INTERNATIONAL BUSINESS

Multinational Corporations
&
F D I

Prof Bharat Nadkarni

 International Business

Multinational Corporations
Multinational Corporations are huge industrial organisations
having a wide network of branches and subsidiaries spread
over a number of countries. The two main characteristics of
MNCs are their large size and the fact that their worldwide
activities are centrally controlled by the parent companies.
Such a company may enter into joint venture with a company
in another country. There may be agreement among
companies of different countries in respect of division of
production, market, etc. These companies are to be found in
almost all the advanced countries with the USA perhaps the
biggest amongst them. Their operations extend beyond their
own countries and cover not only the advanced countries but
also the less developed countries.
 International Business
Advantages of MNCs to the Host Country
1. They bring about increase in the national income and per
capita income of the host country.
2. They bring about increase in the level of investment,
employment and income in the host country.
3. They fill up savings gap in the economy by transferring surplus
saving of one country to the deficient savings in some other
countries of the world.
4. They help the host country to solve the problem of trade
deficit through export promotion and import substitution.
5. They fill up technological gap by transfering technology from
technically advanced country to technologically backward
country.
6. They create employment opportunities in manufacturing as
well as allied service sectors.
 International Business
7. They break protectionalism, create competition among
domestic companies and thus enhance their competitiveness.
8. The marketing skills of the MNCs are impressive particularly
in providing marketing infrastructure.
9. They help rapid industrialisation and improve general
standard of living in the host country.
Advantages of MNCs to the Home Country
1. They create opportunities for domestic firms to market their
products throughout the world.
10. They create employment opportunities for the people of
home country, both at home and abroad.
11. They earn valuable foreign exchange for the country and
therefore, strengthen the balance of payments condition of
the home country.
 International Business
Disadvantages of MNCs to the Home / Host Country
1. Although the initial impact of MNC investment is to improve
the foreign exchange position of the recipient nation, its long-
run impact may reduce foreign exchange earnings on both
current and capital accounts. The current account may
deteriorate as a result of substantial importation of
intermediate and capital goods while the capital account may
worsen because of the overseas repatriation of profits,
interest, royalties, etc.
2. While MNCs do contribute to public revenue in the form of
corporate taxes, their contribution is considerably less than it
should be as a result of liberal tax concessions, excessive
investment allowances, subsidies and tariff protection
provided by the host country government.
3. The management, entrepreneurial skills, technology, and
overseas contacts provided by the MNCs may have
 International Business
little impact on developing local skills and resources. In fact,
the development of these local skills may be inhibited by the
MNCs by stifling the growth of indigenous entrepreneurship
as a result of the MNCs dominance of local markets.
4. MNCs impact on development is very uneven. In many
situations MNC activities reinforce dualistic economic
structures and widen income inequalities. They tend to
promote the interests of some few modern-sector workers
only. They also divert resources away from the production of
consumer goods by producing luxurious goods demanded by
the local elites.
5. MNCs typically produce non-essential products and stimulate
inappropriate consumption patterns through advertising and
their monopolistic market power. Production is done with
capital-intensive technique
 International Business
which is not useful for labour surplus economies. This would
aggravate the unemployment problem in the host country.
6. MNCs often use their economic power to influence
government policies in directions unfavourable to
development. The host government has to provide them
special economic and political concessions in the form of
excessive protection, lower tax, subsidised inputs, and cheap
provision of factory sites. As a result, the private profits of
MNCs may exceed social benefits.
7. MNCs may damage the host countries by suppressing
domestic entrepreneurship through their superior
knowledge, worldwide contacts, and advertising skills. They
tend to drive out local competitors and inhibit the emergence
of small-scale enterprises.
 International Business
8. They exploit the economy of the host nation by paying low
wages to workers, by exporting scarce natural resources or by
adversely interfering with the development of local
businesses.
9. Workers in major industrialised nations argue that building a
plant abroad takes away jobs at home. Ex. Jobs going away in
USA are called “Bangalored (Discuss H1B VISA)
International Business
Foreign Direct Investment
Prof Bharat Nadkarni
 International Business : Prof Bharat Nadkarni

