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MULTINATIONAL CORPORATION

Introduction
A multinational corporation/ company is an organization doing business
in more than one country. Transnational company produces, markets,
invests, and operates across the world. It is integrated global enterprise
which links global with global market at profit. These companies have
sales offices and/ or manufacturing facilities in many countries. A
corporation (MNC) engages in various activities like exporting,
importing, manufacturing in different countries. MNCs have worldwide
involvement and global perspective in its management and decisionmaking
1.MNCs consider opportunities throughout the globe through they do
the business in a few countries.
2.MNCs invest considerable portion of their assets internationally.
3.MNCs engage in international production and operate plants in the
number of countries.
4.MNCs take managerial decision based on a global perspective. The
international operations are integrated into the corporations overall
business.
MNCs are huge industrial/ business organizations. They extend their
industrial/ marketing operations through a network of branches or their
majority owned foreign affiliates. MNCs produce the products in one or

few countries and sell them in most of the countries. Transnational


corporations produce the products in each country based on the specific
needs of the customers of that country and market these. A transnational
corporation mostly uses the inputs of the host country where it operates
unlike a multinational company. Large corporations having investment
and business in a number of countries, knows by various names such as
multinational corporations, international corporations and global
corporations have become
a very powerful driving force at the worlds economy

MEANING AND CHARACTERISTICS OF MULTINATIONAL


COMPANIES
Multinational company is the company which is registered in one
country but conduct its business operations in multiple countries. It
evolved during the 19th century.
First multinational company was formed in 1860 in U.S.A. At present
these companies are operating worldwide.
Multinational company are not only found in USA, but also in
many other countries like China, England, France, Germany, Japan,
South Korea etc. These companies are doing well in India also.
Multinational

companies

are

also

known

as Trans-National

Corporations or the International Corporations or the Global


Giants.
Hindustan Lever Limited, Hero Honda, Reliance Infosys, etc. are
some examples of multinational companies operating in India.

Definitions of MNCs:
1) According to UNO, multinational companies means, Those
enterprises which own or control production or service facilities
outside the country in which they are
based."

2) According to International Labour Organisation The essential


nature

of

the multinational enterprises lies in the fact that

its

managerial headquarters are located in one country, while the enterprise


carries out operations in number of other countries.
3) According to N.H. Jacob, A multinational corporation owns &
manages its business in two or more countries.
Characteristics of Multinational Companies (MNCs)
The distinctive features of multinational companies are as follows.
1. Large Size:
A multinational company is generally big in size. Some of the
multinational companies own and control assets worth billions of
dollars. Their annual sales turnover is more than the gross national
product of many small countries.
2. Huge Capital:
These companies can easily raise huge capital by way of issuing
shares to general public, within & outside the country. They
exercise great degree of economic dominance. A large part of the
capital assets of the parent country are owned by the

citizens of the home country.


3. Worldwide operations:
A multinational corporation carries on business in more than one
country. Multinational corporations such as Coco cola has branches in
as many as seventy countries around the world.
4. International management:
The management of multinational companies are international in
character. It operates on the basis of best possible alternative
available anywhere in the world.Its local subsidiaries are managed
generally by the nationals of the host country. For example the
management of Hindustan Lever lies with Indians. The parent company
Unilever is in The United States of America.
5. Mobility of resources:
The operation of multinational company involves the mobility of
capital, technology, entrepreneurship and other factors of production
across the territories.
6. Integrated activities:

A multinational company is usually a complete organisation comprising


manufacturing, marketing, research and development and other
facilities.
7. Several forms:
A multinational company may operate in host countries in several ways
i.e., branches, subsidiaries, franchise, joint ventures. Turn key projects.
8. Centralized Control:
These multinational companies have their branches worldwide.
They control all its branches through head office which is situated in
home country of those companies.

