Concept of MNCs:

A multinational corporation is an enterprise that carries on busine3ss operations in more than one
country. It extends its manufacturing and marketing operations through a network of branches
and subsidiaries which are known as its foreign affiliates.
According to a report of international labour office the essential nature of multinational
enterprises lies in the fact that its managerial headquarters are located in one country while the
enterprise carries out operations in a number of other countries as well.
Characteristics of MNCS:
1.
2.
3.
4.
5.
6.
7.

Large size
Worldwide operations
Centralized control
Sophisticated technology
Professional management
International market
High brand equity

International Corporation:
An international corporation has a domestic orientation in so far as the overseas operations are
treated as appendages to the headquarters. The parent company extends the domestic product,
price, promotion and other business practices to the foreign markets. The assets, processes and
decisions in overseas affiliates are controlled from the headquarters.
Multinational Corporation:
It operates like a domestic company of the country and responds to the specific needs of each
countrys market.

Global Corporation:

It produces in home country and markets these products globally and focuses on marketing these
products domestically. Overseas operations are used to build global scale and overseas affiliates
act as implementing agencies for the decisions taken by the headquarters.
Transnational Corporation:
A transnational corporation invests, produces, markets and operates across the world. It seeks to
achieve global competitiveness through worldwide flexibility and learning. The resources and
decisions of all the units are decentralized and these units act in an interdependent but integrated
manner.
Reasons for the growth of MNCs:
1. Market Expansion:
The growth of GDP and per capita income in various countries led to increasing
demand for goods and services. Companies in developed economies expand their
operations overseas to exploit the expanding markets abroad.
2. Marketing Superiorities:
MNCS enjoy the following marketing superiorities over the domestic companies:
a. Availability of more reliable and up to date information about market conditions
b. Reputation in market due to popular brands and image
c. More effective advertising and sales promotion techniques.
d. Wide distribution network.
e. Quick transportation and warehousing facilities.
3. Financial Superiorities:
MNCS are financially superior to domestic companies in the following respects:
a. Huge financial resources
b. More effective and economical utilization of funds through transfer of excess
funds from one country to another
c. Easy access to foreign capital markets.
d. Easy mobilization of high quality resources of different types.
e. Access to international banks and financial institutions.
4. Technological Superiorities:
MNCS have strong R&D departments. They can invent and innovate new products
and processes more easily and frequently. This provides them an edge over national
companies. Developing countries invite MNCS for advanced technology due to the
following reasons:
a. Developing countries do not have the resources to develop advanced
technology and the level of industrialization is low.

b. They are unable to exploit their rich mineral and other natural resources due to
shortage of funds and low level technology.
c. They do not have adequate foreign exchange reserves to import raw materials,
capital equipment and technology on their own.
d. They face difficulty in marketing their products in highly competitive world
markets.
Advantages of MNCS:
1. Benefits to the host country:
a. The levels of investment, employment and income increase due o the operation of
MNC.
b. MNC help in growth of ancillary and service industries thereby increasing
industrialization and economic development.
c. MNC brings advanced technology to the host country.
d. Business firms in the host country get sophisticated management techniques and
practices.
e. MNC enable the host country to increase its exports and reduce the imports.
f. Domestic industry gets the benefit of R&D systems of MNCS. Their capability
of invention and innovation increases.
g. MNCS increase competition and break domestic monopolies.
h. MNCS help to integrate national economies both economically and culturally.
2. Benefits to the home country:
a. The products manufactured in home country can e easily marketed throughout the
world.
b. Employment opportunities for home country people are increased both at home
and abroad.
c. The level of industrial activity in the home country increases.
d. In long run, the
BOP position of the home country improves through
inflows in the form of dividend, interest etc.
Disadvantages of MNCS:
1. Costs and risks to the host country:
a. MNCS employ capital intensive technology which is not appropriate to the needs
of developing countries.
b. Due to their immense power, MNCs can undermine economic and political
sovereignty of developing countries.

