Multinational Corporations

Multinational Corporations [MNC] or Transnational Corporation [TNC] is a

Corporation or enterprise that manages or delivers services in more than one country.
The first modern MNC is generally thought to be the Dutch East India Company,
established in 1602. Very large multinationals have budgets that exceed some national
GDPs. Multinational Corporations can have a powerful influence in local economies as
well as the world economy. Multinational Corporations play an important role in
international relations and globalization.

Defination

Economics are not in agreement as to how multinational or transnational

corporations should be defined. Multinational Corporations have many dimensions and
can be viewed from several perspectives.

According to Franklin Root, an MNC is a parent company that

1. Engages in foreign production through its affiliates located in several countries.

2. Exercises direct control over the policies of its affiliates.
3. Implements business strategies in production, marketing, finance and staffing
that transcend national boundaries.

In other words, MNCs exhibits no loyalty to the country in which they are
incorporated. Though there is no universally acceptable definition of MNCs, they may
be generally defined as companies that operate in more than one country.

Following are the definitions of MNCs,

“MNCs are corporations that operate in more than one country. MNCs generally
seek to maximize their returns by locating their operations based on labour costs,
transportation issues, tax regulation, etc.”

“MNCs are companies that maintain significant operations in more than one
country simultaneously but manage them all from one base in a home country.”

“A Company or corporation which operates in several countries. Also known as

Transnational Corporations [TNCs].”

Nature of MNCs:

Many of these MNCs are large in relation to the national income of the countries
in which they are located. This means that it is not as easy for the host governments to
enforce national laws on MNCs. Generally, governments want investment from these
MNCs because they generate jobs and incomes. Other benefits include training of local
workers in new and potentially transferable skills. Technology transfer is also an
incentive. In a highly competitive world, companies seek to reduce their costs as much
as possible. The prospect of a foreign country setting up in a country where labour is
cheep is attractive both for the company and a host county’s government.

Thus Multinational Corporation is an enterprise operating in several countries but

managed from one [home] country. Generally, any firm or group that derives a quarter
of its revenue from operations outside of its home country is considered a MNC and
may fall into one of the four categories;

i. Multinational decentralized firm with strong home country presence.

ii. Global decentralized firm that acquires cost advantage.
iii. International firm that builds on technology firm.
iv. Transnational firm.

Role of Multinationals

1. Important Role In Globalization:

Multinationals have played an important role in globalization. Countries
and sometimes sub national regions must compete against one another for the
establishment of MNC facilities, and the subsequent tax revenue, employment
and economic activity. To compete, countries and regional political districts
sometimes offer incentives to MNCs such a tax breaks, pledge of
governmental assistance.

2. Influencing Government Policy:

Due to their size, multinational can have a significant impact on
government policy, primarily through the threat of market withdrawal. For
instance, when governments tried to force MNCs to make their intellectual
property public in an effort to gain technology for local entrepreneurs, MNCs
have withdrawn from the market.

3. Regulation of International Trade and Business:

Globalization has significant implications for the MNCs which in turn has
led to regulation and governance of international business, trade and
investment.

4. Negative as Well as Positive Role:

Large companies are moving across their home countries’ borders to
conduct business in foreign markets. But these newly entered multinationals
are posing a threat to local existing businesses, culture and other economic
factors.

5. Powerful Influence in International Relation:

Large multinational corporations can have a powerful influence in
international relations. This is due to the fact that they have a large economic
 influence in politicians’ representative districts. They also have an extensive
financial resource available for public relations and political lobbying.

6. Sustainable Development of Developing Countries:

In the first fifty years of the 20th century, the living standards of the world
measured by GDP per head rose by just one percent a year, with population
growing by around one billion. In the second half of the century, GDP per
head rose more than twice as fast, despite a population growth of 3.5 billion
people. The great difference between the two halves of the century is that in
the period up to 1945, the world was characterized by protectinalism.

7. High Quality and Low Priced Products:

Competition is not destructive. It has compelled MNCs to provide the
world with an immense diversity of high quality and low priced products. Thus
MNCs have created competition and free trade which has delivered gains from
exchange and created the effort of all nations to produce commodities
efficiently.

8. Creation of a Global Economy:

MNCs play an important role in the creation of global economy. Sales
through foreign affiliates are put at $7billion, a figure higher than the exports
of the entire world. MNCs create global economic integration and bring
advanced technology to poorer countries.

Thus the MNCs have provided developing countries with much needed
capital, jobs and environmentally friendly technologies. Through free market
initiatives, MNCs create wealth, which provides the income flow necessary for
welfare improvements. If the developing countries require to escape severe
conditions of poverty, they need to privilege, deregulate, protect property
rights and establish a rule of law which will encourage the MNCs to provide
the capital investment.