One of the most interesting phenomena in the contemporary

world economy is the explosive growth of foreign direct
investment. Regional integration typically leads to reductions in
tariffs and other barriers to trade between the member states
and this liberalisation has a number of effects on both trade
and an FDI. To the extent that firms increase their investment
in response to a larger market or rationalise their production to
lower cost locations within and across the block , then there
will be benefits of efficiency and welfare. The removal of
restrictions on the movement of factors of production should
facilitate both intra block FDI and FDI from third countries. FDI
should also be stimulated by the relaxation of ownership and
entry requirements and other liberalising measures to open
markets to greater competition.
 International Business : Prof Bharat Nadkarni

The firms are motivated to invest overseas for a variety of

reasons such as access to factors of production, cheaper
factors of production, access to products, access to markets
and customers, present and future.

Foreign Direct Investment (FDI)

Direct investment represents acquisition of some amount of
permanent interest in the enterprise, implying a degree of
control over the management of the company in which the
investment is made. FDI involves the ownership and control of
a foreign company in a foreign country. In exchange, for this
ownership, the investing country usually transfers some of its
financial, technical, managerial trademark and other resources
to the foreign country.
 International Business : Prof Bharat Nadkarni

Foreign Investment policy in India

The Indian Government’s attitude towards foreign direct
investment can be divided into two phases. The first phase is
the period from independence to the late 1980s where gradual
liberation of attitude towards FDI and the second phase is the
period from late 1980s onwards where a liberal policy towards
FDI was accepted and India became host to a large body of
foreign capital. As a result of the policy changes in 1991 and
active promotion of India as a destination, the amount of FDI
approved and received has increased sharply.
The foreign investment policy was revised in 1990 in order to
encourage direct and portfolio investment by NRIs and
Overseas Commercial Borrowings OCBs and investors on Oil
Exporting Development countries to invest their money in
India.
 International Business : Prof Bharat Nadkarni

The policy relating to foreign investments was radically

changed in 1991 with the introduction of structural changes in
the economy. A three-tier systems for approvals for foreign
investments was introduced i.e. (a) Reserve Bank of India.
(b) Secretariat for industrial approvals (SIA) and (c) Foreign
Investment Promotion Board (FIPB).
The existing companies in India with foreign equity
participation wishing to increase 51% will be granted automatic
approvals provided that the expansion programme is in the
high priority industries and the cost of import of capital goods is
covered by foreign equity. The proposals for foreign investment
within the general policy framework but outside the powers
delegated to the RBI would be considered by the SIA. FIPB
was specifically created to invite, negotiate and facilitate
substantially large investment by international companies
which would provide access to high technology and world
markets. Foreign Institutional investors such as Mutual funds,
 International Business : Prof Bharat Nadkarni

pension funds were permitted to invest in Indian Stock

Markets. However, such investment would be subject to a
ceiling of 24% of the issued share capital of a company for all
FIIs put together. An individual FII can invest up to 10 percent
of the issued capital.
 International Business : Prof Bharat Nadkarni

Advantages of Foreign Direct Investment

1. Economic Development

2. Transfer of Technologies

3. Human Capital Resources

4. Employment Creation

5. Research & Development

6. Income Generation

7. Beneficial for SMEs (Small & Medium level Enterprises)

 International Business : Prof Bharat Nadkarni

International Investment Theories

1. Ownership Advantage Theory

2. Internalisation Theory

3. Dunning’s Electic Theory

4. Factor Mobility Theory

5. Product Life Cycle Theory

 International Business : Prof Bharat Nadkarni

International Investment Theories

1. Ownership Advantage Theory
The firms having competitive advantage domestically
derived from its domain knowledge and valuable assets like
technology, brand names and large scale economies
extend their operations to foreign markets through FDI.
ex. Dr Reddy’s Lab, Caterpillar.

2. Internalisation Theory
ex. Licensing, franchising, exporting loses advantage.

3. Dunning’s Electic Theory

ex. Locational advantage, advantage from factors of
productions.
 International Business : Prof Bharat Nadkarni

4. Factor mobility theory

ex. The capital flow from developed to LDCs, Petrodollars.