c. MNCS may kill the domestic industry and acquire monopoly over the host
countrys market.
d. Employment growth in the host country may be retarded because MNCS may
employ foreign staff.
e. MNCS may cause fast depletion of host countrys natural resources through their
indiscriminate use.
f. The host countrys BOP may be under pressure when MNCS repatriate huge
amount in the form of profits, dividends and royalty.
g. MNCS may undermine local culture, distort consumption patterns and promote
conspicuous consumption in the host country.
2. Dangers to home country:
a. Pressure on BOP due to transfer of capital to host countries.
b. Loss of employment for home country people due to location of manufacturing
and marketing facilities abroad.
c. Investment in more profitable countries may retard industrial and economic
development in the home country.
d. Cultures of foreign countries may distort home countrys culture.

GLOBALISATION:
Globalisation may be defined as the integration of countries into world economy or one global
market. It involves removal of all trade barriers between countries.
Globalisation is the shift towards a more integrated and interdependent world economy Charles
Hill.
Features of Globalisation:
1. It involves expansion of business operations throughout the world.
2. It leads to integration of individual countries of the world into one global market thereby
erasing difference between domestic market and foreign market.
3. Buying and selling of goods and services takes place from / to any country in the world.
4. It creates interdependency between nations.
5. Manufacturing and marketing facilities are set up any where in the world on the basis of
their feasibility and viability rather than on national considerations.
6. Products are planned and developed for the world market.

7. Factors of production like raw materials, labour, finance, technology and managerial
skills are sourced from the entire globe.
8. Corporate strategies, organizational structures, managerial practices have a global
orientation.
Essential conditions of Globalisation:
1. Removal of quotas and tariffs.
2. Liberalization of government rules and regulations.
3. Freedom to business and industry.
4. Removal of bureaucratic formalities and procedures.
5. Adequate infrastructure.
6. Competition on the basis of quality, price, delivery and customer service.
7. Autonomy to public sector undertakings.
8. Incentives for R&D.
9. Development of money and capital markets.
10. Administrative and government support to industry.
Indicators of Globalisation:
1. Share of foreign trade in national income
2. Foreign investment as a proportion of total investment in the country.
3. International investment income flows as a proportion of total investment income in the
economy.
4. International tourism traffic as a proportion of total population of the country.
5. Share of foreign remittances.
6. Value of credits and debits to BOP as a proportion of national income.
Strategies for Globalisation:
1. Exporting:
It is an appropriate strategy under the following conditions:
a. Cost of production in the foreign market is high
b. The volume of exports is not large enough to justify production in the
c.
d.
e.
f.
g.
h.
i.

foreign market.
There are production bottlenecks in the foreign market.
Investment in the foreign country involves political and other risks.
There is no guarantee of long term availability of the foreign market.
The company does not have permanent interest in the foreign market.
The foreign country concerned does not favour foreign investment.
The company has underutilized production capacity.
Domestic government provides incentives for export production.

j. It is easier and less costly to export than to set up production facilities

abroad.
2. Licensing and franchising:
Franchising is a form of licensing in which a parent company grants another
company through a written contract the right to offer, sell or distribute goods or
services through a business system created by the franchiser.
Its advantages are as follows:
a. It requires neither capital investment nor marketing strength in foreign
markets.
b. It reduces risk of exposure to government intervention and host country
regulations.
c. It provides a means to test foreign markets without involving major capital
or management time.
d. It can be used as a pre emptive strategy against competitors by combing
the foreign markets before competitors could enter.
e. It can be used to harvest obsolete products in poor countries.
f. The licensor can earn royalty income.
g. The licensee gets a proven product.
3. Contract manufacturing:
Under this strategy the company enters into a contract with a firm in the foreign
market to manufacture or assemble the product. The company retains the
responsibility of marketing the product. This is common practice in book
publishing industry.
Advantages:
a. The company has not to invest resources in setting up production facilities.
b. The company is free from the risk of investing in foreign markets.
c. The company can start immediately when idle production capacity is
available in the foreign country.
d. Contract manufacturing may enable the company to obtain host countrys
support.
Disadvantages:
a.
b.
c.
d.

