eS Chapter3

Ae
the
MULTINATIONAL COMPANY'S
a
(MNCS)
ely
INTRODUCTION

Smit This chapter aims at giving idea of the growing role of Multinational
an
aratih
e, ea corporations (MNCS). It will give an insight into the important characteristics of
Xport different organisational models of international firms. It studies the positive
age an and negative aspects of MNCs.
In it's more than two and a half centuries;
r-Oh the mother ol the modern corporation. It was in India
England's
East India Company is
er-Ohi impacts were most profound. Some of the
that the Company's
ario
tak back of the Company's trade- Bombay (Mumbai). Calcutta
country's major cities(Kolkata)
grew on and
the
vario Madras (Chennai). If India was the site of
the Company's first commercial
triumphs, it was in China that it made its
second fortune.
neorem existence, the Company was in a state of Throughout
its
try ha
ta1600 and 1874 A.D.. the company had metamorphosis.
Between the years
pioneered the shareholder model of
ich us corporate ownership and built the foundations for modern
business
or-Prie administration. The East India
Company's track record has been achieved. We
qualise have the Enron debacle. Monsanto's
itute fa development of seeds that produced
plants which, in turn, produced seeds that could not be
forcing the farmers to buy new seeds annually. replanted, thereby
But, do we remember about global
the global companies have
enterprises for their misdeeds? Many of
of the
played positive role in the economic development
a

developing countries. This chapter studies the role and importance of

multinational companies.
hith.
MEANING AND NATURE OF INTERNATIONAL
CORPORATIONSs
The Multinational
Corporations (MNCs), also known as Multinational
Enterprise, Transnational Corporation (TNC). Global
Corporation, International
Corporation (or lim.
enterprise or company) etc. has been
most important and most visible regarded as "the
innovation of the post-war period in the
economic field."
heory o

(3.1)
 3.2 Multinational Company's (Mc
Siness
n t e m a l o n a iB u s i n e

3.3 Muitinational Company's (MNCS)

International Business
Although the multinational corporation took birth in the early 1860
mational
mulunatlonal is a matter
or
of
globalisationis not a one-dimension concept. and thus it degree. Further.
is essential
alter the Sccond World War that multinationals have grown rapidly, a
neasure to characterise the concept of
s l n g l e - v a r i a b l e imne
to employ
th
early days. the U.S. was the home of most of the MNCs. Now there are aa large internationalisation.
number of European. Japanese and other Asian multinauonals. MNC
an
1s a n
organisation
organisation thal
engages in production or service
actuvities.
An
ils
Own yn affiliates,
alliliates, iin several
countries. maintains control over the
h r ough
he concept of multinational has several dimensions. nlact, there ugh
iliates
fthose aflilia and manages from a
ere global
single criterion that can deline the multinational: there is no perspective. With a global
hence sin
policies

lop agers allocate resources and co-ordinate

manag

universally agreed detinition of the term multihational corporalion. singe perspe

ctive.
1age of favourable business
conditions
activities to take

Some of the definitions given below are based on the different criterion-
t h eb e s t
throughout the world.
AMultinattonal Enterprise passes through the following stages:
MNC implies
Definition on the criterion of size The term
masshve Products are
exporled to foreign nation
proportions. But, massivenessis related to many factors like market valh
Ih Sales organisauO1s set-up abroad.
are
results and
sales. prolits and return on equity, which yield varying determh.ne es use
u s e of
of Patents and technology to
the largest multinationals.
c)
Licenses
foreign firms that make and
sell the MNCs goods.
However,it is to note that the extent of internationalisation does not depend
on the size. Indeed, many small firms are much more global than the large
pend (d.
INCs provide foreign production facilities substantial autonomy:
however it reserves some important decisions for home office.
ones. Equally
imporlant is to be pointed out that firms below certain are size
normally excluded from the definition of multinational. MNCS do provide loreign production facilities but important decisions
Definition on the criterion of structure Structural requirements for 1ike product design. markeling and linance are made at home office.
definition as an MNC include the number of countries in which the firm 0 Decentralises au thority throughout the company so that functions at
does
business and the citizenship of corporate owners and top managers. home and abroad are done by executives from different nations.
multinational enterprise does not pass through the above mentioned
Definition on the criterion of performance This deînition : depends on Any
such characteristics as earnings. sales and assets. These performance slages iin a sequential manner. The
employees whether the top management
characteristics indicate the extent of the commitment ofcorporate resourees to down the line in production activity should possess global mindset. It
loreign operations and the amount of rewards from that commitment.
D e f i n i t i o n o n t h e c r i t e r i o n o f b e h a v i o u r T h i s is an a b s t r a c t m e a s u r eo f d omeesan
o
ns the willingness to accept the best idea or practice. no matter where it
sriginate Irom.