9. Employment:
It provides with employment opportunities to a large number of
unemployed individuals in

the

respective

countries

of

operation. In 2006, foreign affiliates of MNCs


employed over 73 million people, compared to 25 million in 1990.

their

Classification of MNCs:
MNCs can be classified on the basis of several criteria, such as
function, control, investment, origin, turnover, products, etc.
On the basis of functional criterion, the MNCs are broadly grouped into:

1. Service MNCs:
A service MNCs is defined as a transnational company which derives
more than 50 per cent of its revenues from services. Service MNCs are
found in areas such as banking, insurance, finance, transport, tourism,
etc.
2. Manufacturing MNCs:
A Manufacturing MNCs is one which derives at least 50 per cent
of its revenue from manufacturing activity. A large number of
MNCs has entered into the manufacturing sector. Out of the top 200
MNCs, 118 firms are manufacturing MNCs. They produce a variety of

goods. For example, Parry and Cadbury Fry produce Chocolates,


Colgate and Palmolive produce soaps and detergents, Ponds cosmetic goods, Olivetti -Teleprinting equipments, Dunlop, Good
Year, Ceat-tyres and tubes.
3. Trading MNCs:
A trading MNCs is the one which derives at least 50 per cent of its
revenue from trading activity. These are the oldest form of
multinationals. Trading MNCs control

about 60 per cent

of

the

world's export trade. Tatas, Liptons, Brooke Bond, Hindujas etc.


are the trading MNCs.

IMPORTANCE OF MNCS AND THEIR BENEFITS


TO HOME/HOST COUNTRIES:
Importance of MNCs
1) Economic Development: The Developing countries need both
foreign capital and technology to make use of available resources
for economic and industrial growth. MNCs can provide the required
financial,

technical

and

other

resources

to needy countries in

exchange for economic gains.


2) Technology Gap: MNCs are the instruments of transfer of
technology to the host country. Technology is necessary to bring
down cost of production and produce quality goods on a large scale.
The services of MNCs can be of great help to bridge the technological
gap between developed and developing countries.
3) Industrial Growth:

MNCs are dynamic and offer growth

opportunities for domestic industries. MNCs assist local producers to


enter the global markets through their well established international
network of production and marketing. And there by ensure industrial
growth.

4)

Marketing Opportunities:

MNCs have access to many

markets in different countries. They have the necessary skills and


expertise to market products at international level. For example, an
Indian Company can enter into Joint Venture with a foreign company to
sell its product in the international market
5) Work Culture:

MNCs introduces a work culture of excellence,

professionalism and

fairness

in

deals. The

sole

objective

of

Multinational is profit maximisation. To achieve this, they use


various strategies like product innovation, technology up gradation,
professional management etc.
6) Export Promotion:
earnings

MNCs assist developing countries in

foreign exchange. This can be done by promoting and

developing export oriented and import substitute industries.


7) Tax Revenues: For the host country, there is a likelihood that the
MNC will have to be subject to the tax regime in that country. As a
result, many MNCs pay large sums in taxes to the host government. In
less developed countries the problem might be that there is a large
amount of corruption and bad governance and as a result MNCs might

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not contribute the tax revenue they could and even if they do it might
not find its way through to the government itself.
8) Improvements in Infrastructure: In addition to the investment
in a country in production or distribution facilities, a company
might also invest in additional infrastructure facilities like road,
rail, port and communications facilities. This can provide benefits
for the whole country.
9) Raising Standards: Multinational corporations bring about
competition in the foreign markets they venture in. Multinationals
produce goods and services that adhere to the best possible standards.
Since consumers are willing to spend their money on only the best
products, local businesses are forced to improve on the quality of
their products. This competition to produce good quality ends up
benefiting consumers who get good value for their money
10)

Job Creation:

Multinational corporations play a big role in

creating employment in the foreign countries they venture in.


