Multinational corporation (MNCs)

Definition:-

A multinational corporation (MNC) or multinational enterprise is an

organization that owns or controls production of goods or services in
one or more countries other than their home country. It can also be
referred as an international corporation.

A multinational corporation is usually a large corporation which

produces or sells goods or services in various countries.

 Importing and exporting goods and services

 Making significant investments in a foreign country
 Buying and selling licenses in foreign markets
 Engaging in contract manufacturing—permitting a local
manufacturer in a foreign country to produce their products
 Opening manufacturing facilities or assembly operations in foreign
countries
Role of Multinational Corporations in the Indian Economy:-

Prior to 1991 Multinational companies did not play much role in the Indian
economy. In the pre-reform period the Indian economy was dominated by public
enterprises. To prevent concentration of economic power industrial policy 1956
did not allow the private firms to grow in size beyond a point. By definition
multinational companies were quite big and operate in several countries.
1. Promotion of Foreign Investment:
In the recent years, external assistance to developing countries has been declining.
This is because the donor developed countries have not been willing to part with a
larger proportion of their GDP as assistance to developing countries. MNCs can
bridge the gap between the requirements of foreign capital for increasing foreign
investment in India.

2. Non-Debt Creating Capital inflows:

In pre-reform period in India when foreign direct investment by MNCs was discouraged,
we relied heavily on external commercial borrowing (ECB) which was of debt-creating
capital inflows. This raised the burden of external debt and debt service payments reached
the alarming figure of 35 per cent of our current account receipts.
3. Technology Transfer:
Another important role of multinational corporations is that they transfer high sophisticated
technology to developing countries which are essential for raising productivity of working
class and enable us to start new productive ventures requiring high technology.
4. Promotion of Exports:
With extensive links all over the world and producing products efficiently and therefore
with lower costs multinationals can play a significant role in promoting exports of a
country in which they invest. For example, the rapid expansion in China’s exports in recent
years is due to the large investment made by multinationals in various fields of Chinese
industry.
5. Investment in Infrastructure:
With a large command over financial resources and their superior ability to raise
resources both globally and inside India it is said that multinational corporations could
invest in infrastructure such as power projects, modernization of airports and posts,
telecommunication.
Characteristics of Multinational Company

Large scale operation

Large scale operation in the most important feature of a multinational company. It
performs large scale business operation by investing a huge capital. And it also performs
activities in large scale, like production, distribution, organization, employees and
promotional activities. The large scale production minimizes per unit cost and helps to face
competition in the market.
Advanced Technology
Advancement in modern science and technology is one of the major features of a
multinational company. Multinational companies establish research and development
departments for the research and invention of new technology in production, distribution
and for promotion of business activities. Monopoly is new scientific technology is one of
the main reasons for the development of some multinational companies. Such
multinational companies can get easy entry in developing countries. They also transfer new
technology in to developing countries through their branches and subsidiaries which are
helpful for industrialization
International operations
One of the important features of a multinational company is its operation in two or more
countries. It performs production and distribution activities at the international level
through its branches or subsidiaries. Examples companies are coca cola, IBM, National
Panasonic, Toyota, Pepsi Cola etc.
Efficient management
Efficient management is one of the main reasons for the successful operation of a
multinational company. It hires efficient and skilled manpower. It has the capacity to hire
professional by paying high remuneration. It also blends technology and manpower to give
better management. It is thus essential for their successful operation.
Ownership and control
The ownership of multinational companies remains both with the parent company and the
subsidiary company. However, major shares of the subsidiary companies established in
various countries are contributed by the parent company. Therefore, the parent company
plays a major role in the management and control of the subsidiary companies.
Productive organization
Multinational companies are known as productive organizations. They produce goods and
services of a specific nature both in the parent company and the subsidiary companies in
various countries. This is done to spread their products at the international level. The parent
company uses its own technology, brand, trademark and method of production.
Monopolistic market
The product specialization and efficient management system of multinational companies
contribute to developing their monopoly power even in a competitive market. The use of
latest technology, own trade mark, goodwill, along with better distribution system and
promotional network are the main components of multinational companies.
the main features of MNCs:-
Location – MNCs have their headquarters in home countries and have their
operational division spread across foreign countries to minimize the cost.
Capital Assets – Major portion of the capital assets of the parent company
is owned by the citizens of the company’s home country.
Board of Directors – Majority of the members of the Board of Directors are
citizens of the home country.
MNCs are large-sized corporation and exercise a great degree of economic
dominance.
Advantages of MNC's for the host country