multinationalisation and it refers to the behavioural characteristics of top There is a debate about what to call a company. whose business ranges
management. Globalisation is a mindset that redects the global orientation af axtass national borders, tying together home and host countries through
the company. corporate policies and practices- MNCs, TNCs, MNEs, Global Corporation.
According to an ILO report. "the essential nature of the multinational International Corporation. We discuss below these various terms.
enterprises lies in the fact that its managerial headquarters are located in one
Multinational Corporation (MNC) These companies operate in multiple
country (referred to as "home country) while the enterprise carries out
countries and thus some experts define such companies as MNC or
operations in a number of other countries as well (host countries"). It impies
Multinational Corporation. This term is quite popular and seems to be the most
"a corporation that controls production facilities in more than one country generic name to describe corporations operating around the world.
such facilities have been acquired through the process of Foreign Direct
Investment. Firms that participale in intermalional business, however large Multinational Enterprise (MNE) : When the international giants are state-
they may be. solely by exporting or by licensing technology are not Owned enterprises, rather than by corporations, the term used for such
multinational enterprises". companies is Multinational Enterprise or MNE. This term has entered the
NOCcabulary of international business.
International Business 3.4 Multinational Company's (MM +amotionaB U s i r i e s s
3.5
of a branch, Multinational Company's (MNCS)
Transnational Corporation (TNC):
operate across national borders. some
Because companies 'transcene
experts prefer the term Transna m
for rnm

thethe host country which is one of

it is a
wholly or
jointly owned unincorporated
1ationa
Corporation or TNC. The United Nations favours this term and has create
enterprise
following:
(a) A permanent set-up or oflice of the foreign investor:
the
created a
Research Centre for the study of Transnational Corporations. (b) An unin
ncorporated partnership or
joint venture between the
Global Corporation : This term seems to have first
been used to
descri. investorand one or more
third parties: foreign
ribe a
small number of companies. whose business was conducted in
dozens c) Land structures-not owned by government
- and/or immovable
example, Nestle is directly owned by a foreign resident:
than 100 nations). For
bal int
truly global uipment .
nations (perhaps more

operations extends to more than 150

this sense as the scope of its
to
countries hile
Mobi equipment-aircralt,
ships- operating within a
country other than
around the globe. Therefore. this term is often applied companies doin at of the foreign investor for atleast one year.
business in several areas of the world- Europe, Latin America, Asia-Pacifie and an As pointed above, under the common
North America. governance. TNCs establish
ion
a l productior
systems in which factors of
nter production
different countries. They cover a number
move among
The term TNC (used to mean the same thing as MNC and similar terms) as ted in
units l o c a t e d

of activities ranging
given in UN's World Investment Report is - TNCS are incorporated or
from
cearch and development to0 manufacturing to
service functions like
unincorporated enterprises comprising parent enterprises and their forelgn accounting. advertising, marketing. trainíng etc.
afiliates. A Parent Enterprise is defined as an enterprise that controls assets terms such as International
Corporation, Multinational Corporation.
of other entities in countries other than its home country, usualy by owning Tansnational Corporation and Global Corporation are often used as svnonyms,
a certain equity capital stake. An equity capital stake of 10% or more ofthe However. several multinationals have evolved into certain advanced stase of

ordinary shares or voting power for an incorporated enterprise or its equivalent nsnational organisation and operations that some distinctions have been
for an unincorporated enterprise is considered as a threshold for the control of dawn between these terms. For sake of convenience, in this book
assets. This percent varies, for example, in Germany and U.K., the threshold is tmMNC. which is comimonly used in business and in academics.
CS.