Because of their massive operations, they employ many local people
in those countries to work there. They also employ some to work in
their headquarters, thereby giving foreign nationals a chance to
gain international career exposure. In 2006, foreign affiliate of

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MNCs employed over 73 million people, compared to 25 million in


1990. Greater part of increase of employment in foreign affiliates in
recent times has taken place in developing countries.
Benefits of MNCs to home country:

1) Facilitate inflow of foreign exchange: - MNCs collect funds from


the enterprises of other countries in the form of fees, royalty, and service
charges. This money is taken to the country of their origin. MNCs make
their home countries rich by facilitating inflow of foreign exchange from
other countries.
2) Promote global co-operations: - MNCs provide co-operation to
poor or developing countries to develop their industries. The countries
of their origin participate in such international co-operation, which is
beneficial to all countries- rich and poor.
3) Ensure optimum utilization of resources: -MNCs ensure optimum
utilization of natural and other resources available in their home
countries. This is possible due to their worldwide business contacts.

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4) Promote bilateral trade relations: -MNCs facilitate bilateral trade


relations between their home countries and the other countries with
which they have business relations
Benefits of MNCs to host countries:
1) Raise the rate of investment: - MNCs raise the rate of investment in
the host countries and thereby bring rapid industrial growth
accompanied by massive employment opportunities in different sectors
of the economy.
2) Facilitate transfer of technology: -Multinationals act as agents for
the transfer of technology to developing countries and thereby help such
countries to modernize there industries. They remove technological gaps
in developing countries by providing techno-managerial skills.
3) Accelerate industrial growth: - multinationals accelerate industrial
growth in host countries through collaborations, joint ventures and
establishment of subsidiaries and branches. They facilitate economic
growth through financial, marketing and technological services. MNCs
are rightly called messengers of progress.
4) Promote export and reduce imports: - MNCs help the host
countries to reduce the imports and promote the exports by raising

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domestic production. Marketing facilities at global level are provided by


MNCs due to their global business contacts.
5) Provide services to professionals: - MNCs provide the services of
the skilled professional managers for managing the activities of the
enterprises in which they are involved/interested. This raises overall
managerial efficiency or enterprises connected with multinationals.
MNCs bring managerial revolution in host countries.
6) Facilitate efficient utilization of resources: - Multinationals
facilitate efficient utilization of resources available in host countries.
This leads to economic development.
7) Provide benefits of R and D activities: -Multinationals has
enormous resources at their disposal. Some are utilized for R and D
activities. The benefits of R and D activities are passed on to the
enterprises operating in the host countries.
8) Support enterprises in host countries: - MNCs support to
enterprises in the host countries in order to support their own operations
indirectly. This is how MNCs support enterprises in the host countries
to grow. Even consumers get new goods and services due to the
operations of MNCs.

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DEMERITS OF MULTINATIONAL COMPANIES (MNCS)


1) Profit maximization: The basic purpose of MNCs in the
maximization

of

profit through

exploitation

of

host

country's

resources. MNCs hardly bother about the economic development of


the host country.
2) Plunder of wealth: MNCs plunder wealth to their home
countries in the form of transferring the huge amount of foreign
exchange gamed through royalties, fees, dividends etc. to their home
countries.
3) Useless transfer of technology: The technology transfer which takes
place is of the nature of capital intensive and import oriented which
doesn't suit to the underdeveloped countries. Generally it is observed
that the MNCs do not transfer their advanced technology to the
underdeveloped countries.

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4) Effect on Employment: Employment might not be as extensive


as hoped, many jobs might go to skilled workers from other countries
rather than to domestic workers.
Moreover, the amount of new jobs are created depends on the
type

of

investment. Investment into capital intensive production

facilities might not bring as many jobs to an area as hoped.