Potential profits from manufacturing are not available.

The company has less control over manufacturing.
There is risk of developing a potential competitor.
Contract manufacturing is not suitable in cases involving technical secrets
and in high tech products.

4. Management control:

Under this system a company contracts with a firm or government in a foreign

country to manage the entire product or undertaking for a specified period.
Advantages:
a. The risk involved is low.
b. It starts yielding income right from the beginning.
c. The arrangement is specially attractive if the contracting firm is given an
option to purchase some shares in the managed company within a stated
period.
d. Management contract can provide organisational skills, expertise and
support services that are not available locally.
e. It enables the firm to commercialize existing knowhow and the impact of
fluctuations in business volumes can be reduced by making use of
experienced personnel.
f. The managing company may obtain the business of exporting or selling
otherwise the products of the managed company or supplying the inputs to
it.
5. Turnkey contract:
In this the company contracts with a foreign firm to design and built an entire
operation. On completion the operation is turned over to the local personnel who
have been trained by the company.
6. Third country location:
When commercial transactions between two countries are not possible due to
political reasons, a company may have to enter the foreign market from a third
country.
7. Joint ventures:
A company may enter a foreign market by entering into a joint venture with a
foreign firm. The local firm and the foreign firm share ownership and
management in a joint venture.
8. Direct investment:
A company which wants to have substantial and long term interest in the foreign
market has to establish fully owned manufacturing facilities abroad. This strategy
provides the company complete control over production and quality. There is no
risk of developing potential competitor as in the case of licensing and contract
manufacturing.
Advantages of Globalisation:

1. Wider markets:
Globalization offers larger markets to domestic producers. Domestic firms can
export their surplus output. They realize higher prices from foreign markets.
Global operations help to improve public image which is helpful in attracting
better talent.
2. Rapid industrialization:
Globalization helps in free flow of capital and technology between countries this
help the developing countries to boost up their industralisation.
3. Greater specialization:
Globalization enables the domestic firms to specialize in areas where they enjoy
competitive advantage.
4. Competitive gains:
Globalisation increases competition for domestic firms through imports and
multinational corporations. Domestic firms learn about new products, new
technologies and new management systems.
5. Higher production:
Globalisation leads to spread up of manufacturing facilities in different countries.
Firms with world wide contacts can outsource funds, technology, distribution and
other functions from any where in the world which helps to improve operational
efficiency and to reduce costs.
6. Price stabilization:
It reduces price differences between countries. Free trade and international
competition help to equalize price levels in international markets. Countries with
a high degree of globalisation can attract greater foreign investment which
supplements domestic funds, brings in foreign exchange and improves BOP.
7. Increase in employment and income:
Globalisation creates job opportunities in developing countries and the incomes of
people increase due to increased industrialization.
8. Higher standards of living:
Lower prices, better quality and higher incomes help to enhance consumption and
standards of living of people in developing countries. Increased economic
development enables governments to provide better facilities like education,
health, sanitation etc.
9. International economic cooperation:
Globalisation improves economic cooperation between nations in the form of
trade agreements, investment treaties, standardization of commercial procedures,
avoidance of double taxation, intellectual property protection etc.

10. World peace:

Globalisation promotes cultural exchange and mutual understanding among
different nations.
Disadvantages of Globalisation:
1. Interdependence:
Globalisation increases interdependence between nations of the world as a result
of which economic sovereignty and control over the domestic economy are
reduced.
2. Threat to domestic industry:
Globalisation leads to establishment of manufacturing and marketing facilities by
MNCS in developing countries. The domestic firms of these countries fail to face
the onslaught of MNCS.
3. Unemployment:
Globalisation leads to restructuring of industry, technology up-gradation and
focus

on

areas

of

comparative

advantage

create

unemployment

and

underemployment among low skilled workers.

