managerial quarters are located in one country (referred to for convenience as the home country) while the enterprise carries out operations in a number of other countries as well".

IBM World Trade Corporation President :
"A multinational corporation is the one that : 
1. Operates in many countries. 
2. Carries out research, development and manufacturing in those countries, 
3. Has a multinational management and 
4. Has a multinational stock ownership."

Objectives of Multinational Corporations 

  1. To expand the business beyond the boundaries of the home country, where they were originally established.
  2. Minimize the cost of production, especially the labour cost.
  3. Capture the lucrative foreign market against international competitors.
  4. Avail the competitive advantage internationally.
  5. Achieve greater efficiency by producing in local markets and then exporting the products.
  6. Make the diversification intentionally effective so that a steady growth of business could be achieved.
  7. To safeguard the company's interest in order to get behind the tariff walls.
  8. Make the best use of technological advantages by setting up production facilities abroad.
  9. Establish an international corporate image.
  10. Counter the regulatory measures in the parent country.

Advantages of a Multinational Corporation 

The merits of a multinational corporation may be enumerated as follows :

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

2) Far-reaching effects on the economic, social and political conditions of the host country :
Multinational corporations provide a number of benefits to the host country in the form of :
a) Economic growth;
b) increased profits ;
d) Reduced operational costs;
f) Changing social and political structure, etc. 
Thus, it helps in the exploitation of resources of host countries for their own economic advancement.

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

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

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

6) Technological Superiority :
Multinational corporations can participate in the industrial development programmes of underdeveloped countries because of their technological superiority. They can produce goods having international standards and quality specifications by adopting the latest technology. Generally, multinationals transfers technology through joint venture projects.

7) Potential Source of Capital and Advanced Technology :
Economically backward countries invite multinational corporations as a potential source of capital and advanced technology to generate economic growth and to create employment opportunities.

8) Expansion of Market Territory :
Multinational corporations enjoy extension of activities beyond the geographical boundaries of their countries. Multinational corporations can enhance their international image by expanding their operations activities.

9) Creating Employment Opportunities :
Increase in the scale of operations results in more job opportunities. The entry of multinational corporations helps in creating employment opportunities in production and marketing activities.

10) Lower Cost of Production :
Multinational corporations carry on operations on a large-scale, which ensure economics in material, labour and overhead costs.

Disadvantages / Criticisms of Multinational Corporation 

The demerits of a multinational company are as follows :

1) Disregard of National Priorities :
MNCs disregard the national priorities of the host country. They invest only in
most profitable sectors e.g. consumer goods.

2) Obsolete Technology :
There is always a danger that a multinational may provide back-dated technology.

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

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

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

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

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

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

Problems of Multinational Corporations 

Problems of Multinational Corporations

1) The Global Economic Slowdown :
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 UUS market and in particular the financial markets, which is the epicenter of the recession. The economic slowdown may however not be such a catastrophe 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 at about six percent during 2009. While it is a down-ward 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 cost across the world, which would provide a business opportunity for Indian firms.

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. 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.

3) Talent Crunch :
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 on upgrading 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 the large firms (in-house universities) to public-private partnerships where firms take Over and run government-owned training centers and schools.

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 for management. Indian industry is currently so hard up for good managers that, according to local Swedish multinationals, it is as expensive or even more to recruit an Indian manager as to bring in a Swedish expatriate to manage Indian operations. This is shown in an increase in hiring of expatriates to run firms both in India and abroad. From only a handful of expatriate managers in Indian firms in 2003, the latest estimation is about 5 000 in 2007. An outcome of this shortage of management capability is probably the currently observed'so & acquisition strategy of many Indian multinational firms as they may have difficulties in finding replacement managers.

5) Governance Framework :
The biggest challenge that most multinational companies face is the unique architecture of the Indian governance framework, which is badly intertwined between the Central and State structures. Hence, the attractiveness of contiguity of geography needn't enable simplicity of market access, and may not even offer benefits of scale due to logistics optimisation. The reasons are simple. State laws and incentives are structured to attract investments which local leadership see as critical to driving economic growth, and are also dependent on electoral constituencies of ruling parties. It's not uncommon for neighbouring State Governments to have vastly differing legislations on labour, land acquisition, commercial taxes, prioity sector categorisation for incentives, and intrastate movement of goods. 
These come into play in a substantial way when planning investments in India. Very often, companies get lured with incentives and/or hinterland market access, yet realise much later that it doesn't translate to improved returns on capital employed. A lassic example is the currently applicable duty on automobiles, which includes customs duty, CENVAT, excise duty, central sales tax, motor vehicles tax, passenger and goods tax, state sales tax, and additional road user/toll taxes. All of which ensure that you could buy a car manufactured in Gurgaon at a much cheaper price 2,000 km away in Goa or Pondicherry. In addition, duties and levies see frequent changes in the Annual Central and State budgets presentation exercise.