a stake of 20% or more. Characteristics of International Business at a glance

Forms of TNCs: Oorganisational Multinational Global International Transnational
Foreign Affiliate : It is an incorporated or unincorporated enterprise in Characteriss
which an investor. who is resident in another economy, owns a stake that Configuration Decentra- Centralised Sources of Dispersed.
permits a lasting interest in the management of that enterprise- an equity dassets and lised and and globally Core interdepen-
stake of 10% for an incorporated or an unincorporated enterprise. In the World apabilities nationally scaled Competencies dent and
self- centralised. specialised
Investment Report. a subsidiary enterprise, associate enterprise and branches
affiliates. sufficient others
are all termed to as foreign
decentralised
In case of a Subsidiary. it is an incorporated enterprise in the host country
Roles of Sensing and Implementing | Adapting and Differentiated
in which another entity directiy owis more than a half of the shareholders Jverseas

r a t i n g p o w e r a n d h a s t h e r i g n t to appoltit or remove a majority o f t h e members Operations exploiting Parent Leveraging contributions

local Companyy parent by national
adminislrauve or
supervisory body
of the management, opportuni Strategies company units to
ase of an Associate. 1t 15 ncorporated enterprise in the host country ties strategies integrated
owns a total ol atleast 10%, but not
in which an investor more than a half, of worldwide
power.
shareholders'
voting operations
the
contd.
InternationalBusiness

Knowledge
3.6

Knowledge
tionalComporysh nternaliornal Business 3.7 Multingtional Cornpany's (MNC
Development
Knowledge
developed developed novlet sically powerful too. They threaten the host governments that they wil
and diffusion

of knowledge
developed
and
retained and retained
at t h e c e n t r e
and retained
at the centre
develointloypetan
jsharet
olitic.

pate
re
if the host governments decide to tax
l e to them. These corporations know
or regulate them in ways not
that there is always another
within each
and waiting to welcome them with several incentives.
unit
transferred to worldwid country
Table 3.2: Illustrates the distribution of MNCs. (2006)
Overseas
units
Country Number of MNCs
United States 192
Bartlett and Stum
Reproduced
from Christopher A
umantra Gh Japan 88
Managing
Across Borders,
Boston. Harvard Business
School Press
Scb
France 40
World
MNCs around the Germany 35
is outstanding. Todas
MNCs in global economy
The position of Britain 34
around the world. conlrolling
over 1, 80 00
more than 60.000 MNCs Canada 14
Table 3.1: Gives the
World's Largest Corporationns
China 11
Corporations Head- Revenue
Rank 2004
Switzerland 11
quarters (O5)
from Chan All others 51
2005 ($ Million) 2004
The above table 3.2 shows the distribution of MNCs across the dilerent
3 Exxon Mobile U.S 339.938 255 Countries. The U.S. has the largest number of MNCs with headquarter within
2 1 Wal-Mart Stores U.S. 315.654
its territories and then it is Japan.
Dutch Shell Netherlands 306.731 142
3 4 Royal The massive size gives the corporation not only economic but at times
2 BP Britain 267,600 6political power too in relation with the counuries in which they operate. And. if
General Motors U.S 192.604 (05 it is oligopolistic market position. i.e. the fact that they tend to operate in
ngworldwide markets dominated by a few sellers. it gives them ability to
6 11 Chevron |U.S 189.481
manipulate the prices and profîts. They are able to restrict the ernury of
6 Daimler Chrysler Germany 186,106
potential competition by technologies and special skills. product dillerentiation
7 Toyota Motors Japan 185,805
and advertising.
8 Ford Motors U.S 177.210 2 29
It is true that MNCs are generally not into projects of
development of the
10 12 Conoco Phillips U.S 166.683 Shost country because their objective is to maximise return on their capital. This
It is estimated that some MNCs are richer than most developing countis the reason as to why 90% of cross country capital investment goes to other
In 2004. the revenues of General Motors were $ 191.4 billion. greaterthan nch nations and the fastest growing developtng nations. In short. MNCs invest
GDPofmore than 148 nations. Further. in 2005, the retail giant Wal-ManIn the best profit opportunity and are unconcerned with issues suh as
130.000 employees earned revenue S 285.2 billion,
greater than the copOverty. inequality and unemployment alleviation
GDP of Sub-Saharan Africa. These
corporations are not only wealthy, Du
 3.8 Aultinotiona
InternationalBusiness
India's Global Business
COmparv n t e r n a t i o n d iB u s i n e s s

w h e n we compare
Indian
3.9 Multinational Company's

global MNCs. they a r e small in

lirms with
(MNCS)

can now ho
felt more th
business

power and visibility. However, a beginning in the direction

international

India's prescnce
in a r e working
in 1
aread. in
in the country has been made. In future, India's presence in the world
before. Several
developments
and skilled human ree er lavour e obalisation
educated
e l will be significant.
has a vast
the country
research and
D a s e . exCellent track
development track o
in
r
IMPORTANCE OF MNCs IN INTERNATIONAL BUSINESSs
irms, strong
and a huge
market. Due to
these advantages, Indi-
of 8pe
to 9
manuaaROLE
dian economy AND
of MNCs
sector
c o n s i s t e n t GDP
growth rate 3,objectives

experiencing
a
r e v e n u e earnings
ol selected Indian.C o m p a e
nies, Profi
t-maximisationhostis the fundamental goal ofof MNC. This goal at times
an

the extent of overseas ash with the government's objective achieving better quality of
Earnings In total Revenues of Indi.
Table 3.3:
Overseas
Sector % of Compas
ife for its
citizens. However. the MNCs and its subsidiaries have following
foreign
total salessale
Company objectives