5) Misuse of weak Government: The size and power of multinationals
can be used to exploit weak or corrupt governments to get better deals
for the MNC. The MNCs may use their economic power to turn the
political table in their own favour. They may even see to it that the
choicest party Govt. should get elected by hook or crook.
6) Undermining Local Cultures and Traditions: The MNCs have
been criticized for their business strategies and practices in the ho st
countries. They may undermine local cultures and traditions, change
the consumption habits of the people for their benefit against the
long term interest of the local community, promote conspicuous
consumption, and dump harmful products in the developing countries.
7) High tempo of show and advertisement:- The MNCs may take
undue advantage of their financial strength in terms of lavishly

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spreading the huge amount in unnecessary showrooms

and

advertisement as a result of which the prices of goods zoom like


anything in the host country.
8) Repatriation of profits: Profits might go back to the headquarters of
the MNC rather than staying in the host country. Hence, the benefits
might not be as great. These funds will not be beneficial for the
domestic country which is allowing MNCs to establish their
base in the home country.
9) Destruction of Local Industries: Multinationals usually have more
money in terms of capitalization than local businesses. This means
that they are able to finance operations for a long time even without
making a profit in the knowledge that, once they have developed brand
loyalty, they will start making sustainable profits thereafter. This
means that they can deliberately set very low prices so as to take the
market share of the companies they have found in that market. This
may therefore lead to the local companies to close down as they
cannot afford to charge these low prices.
10) BOP Problem: The MNCs transfer the technology which is import
oriented due to which the host countries imports increase . On the

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contrary due to high prices prevailing in the host country its exports
curtail. Thus the B.O.P. problem gets aggravated.
11) Monopoly: The MNC's being the joint companies establish
their monopolies and iron out competition in the host country.
12) Evasion of taxes: The MNC's may evade the taxes by manipulating
their accounts.In the era of Liberalization we are not suppose to
look towards MNCs as a agents of exploitation but they also act as
agents of development by helping the host countries to increase
domestic investment and employment generation, boost exports, transfer
of technology and accelerate economic growth.
What is needed is to have a proper code of conduct for MNCs and an
effective competition policy and law in the host countries.

GROWTH OF MNC:
The MNCs share in global investment, production, employment and
trade has assumed considerable proportions.
According to the UN, there are 63,000 MNCs with 6,90,000 affiliates all
over the globe with 2,40,000 in China and only 1400 in India. The US
was the forerunner in giving births to MNCs. Today, biggest MNCs are

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Japanese. THE global liberalization wave, paved the path for faster
expansion and growth of MNCs. The value added by the foreign
affiliates of MNCs, as a percentage of global GDP grew from 5% in the
1980s to about 7% by the end of 90s. The MNCs control about a third of
world output and the total sales of their foreign affiliates is almost equal
to the GNP of all developing countries. The value of the annual sales of
the largest manufacturing multinational General Motors, was about
$178bn in 1996. The total sales of the 3 largest automobile firms of the
world, namely, General Motors, Ford and Toyota is greater than the
value of Indias GDP.
In terms of direct employment, the MNCs accounted for 73mn people
worldwide and if indirect employment is considered, the figure
approximates 150mn people. Over 350m people were employed by the
foreign affiliates of MNCs in 1988.
A number of factors have contributed to the phenomenal growth of
MNCs. Some of the important factors are as follows: 1) Expansion of market territories: Rapid economic growth in a number of countries resulting in rising
GDPs and per capita incomes contributed to the growing standards of
living. This in turn contributed to the continuous expansion of market
territories. MNCs, both contributed to the expansion of market

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territories and also grew in size and spread as a result of expansion of


market territories.
2) Market superiorities: In many ways, MNCs have an edge over domestic firms, such as: a) Availability of reliable and current data,
b) MNCs enjoy market reputation,
c) MNCs encounters relatively less problems and difficulties in
marketing the products,
d) MNCs adopt more effective advertising and sales promotion
techniques, and
e) MNCs enjoy faster transportation and adequate warehousing facilities
3) Financial superiorities: MNCs also enjoy a number of financial advantages over domestic firms.
These are: a) Availability of huge financial resources with the MNCs helps them to
transform business environment and circumstances in their favor.
b) MNCs can use the funds more effectively and economically on
account of their activities in numerous countries.
c) MNCs have easy access to international capital markets, and
d) MNCs have easy assessed to international banks and financial
institutions.