6) Policy Environment :
And not all MNCs are able to cope with the uncertainty and want of clarity around the policy environment. A good example of the recent past is the telecom sector, which saw a huge enthusiastic entry of large MNCS when the sector was opened up tor FDI, and soon enough, many exited, thanks to the ever-changing policy framework. The few that survived were mostly Indian, and earned good returns The boldest of them all, Vodafone, a start-up MNC, continues to battle the Government in the Indian courts. The risk of an uncertain regulatory environment eventually ensures that those who survive usually do so with good returns. This brings us to an interesting conundrum, when we compare ourselves with China. 
While most statistics reveal that FDI in China is almost three times that of India, yet, in terms of GDP growth, China delivers just a percentage point more than India. Consequently, it may be assumed, with some degree of certainty that the return on capital for investments, made by foreign firms in India is, on an average higher than China. A recent McKinsey study showed that the nine market leaders by category in India enjoyed a ROCE (Return on Capital Employed) of 48 per cent, and even the next 26 enjoyed a ROCE of 36 per cent. Implicit in the retun is the reward for managing the regulatory risk. 
Interesting inclusions in the list are Korean white-goods-maker LG and automobile giant Hyundai, and Japanese automotive giant Suzuki. Surprisingly, these companies don't enjoy market leadership in their very own home countries, which score far higher than India in terms of 'ease of doing business' or 'starting up anew'. The one common theme visible across these companies is their willingness to remain engaged with the regulatory environment and manage the concomitant uncertainties. Their ability to win includes, in large measure, their capacity to allow Scale to subsume the vagaries of an uncertain political and regulatory environment.

7) Joint Ventures :
The coming decade will be a decade of momentous change, as India integrates better with the global economy, focuses on driving greater competitiveness, and draws up a policy framework to enable a more transparent governance structure. Those MNCs that participate in this process are likely to position themselves more strongly to succeed, compared to those that rely on local Indian partners or JVs. The reason isn't difficult to fathom. Indian JV partners would be mostly family-owned or state PSUs, and, in most cases, diversified. Consequently, they may often have competing priorities in leveraging their relationship with the Government, and hence deferring to them for insights is fraught with inherent risks. In fact, many a times these conflicting interests can make the task of setting up a new business in India appear a lot more difficult than it might actually be.

Performance of Multinational Corporations 

A multinational 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. The International Labour Organisation (ILO) has defined an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries. 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 mega corporation, possessing quasi-governmental powers, including the ability to wage war, negotiate treaties, coin money, and establish colonies. 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 world's economy, and play an important role in international relations and globalisation.

Performance of MNC's :

An organisation becomes multinational only because of its operation in many countries. After independence in India many multinational corporations have gained ground. Many United States Companies also have entered and grab all Indian business. They have made number of collaboration agreements with Indian business houses. The great contribution made by Multinational Corporations to developing economics Multinational Corporations have tremendous scope in the country like India which can be evaluated as follows in terms of the contribution they make for the economic growth.

1) Transfer of Technology :
Technological development and to manage successively with the social change and to replace the obsolete technology is essential for any country. In developing country technology transfer is must. Multinational are the most effective bridge for technology transfer.

2) Core Sector Lines :
The core sector lines which require tremendous capital investment, latest technology, foreign investment, even for 100 % participation, Multinational Corporations have a very great role to play in this direction.

3) Export Oriented Industries and Latest Sophisticated Technology :
Multinational corporations have very great capability to fair share in highly export oriented industries and latest sophisticated technology are left open as per the Industrial and Industrial licensing policies even for 100% share of foreign investors.

4) Employment Opportunities :
Primary, secondary and tertiary sectors of Indian economy could not be provide adequate gainful employment opportunities to all those who are available for employment, due to this unemployment and full unemployment has become most intense problems of densly populated country like India. Multinational Corporations helps with extensive capital and technological resources are able to provide employment opportunities for unemployed manpower.

5) Adequate Achievement :
In modem age innovation and invention and mechanization, computerization is most important factors of industrial development. Multinational are able to gain all these adequate achievements with their vast resources.

6) Corporate Objectives :
Improvements of existing products and matching the supply of goods and services with the social and national needs for developed economies and developing economies. Due to new techniques and methods which leads to large-scale production of new products. In developed countries leads to definite approaches of business organisation to their business by trial and error method for the scope of research and development activities, For the achievement of corporate objective of their subsidiaries. Multinationals with extensive exposure to new methods and techniques are bound to make use of the same.

7) Increase Industrial Production :
For the economic growth the growth of output is an essential prerequisite. To increase industrial production and national productivity multinational corporations can substantial help.

8) Large Scale Production :
Multinational Corporations have greater degree of economies of large-scale production.

9) Profit Making Enterprises :
Multinational Corporations are highly profit-making enterprises they pay high rate of dividend against equity, due to this ditution principle stressed in India, Indian citizens make use of the opportunity to invest more in the business of multinational company.

10) Industrial Development :
Due to large scope of multinationals to help in a subsidiary way in India which would help industrial development and better entrepreneur development.

11) Latest Technology :
Multinational Corporations provides new and latest products into the market, and due to multinational corporations different extensive programme create an awareness to raise to a higher rank or help to sell which warns ultimately help to bring about improvement in the standard of living.

12) Manpower Development :
Multinational contributions can play fairly great role in development of the manpower.

13) Improvement in Balance of Payment :
Multinationals undertake profit making so it can make considerable amount of contribution to national revenue (Government department) by way tax on certain goods or imports and different duties which have ability for the improvement of balance of payment position by increasing exports of the host countries.