Manufacturing in countries where it finds greatest competitive

T advantage.
98
Infosys IT
96 al To buy and sell their products anywhere in the world to take advantage
Satyam of the most
lavourable price to the company.
IT 88
TCS achieve greater sales.
IT To
75 (c)
Wipro tl To obtain a high and increasing return on invested capilal.
Phama 73
Ranbaxy iel To take advantage. throughout the world, of changes in labour costs.
Manufacturing 62 trade agreements and currency fluctuations.
Tata Tea Droductivity,
Reliance
Manufacturing 36 n To undertake expansion or contraction based on worldwide competitive

Cummins (India) Manufacturing 34 advantages.

Textiles 41 fol Maintain and improve technological and other company strengths.
Arvind Mills
Table 3.4: Lists the major Indian MNCs (h) To maintain control of important decisions.
Encounter fewer barriers in host nations.
Company Foreign Company Acquired (
Governments
Infosys Expert Information Services Objectives of Host
(a) To achieve economic growth.
Wipro Nervewire Inc.
To achieve full employment of people and resources.
Bharat Forge Carl Dan Peddinghams (b)
To improve managerial and workers skills.
c)
Tata Steel Nat Steel Corus
(d) To improve workers productivity.
Tata Motors Daewoo
(e) Increase local ownership of the means of production.
Reliance Industries Flag Telecom
(0 To maintain price stability.
Hindalco Novelis Mount Garden Nifty Copper Mia
(g) To develop a favourable Balance Of Trade.
Dr. Reddys Trgensis (h) To achieve more equitable distribution of income among the population.
Patni Computers Cymbal Corp.
()To improve technological development.
Tata Chemicals Indo Marcos Phosphone
 3.10 Multinaticondl Componys
International Business

of profits made by MNCs in ttheir

() To retain a

control
fair

national
share

security
decisions. country I n t e r n a l l o n a i Business
3.11 Multinationol Cornpany's (MNC)
(k) To
maintain social and political stabilit. Tnternational Trade
and
(0) To develop 1nter Drucker remarks thal
of life of its citizens.
. multinationalism and expanding worled
(m)To improve
the quality During the
60s was the s0s and irade gO
the nation's physical
environment. ional trade. grew al an annual rate period
togc of most rapid
of 15% or so in most growthO
lt

(n) To protect ml
efastes growing domestic cconomy, that of years-than
I m p o r t a n c e o f MNCs
eyCn
count for about one-third of the world Japan. Foreign alfiliatcs ol
MNrcentage ol exporis to total sales) of foreign exports. The export intensily
affiliates of US MNCs. for
Economic power le. increased lrom
iess than 20% in the mid-sixties to over
40% in the
numbering to about for all economies. In case of
International production by TNCS,
7o.
developed economies it doubled fronm
with a number00 paren
cariy0 per cent and in the case the Latin
ol

with over 7.8 lakh foreign

afliliates and areht. 20 to er cent and from 23 to 64 per cent American afliliates il jumped from
for devecloping Asia. However,
of i 10
for
arrangenments virtually in all the countries and economic activit endia. 6 has
done by MNC
been afiliates.
low. And, ior China, more than
50% of the total exporis ol
formidable force in today's world economy. ities, hCh
it
T
not only trade in
commodities,
but other transactions also take
the dilferent parts of
these enterprises, such as place
the MNCS is illustrated in the fact
The economic power of that the QD granting of loans. the
(wcen

1sing of lechnology and providing services.

lower than the annual turnover of tho
most of the nations is ents in favour of MNCs
illustrated in table above in 2005 the retail giant Wal-Mart MNArgumepreface to the lLO report on Mullinational Enterprises and Social Policy
o r some, the Mulinational Companies are an invaluable dynamic
billion a s revenue, larger than
the combined GDP of
Saharan d$ othr they are distribution of capilal, technologr
er monsters
a very snmall number of developing
countries like China, Mexico a force anent: for others
Ca.fore which our present institutions.
India and Republic of Korea had GNI higher than this figure , Rus e nal or international, cannot adequately control, a law to themselves with
henationa

hand. there were also several developed nations whose value of GN asonable concept, the public interest or social policy can accept.
MNCs have played a sIgnilicant role in the development of poor countries.
than this. Was ransser of technology. introducing best management praclices, improving
3e