4. Drain of basic resources:
Globalisation results in exploitation of natural resources and basic raw materials
in developing countries.
5. Technological dependence:
It offers readymade foreign technology which scuttles domestic research and
development. Foreign technologies are available at a high cost and are often not
adaptable to local conditions.
6. Alien culture:
Globalisation promotes consumption patterns and life styles which are
inconsistent with the local culture and values.
Obstacles to Globalisation:
1. Bureaucracy:
Government policies and procedures are still complex and cumbersome. Despite
economic reforms and liberalization, swift and efficient approvals are not
forthcoming. Bureaucratic mindset delays projects and their implementation.
2. High cost:
Costs of production and distribution are comparatively high due to operational
inefficiency and absence of economies of scale.
3. Poor quality:

The quality of local products is poor.

4. Poor infrastructure:
Industrial infrastructure is generally inadequate and insufficient in India.
5. Obsolete technology:
Most Indian firms employ low technology in production and distribution
operations.
6. Resistance to change:
Modernization and rationalization schemes are resisted due to fear of
unemployment.
7. Lack of professional management:
Management of international business requires professional management at the
top level. In India family members are at the helm of affairs in most companies.
8. Limited R&D:
R&D and marketing research activities in Indian firms are quite limited.
9. Trade barriers:
Non tariff barriers in developed nations have been increasing. Trading blocks also
restrict globalisation of Indian business.
Factors Favouring Globalisation:
1. Wide base:
The resource base and industrial base of India are quite broad.
2. Talent pool:
India possesses one of the largest pools of scientific and technical manpower in
the world.
3. Huge market:
Domestic market in India is very large and growing fast. This has attracted several
international firms and helped Indian companies to consolidate their position.
4. Growing entrepreneurship:
New and dynamic entrepreneurs particularly in IT and telecommunications have
emerged in recent years.
5. Non resident Indians:
A very large number of NRIS can contribute to Indias globalisation efforts.
6. Economic liberalization:
Delicensing of industries de-reservation of industries, import liberalization, liberal
policy towards foreign capital and technology are all likely to speed up the
process of globalisation.
7. Global competition:
Many Indian firms have been inspired to improve their competitiveness and enter
foreign markets due to growing competition in the country as well as in foreign
countries.

WORLD TRADE ORGANISATION (WTO):

WTO was established on January 1, 1995. It is the embodiment of the Uruguay Round and the
successor to GATT. WTO has 146 members. The head office is located in Geneva (Switzerland).
Objectives:
1.
2.
3.
4.
5.
6.

Raise standards of living

Ensure full employment
Expand production
Expand trade in goods and services
Optimize use of worlds resources
Achieve sustainable development

Functions:
1.
2.
3.
4.
5.

Administering and implementing the multilateral and plurilateral trade agreements.

Providing a forum for multilateral trade negotiations among the members.
Facilitating settlement of trade disputes among members.
Overseeing national trade policies.
Cooperating with other international institutions involved in global policy making.

Benefits of WTO to India:

1. Boost to exports:
Indias exports are likely to be booste4d due to reduction of tariffs on the products
of export interest to India. Prospects of agricultural exports will improve due to
reduction in domestic subsidies and barriers to trade. Compulsion has been
imposed on India to be competitive in the world market.
2. Security and predictability:
The revamped dispute settlement procedures and the agreements of safeguard,
subsidies and anti dumping measures will provide greater security and
predictability in international trade. WTO rules provide greater protection against
bilateral pressures or restrictive trade practices.
3. Policy assistance:
As a member of WTO, India can get assistance from international trade centre in
formulating and implementing export promotion programs.
4. Trade links:

India has the advantage of having trade links with all other member countries. It is
saved from the trouble of entering into multiple bilateral trade agreements with so
many countries.
5. Settlement of disputes:
WTO provides a forum for trade negotiations and settlement of disputes among
member countries. Elaborate rules and procedures have been laid down for this
purpose.
6. Special concessions:
There are several concessions and exemptions for he developing countries
especially the least developed nations.
7. Promotion of competition:

Quantitative restrictions and non tariff barriers are to be removed

under the regime of WTO. Import restrictions are allowed when a country

faces BOP difficulties.