MNC's help the host country in the following ways

1. The investment level, employment level, and income level of the host
country increases due to the operation of MNC's.
2. The industries of host country get latest technology from foreign countries
through MNC's.
3. The host country's business also gets management expertise from MNC's.
4. The domestic traders and market intermediaries of the host country gets
increased business from the operation of MNC's.
5. MNC's break protectionalism, curb local monopolies, create competition
among domestic companies and thus enhance their competitiveness.
6. Domestic industries can make use of R and D outcomes of MNC's.
7. The host country can reduce imports and increase exports due to goods
produced by MNC's in the host country. This helps to improve balance of
payment.
8. Level of industrial and economic development increases due to the growth
of MNC's in the host country.
Advantages of MNC's for the home country
MNC's home country has the following advantages.

1. MNC's create opportunities for marketing the products

produced in the home country throughout the world.
2. They create employment opportunities to the people of home
country both at home and abroad.
3. It gives a boost to the industrial activities of home country.
4. MNC's help to maintain favourable balance of payment of the
home country in the long run.
5. Home country can also get the benefit of foreign culture
brought by MNC's.
Disadvantages of MNC's for the host country
1. MNC's may transfer technology which has become outdated in the home
country.
2. As MNC's do not operate within the national autonomy, they may pose a
threat to the economic and political sovereignty of host countries.
3. MNC's may kill the domestic industry by monopolizing the host country's
market.
4. In order to make profit, MNC's may use natural resources of the home
country indiscriminately and cause depletion of the resources.
5. A large sums of money flows to foreign countries in terms of payments
towards profits, dividends and royalty.
Disadvantages of MNC's for the home country

1. MNC's transfer the capital from the home country to various host countries
causing unfavorable balance of payment.
2. MNC's may not create employment opportunities to the people of home
country if it adopts geocentric approach.
3. As investments in foreign countries is more profitable, MNC's may neglect
the home countries industrial and economic development
Advantages of MNCs
Access to Consumers – Access to consumers is one of the primary advantages that the MNCs
enjoy over companies with operations limited to smaller region. Increasing accessibility to wider
geographical regions allows the MNCs to have a larger pool of potential customers and help
them in expanding, growing at a faster pace as compared to others.
Accesses to Labor – MNCs enjoy access to cheap labor, which is a great advantage over other
companies. A firm having operations spread across different geographical areas can have its
production unit set up in countries with cheap labor. Some of the countries where cheap labor is
available is China, India, Pakistan etc.
Taxes and Other Costs – Taxes are one of the areas where every MNC can take advantage. Many
countries offer reduced taxes on exports and imports in order to increase their foreign exposure
and international trade. Also countries impose lower excise and custom duty which results in
high profit margin for MNCs. Thus taxes are one of the area of making money but it again
depends on the country of operation.
Overall Development – The investment level, employment level, and income level of the
country increases due to the operation of MNC’s. Level of industrial and economic development
increases due to the growth of MNCs.
Technology – The industry gets latest technology from foreign countries through MNCs which
help them improve on their technological parameter.
R&D – MNCs help in improving the R&D for the economy.
Exports & Imports – MNC operations also help in improving the Balance of payment. This can be
achieved by the increase in exports and decrease in the imports.
MNCs help in breaking protectionalism and also helps in curbing local monopolies, if at all it
exists in the country.
Disadvantages of MNCs for the Host Country
Laws – One of the major disadvantage is the strict and stringent laws applicable in the
country. MNCs are subject to more laws and regulations than other companies. It is seen
that certain countries do not allow companies to run its operations as it has been doing in
other countries, which result in a conflict within the country and results in problems in the
organization.
Intellectual Property – Multinational companies also face issues pertaining to the
intellectual property that is not always applicable in case of purely domestic firms
Political Risks – As the operations of the MNCs is wide spread across national boundaries of
several countries they may result in a threat to the economic and political sovereignty of
host countries.
Loss to Local Businesses – MNCs products sometimes lead to the killing of the domestic
company operations. The MNCs establishes their monopoly in the country where they
operate thus killing the local businesses which exists in the country.
Loss of Natural Resources – MNCs use natural resources of the home country in order to
make huge profit which results in the depletion of the resources thus causing a loss of
natural resources for the economy
Money flows – As MNCs operate in different countries a large sum of money flows to
foreign countries as payment towards profit which results in less efficiency for the host
country where the MNCs operations are based.
Transfer of capital takes place from the home country to the foreign ground which is
unfavorable for the economy.