International Production ualily of life of people. helping in improving the productivity. the contribution
ANCS has been praiseworthy. MNCS. it is claimed, help the host countries in
ways: (See Fig. 3.1)
The global liberalisation has paved the way for fast expansiori, the following
and g
the MNCs. There is enough evidence on the expansion of

production over the past two decades. Sales of 1oreign affiliates are
interma
nou
nea
Export Pro
twice as high as global exports and the grOsS product associated
international production is about one-tenth of global GDP, compared uauiojdu?
one-twentieth in l982. Truly, it exhibits the dominance of MNCs. Improves
Standard of
uoou
Living
Employment
H e l pb u i l d

In 1990 the foreign affnliates of MNCs employed 25 million that

increase torelgn
reserves
73 million by 2006. And. the increase has taken greatly in
develone
countries. A considerable share of the increase was concentrated in East
a
South East Asia. particularly in China and in Export Processing Zone in
th
regions and elsewhere. The largest employment by MNCS is in China
24 million. Further. the employment effect of the TNC activities
large m are

only the direct unemployment effect but also the indirect unemployment efet Fig. 3.1: Shows Defending Arguments
 InternationalBusiness 3.12 Multinationai company's (MNC nternationai
Busine siness
3.13
MNCs help to increase the investment level and thereby boos against t h e MNCs
Multinational Company's (MNCS)
income and employment in the host countiy.
boost the ents
MNCs a r e
criticised. particularly
criticised.
by
tion of labour, developing countries. on grounds like
depletion
ow wages. e x p l o i t a t i o

help to increase competition and break domestic monopoliesS. of resources

(ii) MNCs and abuse of human
The MNCs enable the host countries to
increase their exn
(iii) Xports
i.e. provide greater access to international markets and decrease t
rtighls

It may
ecollected that the MNCs main
goal is to earn
build their foreign excha
in any
ny country and in any form with the
cour money. They are
import requirements. thus help to
change operaling
ad not to indul in philanthropic activities. only objective of earning
reserves.

thro gh
profit

1particular, developing
.lar. developir countrles nurture the
(iv) MNCs kindle managerial revolution in the
a
host cOuntries
(See Fig. 3.2)
following grievances against
professional management and the employment
ol highly sophisticated
ed the
MNCs.

management techniques.
the standard of living
(v) They provide products and services that raise ,

the people in the host countries.

viro
have become vehicles for
(vi) The Transnational Corporations (TNCs) the

transfer of technology. particularly to the developing countries. Imperialism uondnusip

B10OS
of production around the
(vii) They work to equalise the cost of factors
Costly damages

world. inflicted with

SwJy
eu6Jeuu
(viii) MNCs provide an efficient means to integrating national economies.
industries. The
of new
impurity
81eus
and spin-off
(ix) They encourage the development
multinational enterprises enable them to
e n o r m o u s r e s o u r c e s of the