8. Technical assistance:
Training programmes, regional seminars of international conferences are held
regularly under the auspices of WTO. Integrated framework for trade related
technical assistance to the least developed countries is proved.
9. Sustainable development:
The multilateral trading system embodied in the WTO has contributed
significantly to economic growth and social development.WTO seeks to uphold
and safeguard an open and non discriminatory multilateral trading system for
promoting sustainable development.
10. Policy review mechanisms:
Members of WTO have to undergo a periodic review of their policies and
programmes. This is done with a view to promoting mutual understanding of the
need, significance, and the impact of these policies which would promote
transparency and fairness.
Disadvantages of WTO:
1. No export push:
Flow of goods and services across the world depends more on infrastructure,
political environment, quality and technology then on trade barriers. Removal of
trade barriers is no guarantee for increase in exports.
2. Prominence to developed nations:

WTO focuses more on the interests of developed countries. Trade related

investment measures (TRIMS) undermines strategy of self reliant growth based
on local services and technology.
3. Price rise:
WTO agreements are likely to cause a steep hike in the prices of drugs and
agricultural inputs.
4. Danger to service sector:
Service sector in India is less developed than in developed countries. Inclusion of
trade in services would be detrimental to Indias interests.
5. Not really free trade:
World trade has not really opened up. Developed countries are imposing more
restrictions than underdeveloped countries. Free movement of labour is not
allowed. Anti dumping duties have become the sources of new non tariff barriers.
Developed nations want to have monopoly over technology.
6. Erosion of autonomy:
WTO agreements are likely to erode the autonomy of governance in the third
world countries. The governments of these countries will not have full freedom to
formulate the policies and identify the priorities in many areas, in which WTO
agreements will prevail.
Regional Trade Blocks or Organisations:
There has been increasing integration of national economies at regional levels with
the aims of wider market, increased trade, investment and economic efficiency. Some of
these regional economic groups or trading blocks are described below:
European Economic Community (EEC):
It was set up on January 1, 1958 by six European nations. The main objective is to
promote a harmonious development by economic activities, a continuous and balanced
expansion, and an increase in stability and accelerated raising of the standard of living and
closer relation between the member states belonging to it.
The major activities of EEC are as follows:

Elimination of customs duties, quantitative restrictions with regard to exports and

imports of goods among member countries.

Establishment of a common customs tariff and common commercial policy with

regard to non member countries.

Abolition of all obstacles for movement of persons, services and capital among

members.
Formulation of common policy in the area of agriculture and transport.
Establishment of a system which would ensure competition among member

countries.
Application of programs in order to coordinate the economic policies of the member

countries.
Application of the procedures and programs to control the disequilibrium in the

BOP of member countries.

Approximation of legislation of the member governments to the extent required for

the proper functioning of the common market.

Establishment of a European social fund with a view to enhance the employment

opportunities for workers and to improve their living standards.

Establishment of European investment bank for mobilization of fresh resources and

to contribute to the economic development of the community.

Development of association with foreign countries to promote jointly the economic
and social development of the EEC.

EEC has been able to create a single largest market by removing the obstacles for the
free movement of goods, services, persons and capital among the member countries. The
formation and successful functioning of EEC created a trade block for the emergence of
frontier free global trade.
North American Free Trade Agreement (NAFTA):
USA, Canada and Mexico set up NAFTA on January 1, 1994 to achieve the
following objectives:

To create new business opportunities particularly in Mexico.

To enhance the competitive advantage of the companies operating in USA, Canada

and Mexico in wider international markets.

To reduce the prices of the products and services by enhancing competition.
To enhance industrial development and thereby employment throughout the region.
To provide stable and predictable political environment for the investors.