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4) Technological superiorities: MNCs are technologically prosperous on account of high and sustained
spend on R&D. developing countries on account of their technological
backwardness welcome MNCs to their countries because of the
attendant benefits of technology transfer.
CHALLENGES FACED BY MNC:
There is no company without problems it is facing. Whether an
organization is big or small, there will certainly be some sort of
problems or negative factor/influence militating against its survival or
continuity. Weihrich and Koontz (1994) states that the operation of
multinational companies needs to be weighed against the environmental
challenges and most of the challenges being faced by multinational
companies are:
1. There is usually acute shortage of manpower - people with lack of
managerial and technical skills
2. The challenge of unfriendly business environment
3. There is usually the problem of conflicting interest among the three
parties - the government, the MNC and the general public

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4. There may be huge cost of labour in the host country, at least to get
the expatriate managers from home country or somewhere else
Conclusively, the above mentioned authors have given all round and
comprehensive note on the benefits of MNCs to the host country where
they operate and as well highlighted the derivable benefits to the MNCs
themselves from the host country. Likewise, in spite of the challenges
and the problems being faced by these MNCs, they still continue to
survival and waxing stronger.

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Multinational Companies(MNC's) Impact on Indian Economy.


MNC may be defined as a company, which operates in number of
countries and has
production and service facilities outside the country of its origin. They
are also called Trans
National Company (TNC) Their activities have both good and bad
impacts on the economy. They take decisions on a global context or
basis. Their maximum profit objectives take no account of the reactions
produced in the countries felling in their orbit. They operate in different
institutional forms Some are: Subsidiaries companies wholly owned by
MNC in other countries Subsidiary company enter into joint venture
with a company another company Agreement among companies of
different countries regarding production and discussion of market.
Development and Activities: Soon after independence foreign capital
entered India in the form of direct investments through MNC's
Companies had been formed in advanced countries with the specific
purpose of operating in India. Such companies started their subsidiaries,
branches and affiliates in India . At times government gave some tax
concession to them with in the FERA (Foreign Exchange Regulation
Act) and streamlined the licensing procedures. The purpose was to
secure advanced, technical and industrial know how. During the janata
rule the policy was outright purchase of technical know how skills and

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machinery. They took two major decisions. Coco cola was asked to wind
up their operation . Asked IBM to reduce their foreign equity to 40%.
They did not agree, so asked to wind up MNC's operate in several
sectors like tobacco, toiletries beverages etc.
Industrial Policy of 1991 accepted foreign investment essential for
modernization
technology

up

gradation

and

industrial

development.

Several

concessions were given FERA


regulations were liberalized and permitted to use their trademarks in the
domestic market. Now has become a wide spread phenomena with USA
the biggest among them. Recently a large number of Indian brands were
taken over by them some important takeovers are
Asian Paints ICI (UK)
Premier Automobiles transferred two plants to Peugeot (France)
Lakeme brand by Lever.
Hero Honda by TVS Suzuki etc.

For quite a long time, India had a restrictive policy in terms of foreign
direct investment. As a result, there was lesser number of companies that
showed interest in investing in Indian market. However, the scenario
changed during the financial liberalization of the country, especially
after 1991. Government, nowadays, makes continuous efforts to attract

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foreign investments by relaxing many of its policies. As a result, a


number of multinational companies have shown interest in Indian
market.

Profit of MNCs in India


It is too specify that the companies come and settle in India to earn
profit. A company enlarges its jurisdiction of work beyond its native
place when they get a wide scope to earn a profit and such is the case of
the MNCs that have flourished here. More over India has wide market
for different and new goods and services due to the ever increasing
population and the varying consumer taste. The government FDI
policies have some how benefited them and drawn their attention too.
The restrictive policies that stopped the company's inflow are however
withdrawn and the country has shown much interest to bring in foreign
investment here.
Besides the foreign directive policies the labour competitive market,
market competition and the macro-economic stability are some of the
key factors that magnetize the foreign MNCs here.