have very efficient research and development

systems. Thus, they
make a commendable contribution to
inventions and innovations
enterprise because to support their own Fig. 3.2: Shows Arguments
(x) MNCs also stimulate domestic against MNCs
and assist domestic suppliers.
operations. The MNCs may encourage 1. Self-Interests are Primary: When the interest of MNCs clash with the
not otherwise be undertaken needs of host countries. it is the MNCs must compromise its interest for
(xi) They a s s u m e investment risk that might
the satisfaction of the host nation. However, in practice, this is not so.
by the developing country.
from less productive For example. Coca-Cola's self-serving fghts in countries where its
(xi) MNCs mobilise capital for productive purposes
subsidiaries are located. In Mexico, the company is trying to stop a plan
areas.
that many of the to levy 20% tax on soft drinks. In India, the company silenced an NGO
Naturally, MNC managers and their desenders respond
which revealed that the soft drink contained pesticides. Food companies
only partially true at best. It is pointed out by
criticisms of their behaviour are
entice children with sugary cereals that are bad for their teeth.
defenders that at times domestic business in developing countries may engage
in more harmful practices, then why single out only the MNCs? Despite
their 2. Costly Damages Inflicted with Impunity : Examples can be cited to
MNCs significantly influence positively the host draw home this point. Firstly, the infamous Union Carbide that had
alleged shortcomings, they say,
governments to achieve their national aims. leakage of deadly gases at Bhopal and killed more than 20.000 instantly
 Business
n t e m a o n a lB usir
3 15
International Business 3.14 Multinational Company's (MNC) I n t er
rffe r e n c e with Econom Minational Cornpany's ( MNC3)
and injuring 100.000 people. The company
paid only a pallry amou. Goals: "This
This
(a) the mulina ilinallonal can occur
in
instance nany For
S 500 per person. Dow Chemical has bought the Bhopal plant,
talkiof la Osperily when the hostcompany may wish to locale plani ways.
king area in a an
of Union Carbicde's assets but assuming no liability. Second
ol OK Tedi. gold and copper mine in
examn
mple underdeve
.eloped region. Further. (b)country
since
woull prefer its
location in an
Papua, New Guinea. The comba al homc. host lhost countries
become
MNCs
typically lo their R&D
dumped 80.000 tons of contaminated material daily, lor 12 years.
the OK Tedi and Fly Rivers and it extracted lor isell some s 6 into for
cation and invention. (c)
novation
the MNCs technologically
dependent on the MNCS
billi
1on that
ld have bcen avalable lor local are able to
altract bank loans
worth of orc. business. () Though LDCs
in
in
infrastruclure.
but MNCs are need
3. Encourage Bribing: MNCs justify bribery as it adds t0 their botlom-lino this
or. (e)
scctOr. (c) thec
thc host hardly
country may also lose known for
tleveloping
Mining and oil companies often reduce the cost ol acquiring natural cconomy. as Some actions ol
as
the MNCs control over its own
by he host may not be consistent
resources by
bribing govemment oficials for concessions. Because, it s is desired
country. with whal
much eheaper to
pay a government oflicial a large bribe than to
pay India
invited MNCs a wilh
hope that they would
market lor oil
price other natural resource. In U.S., for nort base. Bul he make the country a
or some
instance srons of imports in 1994-95
hope has not bcen
realised.
bribing has been banned. But this has been replaccd by contributions t 85 perccnt of
and 82 Exports paid
r e invited into the percent in
political parties. Companies like GE. Microsoft and Disney and many MNCs were
country to set-up Greenfield1995-96. Further
others have invested s 150 million in political parties and campaigns
lor adal manulacluring capacity may be created. The projects so that
US federal candidates between 1991 and 2001, and enjoyed S 55
billion nofr
encouraging as a
very large amount experience has
of foreign capital has been
in tax breaks in three years alone. acquiring
local
companies merging wilh them.
or

4. Worst Hit is Marginal and Small Firms: Thousands

of small
firms in
co
the
the benefit of
untry new thus
manulacturing capacity. denying
developing countries have closed their shutlers because of the
ialism :
Many LDCs leel
relegated to the role
8. Imals and cheap labour because of
supplying raw
conpetilion from large MNCs. Corporale giants like Wal-Mart believe in
buying cheap and at such low rates that they can drive small firms to
an into industrialised nations. As they
develo
are denicd
such,
thetechnology to
many of awakening nations
on foreign managers with distrust as the
bankruptcy. Its strict policy against formation ol unions implies that its
forgotten exploitatuve colonialism. embodiment of not easily
workers are often low-paid and their low wages force down wages al
competitor organisations. In this way the entire workforce is allected. 9.
hol
Symbol of Frustration
:
Many of the LDCs are
dictatorship that is antagonistic to the governed by some form
5. Environmental Degradation Many nations are becoming more free market mechanism
rerning decision-making of the MNC.
concerned about the impact of MNCs on their environment. ial owners of undertakings set up by Many LDCs insist on
being
MNCs. And. in situations of
Environmental concerns are rapidly moving higher in the list of priorities
EOial upheaval. a host counuy may nationalise the assets of a
throughout the world. even the LDCs. even without paying compensation. The anger company
them to leave a host country.
against MNCs often forces
6. Impact on Society MNCs affect the local ways of thinking with their
introduction of habils, behaviour and ethical values, new products, The
10 Technology: technology brought in by MNCs is hardly suitable to
management styles, more money, technology etc. The introduction of LDCs. Such technology is highly capital intensive but
jeans. movies. western attitudes towards women, work habits shift need a labour intensive one. The technology is highly
developing nations
expensive also.
cultures towards Western values. In short, the ethical fabric of the The MNCs charge exorbitantly in the form of fee and
society of a host country is often denoted by undesirable and corrupt
royalty, which put a
severe strain on the foreign exchange reserves. There are
instances of
practices of MNCs. A report of the UN highlighted many such practices "technology dumping" wherein MNCs use obsolete technology. MNCs
such as unfair competition and restrictive trade practices, rigging of bids tend to make the industries in developing countries
and many market distortions. They also resorted to devious means to dependent on foreign expertise and technology.
permanently
increase their profits.
 3.16 Mulfinatio nal Compan N
International Busine