To develop industries in Mexico in order to create employment and to reduce

migration from Mexico to USA.

To assist Mexico in earning additional foreign exchange to meet its foreign debt

burden.
To improve and consolidate political relationship among member countries.

Measures:

Opening up of government procurement markets in member countries.

Freedom of investment to residents in other member nations.
Protection of intellectual property rights of member countries.
Simplification and harmonization of product standards in all the member countries.
Free flow of employees and business people from one country to another.
Pollution control along the USA Mexico border.

NAFTA helps all the member countries in increasing industrial development,

employment, incomes and living standards. This trade block is a major hurdle or the
globalization of business as two major developed countries are involved in this agreement.

Association of South East Asian Nations (ASEAN):

This is an important regional economic grouping which is emerging as major one in
world trade. It was formed in 1967 but started making progress only in 1970s. Its
members include Brunei, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore,
Thailand and Vietnam. ASEAN has created a common effective preferential tariffs (CEPT)
plan to reduce tariffs for manufactured and processed products leading to an ASEAN free
trade area in 15 years.
ASEAN has helped its members to maintain money, share their resources and
achieve synergy in development. ASEAN has decided to invite China and India as guest
country.
South Asian Association for Regional Cooperation (SAARC):

India, Bangladesh, Maldives, Pakistan and Sri Lanka established SAARC n

December, 1985. The objectives of SAARC are as follows:

To improve the quality of life and welfare of the people in member countries.
To develop the region economically, socially and culturally.
To provide opportunity to the people in the region to live in dignity and to exploit

their potential.
To enhance jointly the self reliance of the member countries.
To provide conducive climate for creating and enhancing mutual trust,

understanding, and application of one anothers issues.

To enhance the mutual assistance among member countries in the areas of

economic, social, cultural, scientific and technical fields.

To enhance cooperation with other developing economies.
To create unity among the member countries on issues of common interest in the

international forums.
To extend cooperation to other trading blocks.

SAARC members signed to SAARC preferential trading agreement (SAPTA) on April

11, 1993 in order to:

Gradually liberalize the trade among member countries.

Eliminate tariffs.
Promote and sustain mutual trade and economic cooperation among member
countries.

Economic and Social Commission for Asia and Pacific (ESCAP):

The original name of ESCAP was ECAFE (Economic Commission for Asia and the
Far East). It has 48 member countries and 10 associate members. The ESCAP region is
subdivided into pacific ISLAND countries. ASEAN (4 countries), developing and developed
ESCAP countries nations. China and the newly industrializing countries and South Asian
countries. ESCAP is the regional arm of the UNO. It promotes economic and social
development of the region.
ESCAP has achieved the following:

Cooperation among the countries of the region.

And integrated communication infrastructure in the region.

An Asian and Pacific Centre for transfer of technology.
Reduction of tariff barriers and promotion of free trade among the Asian countries.
Regional centre for growth.
Intra regional trade and investment, privatization, urbanization, poverty alleviation,

social, and cultural development, etc.

Regional economic cooperation, environment, sustainable development etc.

In addition to the above the other regional trading blocks include:

Asean Free Trade Area (AFTA).

Latin American Integration Association (LAIA).
European Free Trade Association ( EFTA).
Economic Community of West African States (ECOWAS).
Andean Common Market (ANCOM).
Southern Cone Common Market (SCCM).
Central American Common Market (CACM).
Caribbean Common Market (CARICOM).
Gulf Cooperation Council (GCC).
Arab Common Market (ACM).
Southern American Customs Union (SACU).
Preferential Trade Area for Eastern and southern African States (PTA).
Economic and Customs Union of Central Africa (UDEAC).
Economic Community of Central African countries (CEEAC).
Organization of Eastern Caribbean States (OECS).
Arab Maghreb Union (AMU).
Southern African Customs Union (SACU).
West African Economic Community (CEAO).
Asia Pacific Economic cooperation (APEC).
South Asian Preferential Trading Agreements (SAPTA).