5. Product life cycle theory

ex. Nike – Waterfall approach

Factors influencing FDI

6. Supply factors
7. Demand factors
8. Political factors
 International Business : Prof Bharat Nadkarni

Supply Factors
1. Production Costs
2. Logistics
3. Resource availability
4. Access to technology
Demand Factors
5. Customer access
6. Marketing advantage
7. Exploitation of competitive advantage
8. Customer mobility
Political Factors
9. Avoidance of trade barriers
10. Economic development incentives
3. Bureaucracy
 International Business

Forbidden Territories:

FDI is not permitted in following industrial sectors:

1. Arms and ammunition

2. Atomic energy
3. Railway transport
4. Coal and lignite
5. Mining of iron, manganese, chrome, gypsum, sulphur, gold,
diamonds, copper, zinc.
 International Business
The difference between FDI & FPI
FDI FPI
Motive To acquire controlling interest in a foreign entity or To make capital gains from
set up an entity with controlling interest. investments. There is no
intention to control the
entity.

Source FDI investments come from MNCs and corporate so FPI investment come from
as to derive benefit of new market, cheaper investors, mutual funds,
resources (labour), efficiency and skills, strategic portfolio management
asset seeking (oil fields) and time geography (BPO- companies, and corporate
Transcriptions). with pure motive of
investment gains.

Duration More enduring and has longer time stability. FPI is highly volatile.

Form Generally comes as subsidiary or joint venture. Comes mainly through

stock markets.
Purpose Made with core thought of business philosophy of Sole criteria and motive is
diversification, integration, consolidation, expansion gains on investments.
and/or core business formation. Calculation of gain is
always prime criteria but never the sole criteria.
F D I in India
Foreign direct investment approvals will, however, be subject to
sectoral caps: (as on 31.03.2010)
• 20 percent (40'per cent for NRIs} in the banking sector;
•51 per cent in non-banking financial companies;
•100 per cent in power, roads, ports, tourism and venture capital funds;
•49 per cent in telecommunications;
•40 per cent (100 per cent for NRIs) in domestic air taxi operations/airlines;
•24 per cent in small-scale industries;
•51 per cent in drugs/pharma industry for bulk drugs;
•100 per cent in petroleum; and
• 50 per cent in mining ~ except for gold. silver, diamonds and precious stones
 International Business : Prof Bharat Nadkarni

Global Depository Receipts (GDRs)

A depository receipt is basically a negotiable certificate,
denominated in US dollars, that represents a non-US
company’s publicly traded local currency (Indian Rupee) equity
shares. DRs are created when the local currency shares of an
Indian company, for example, are delivered to the depository’s
local custodian bank, against which the depository bank, such
as Bank of New York, issues DRs in US dollars. The
depository Receipts may trade freely in the overseas markets
like any other dollar denominated security, either on a foreign
stock exchange, or in the over-the-counter market, or among a
restricted group such as qualified institutional buyers.
Company’s with good track record of three years may avail of
Euro-issues for approved purposes. According to the revised
guidelines issued in November 1995 companies investing in
infrastructure projects, including power, petroleum exploration
and refining, telecommunications, ports, roads and airports are
 International Business : Prof Bharat Nadkarni

Exempted from the condition of three-year track record. It is

expected to help companies in above sectors to access cheap
overseas funds.
 International Business
20 Best Global Brands
The following table gives top 20 global brands as published
in the Bloomberg Business Week in November 2010.
Rank Owner Brand Value Country of Origin
(in $ million)
1 Coca-Cola 68734 United States
2 IBM 60211 United States
3 Microsoft 56647 United States
4 GE 47777 United States
5 Nokia 34864 Finland
6 McDonalds 32275 United States
7 Google 31980 United States
8 Toyota 31330 Japan
9 Intel 30636 United States
10 Disney 28447 United States
 International Business
Rank Owner Brand Value Country of Origin
(in $ million)

11 Hewlett-Packard 24096 United States

12 Mercedes-Benz 23867 Germany

13 Gillette 22841 United States

14 Cisco 22030 United States

15 BMW 21671 Germany

16 Louis Vuitton 21120 France

17 Marlboro 19010 United States

18 Honda 17803 Japan

19 Samsung 17518 South Korea

20 Apple 15443 United States