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Following are the reasons why multinational companies consider India


as a preferred destination for business:

Huge market potential of the country


FDI attractiveness
Labor competitiveness
Macro-economic stability

Advantages of the growing MNCs to India


There are certain advantages that the underdeveloped countries like and
the developing countries like India derive from the foreign MNCs that
establishes. They are as under:

Initiating a higher level of investment.


Reducing the technological gap
The natural resources are utilized in true sense.
The foreign exchange gap is reduced
Boosts up the basic economic structure.

Disadvantages of MNCs
Roses does not come without thrones. Disadvantages of having an
MNCs in a developing country like India are as under Competition to SMSI
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Pollution and Environmental hazards


Some MNCs come only for tax benefits only
Exploitation of natural resources
Lack of employment opportunities
Diffusion of profits and Forex Imbalance
Working environment and conditions
Slows down decision making
Economical distress

Top MNCs in India


The country has got many M. N. C.s operating here. Following are
names of some of the most famous multinational companies, who have
their headquarters of operational branches based in the nation:

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Tata Consultancy Services:


Commonly known as T. C. S., this multinational company is a famous
name in the field of I. T. (Information Technology) services, Business
Process Outsourcing (B. P. O.) as well as business solutions. This
company is a subsidiary of the Tata Group. The first center for software
researching was established in the country in 1981 in the city of Pune.
Tata Consultancy earned a growth of 8.9 % during the latest quarter of
this financial year, which ended on 30th September, 2011. This
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renowned company is presently looking forward to the 10 big deals that


they have received besides the Credit Union Australia's contract as well
as Government of Karnataka's INR. 94 crore deal for a total period of 6
years. In this current business year, they are about to employ 60, 000
people to meet their business requirement.

Tata Motors Limited:


The biggest automobile company in India, Tata Motors Limited, is
among the leading commercial vehicles manufacturer in the country.
They are one of the top 3 passenger vehicle manufacturers. Established
in the year 1945, this company, a part of the famous Tata Group, has got
its manufacturing units located in different parts of the nation.
Some of their well known products of the company are categorized in
the following heads:

Commercial Vehicles
Defence Security Vehicles
Homeland Security Vehicles
Passenger Vehicles

Post completion of the financial year 2010 to 2011, the global sales of
the company grew by 24.2 % with sales crossing INR. 1MILLION
Nokia Corporation:
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Nokia Corporation was started in the year 1865. Being one of the
leading mobile companies in India, their stylish product range includes
the following:
Normal mobile handsets

Smartphones
Touch screen phones
Dual sim phones
Business phone

The net sales of the company increased by 4 % in the last financial year
with sales of EUR 42.4 billion as compared to 2009's EUR 41 billion.
Over the past few years, this company in India has been acquiring
companies, which have got new and interesting competencies and
technologies so as to enhance their ability of creating the mobile world.
Besides new developments to fight against mineral conflicts, they are
even to set up Bridge Centers in the country for supporting reemployment. Their first onsite for the installation of renewable power
generation are already in place.

PepsiCo:
PepsiCo. Inc. entered the Indian market with the name of PepsiCo India
from the year 1989. Within a short time span of 20 years, this company
has emerged as one of the fast growing as well as largest beverage and
food manufacturer. As per the annual report of the company in the last
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business year, the net revenue of PepsiCo grew by 33 %. By the year


2020, this food manufacturing company intends to triple their portfolio
of enjoyable and wholesome offerings. The expansion of their GoodFor-You portfolio is believed to be assisting the company in attaining
the competitive advantage of the growing packaged nutrition market in
the world, which is presently valued at $ 500 billion.

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