To sum-up the
problems of MNCs Internalionai
Business
3.17 Muitinational Cornpany's (MNC:
MNCs may destroy
copetition and acquire monopoly opoly powers
Dos
Code of Conduct
cnables MNCs to
avoid taxes
The transfer pricing by manipulatihs is widely lelt that there must be
a cod:
transactions. of ronduct to guide and regulate
prices on intra connpany the MNCs

MNCs strategies and praclices

are criticisedsed in the hos
host ACcording to thie Brand Commissiorn, the
local cultures traditions,
and countria
rles
I.
international regime lor investment should
main elements of an

they undermine
consumption habits
the local community.
MNCs retard growth
TNCs have caused fast depletion
erm interestahe
change
include:
for their benefit against the long-termge A frame work that would allow
(a) developing
nations and TNCs to
benefit rom direct investment on terms contractually agreed
Home countries should not restrict investment or upon.
of employment in the home countrv the transfer of
technology abroad and should avoicd from other restrictive
ol some ofof the non-renewable like export controls not restrict current transfers like practices
non.

resources in the host country, caused environmental Drobi and dividends, or the repatriation of profits, royalties

paying for such damages. paying

little regard to the risks of bblems capital,
terms which were agreed when the investment was
so long as
they are on

originally
approved or subsequently negotiated.
(e.g. Bhopal gas tragedy) causing major environmental catastrophesnt
tal cataet
MNCs technology is designed for worldwide profit maximisatie
9 Co-operation by goveTnment in their tax
policies to monitor transfer
the development needs of poor countries.
atlon, not pricing and to eliminate the resort to tax havens.

Fiscal and other incentives and policies towards

The tremendous power of the global corporations poses the rist. foreign investment be to
harmonised among host developing nations, to avoid the undermining of
they may threaten the sovereignty of the nations in which th ha the tax base and competitive positions of host countries.
business.
they
4. Legislation promoted and co-ordinated in home and host countries in
Future holds out an enormous scope 1or the growth ot MNCs. There order regulate the activities of TNCs in matters such as ethical
to
re
changes in economic environment. The number of bilateral
treaties
Te
behaviour, disclosure of information, restrictive business practices, anti-
s
that competitive practices and labour standards.
promote and/or protect FDI has increased markedly in recent times
A report from U.N. described several developments that points to 5. An international procedure for discussions and consultations
a rapid measures affecting direct investment and the actions of TNCs.
on
changing context for economic
growth, along with growing role of TNCs. These
include Recommendations of the United Nations

Increasing emphasis on market forces and growing role tor The Code of Conduct for MNCs, drawn by the Commission
privatisation on TNCs, set-up
in nearly all by UN's Economic and Social Council. requires MNCs to-
developing nations.
Rapidly changing technologies that are transfoming the Respect the national
nature
sovereignity of host countries and observe their
of domestic laws, regulations and administrative practices.
organisation and location of international production.
Globalisation of firms and industries. Not interfere in internal political affairs or in
relations.
inter-governmental
The rise of services to constilute
the largest single sector in the World
economy. Respect human rights.
Regional economic Adhere to host
countries economic goals. development objectives
integration. which involve both the World's and
economies and the selected largest socio-cultural values.
developing nations.
Not engage in corrupt practices.
 InternaiornaiBusiriess

Multinational Company' 3.19

International Business 3.18
ony'ss (MN)
(MM
iticism is the Multinational Componys (MNCS)
drain of
.Disclose relevant infomation to host countiy governments. notheontries.
developr
oping countrie foreign
Foreign companies are exchange resources of tne
less of a drain
Apply good practice with regard to payment of taxes, abstention exchange reserves than Indian ones.
ves tha
on foreign
ro Aiyar's study further
involvement in anti-competitive practices. consumer and environme has a higher
propensity to use points out that the
protection and the reatment of employecs. mental PSU's

foreign exchange outgoforeign

Infact. the foreig exchange on a net basis than
of the PSU's
According to the OEcD Code of Practice (1976) for MNCs, declares
MNCs.

entire
trade defici of the
country. alone was
greater than
that
they should contribute positively to economic and social progress within host
the
HOwever.
to correct
correct the above
statement against
host ating
NC i s o p e r a t i n g in an
import substitution PSU's, it can be said that if
nations. Its main provisions were that MNCs should:
favourable. industry,
foreign e x c h a n g e r e s ves would be the net effect on the
Contribute to host countries science and technology objectives
s
permitting the rapid diffusion of technologies. everal developing countries make
vport
MNCSnds, However, in case ot India. the substantial contribution to
e a r n i n

Provide full information lor tax purposes.

is
stly to the Govt. Policy," we
a t t r i b u l e d
mostlv performance has been dismal.
have
Consider the host nation's Balance Of Payments objectives when taking
ng
This that discriminate
policies i n I n d i a
against export productionconsistently followed
roduction for the local market. In this and in favour of
decisions ar
milieu it has not made
sense for the
Not behave in manners that would restrict compelition by sector or
public sector to locus on
abusing Indianp r i v a t e
sense for foreign companies either. exports. Naturally, it has not
dominant positions or narket pOwer. In 1947.
made

anti-export image. Only after Pandit Nehru foreign companies did not
Avoid unfair discrimination in employment and provide reasonable have ustitution at the expense of decided to
working conditions.
inport-subs

companies s h u n e x p o r t s . "
exports did foreign (andemphasise
Indian)
Regularly make public significant inlormation on linancial or operational
matters. Host countries should possess the absolute right to nationalise tace
Sin the Third Plan exports are being
pursued, but highly protected
arket and unrealistic exchange rate made
foreign-owned asscts within their frontiers, but must pay proper
dO domestic market more
ethan the exports. However, since the mid 1980s with
Compensation.
The demand by developing countries that the Code becomes legally binding
aueation that increased domestic competition, depreciation of theeconomic
made exports m o r e attractive and several rupee.
was rejected by the UN General Assembly, at he behest of economically foreign companies and companies
with foreign participati
and Indian
companies have become thoughtful about
advanced countries. xports. This was lected in the growth in exports.
MNCs in India ln addition, since the economic liberalisation in
1991, many MNCs in
In comparison, very little foreign investment had taken place in India due to different lines of business have entered the Indian market.
several reasons like the dominant role assigned to the public sector in the
industrial policy and the restrictive Govt. Policy towards foreign investment. As SUMMARY
the conditions were unacceptable to s o m e MNCs - Coca Cola and IBM
left India
. MNCs are business enterprises
that carry transactions across countries.
in the late 1970s.
MNCs are the most active players in international business.
A common criticism against the MNCs is that they invest in the low priority
the .The MNCs known
are also as MNEs, TNCs, Global
and high profit sectors in the developing countries. ignoring
priorities. However, in India, the Govt. Policy confined the foreign investment to
nation's International Corporations.
Corporations.
the priority sectors like high technology and sectors requiring heavy investment TNCs have been spreading and growing across the globe very rapidly.
and of national importance and export sectors.
Although the MNCs from the developed nations still dominate the scene.
The strict implementation of FERA in 1973, required the foreign companies more and more MNCs are emerging from the developing countries.
in India to dilute the foreign equity holding to 40% with certain exceptions in
Multinational Corporation has no universally acceptable definition.
sectors like high technology and export oriented sector.
 International Business 3.20

Firms that participatein international business, ho

tinational o
be solely by exporting or by licensing technolog Nexer. larg
re not m
enterprises.
With liberalisation, MNCs have been spreading fast
countries, with China hosting the largest number. in the
Several Indian companies too are emerging as global i.
criticised. particularly by developing countries, on seu
Criticisms of MNC's
Self interest are primary
Costly damages inflicted with impunity
Encourages bribing
Worst hit are the marginal and small firms.

Interferes with economic goals

Social disruption
Environmental degradation
Imperialism
Frustration and antipathy
Technology.
I n support of MNCs.
Provide employment.
Raise national product and productivity.
Help build foreign exchange resources.
Introduce and develop new technical skills.
Introduce new managerial techniques.
Encourage the development and spin-off of new industries.
Raise the standard of living of the
people.
QUESTIONS
1. What is MNC? What are its salient features?
an
2. Examine the arguments for and
against the MNCs.
3. Discuss the role of MNCs in
4. Write short notes on
developing countries.
(a) Meaning of Multinational
(b) Code of conduct for MNCs.
Corporation.
(c) Different patterns of MNCs.
5. Discuss the role of MNCs in India.