A multinational corporation (MNC) or transnational corporation (TNC), also called multinational enter­prise (MNE), is a corporation or an enterprise that man­ages production or delivers services in more than one country. It can also be referred as an international cor­poration.

MNCs will always look out for opportunities. They carry out risk analysis, and send their personnel to learn and understand the business climate. They develop expertise in understanding the culture, politics, economy and legal aspects of the country that they are planning to enter.

The multinational corporation (MNC) has now become a household word. Although its definition is still the subject of debate what distinguishes an MNC from its predecessors, companies with foreign subsidiaries or affiliates, is direct investment abroad and direct interest in the business environment in which it has such investments.

Learn about:-

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1. Meaning of Multinational Corporations 2. Definitions of Multinational Corporations 3. Concept 4. Characteristics 5. Types 6. Strategic Approach 7. Regulations 8. Market Imperfections

9. International Power 10. Organizational Framework 11. Rationale 12. Business Strategies 13. Reasons for Growth 14. Criticism in Developing Countries 15. Suggestions to Avoid Criticism 16. Destination India for MNCs.

Multinational Corporation: Meaning, Definitions, Concept, Characteristics, Types, Strategic Approach, Rationale and Regulations


Contents:

  1. Meaning of Multinational Corporations
  2. Definitions of Multinational Corporations
  3. Concept of Multinational Corporations
  4. Characteristics of Multinational Corporations
  5. Types of Multinational Corporations
  6. Strategic Approach of Multinational Corporations
  7. Regulations of Multinational Corporations
  8. Market Imperfections of Multinational Corporations
  9. International Power of Multinational Corporations
  10. Organizational Framework of Multinational Corporations
  11. Rationale of Multinational Corporations
  12. Business Strategies of Multinational Corporations
  13. Reasons for Growth of Multinational Corporations
  14. Criticism of Multinational Corporations in Developing Countries
  15. Suggestions Implemented by MNCs to Avoid Criticism
  16. Destination India for Multinational Corporations

Multinational Corporation – Meaning

A multinational corporation (MNC) or transnational corporation (TNC), also called multinational enter­prise (MNE), is a corporation or an enterprise that man­ages production or delivers services in more than one country. It can also be referred as an international cor­poration.

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The International Labour Organization (ILO) has defined an MNC as a corporation which has its man­agement headquarters in one country known as the home country and operates in several other countries known as host countries.

The first modern MNC is generally thought to be the Dutch East India Company. Nowadays many corpora­tions have offices, branches or manufacturing plants in different countries than where their original and main headquarter is located.

This often results in very powerful corporations that have budgets that exceed some national GDPs. Multina­tional corporations can have a powerful influence in local economies as well as the world economy and play an important role in international relations and globalization. The presence of such powerful players in the world economy is reason for much controversy.

Business organizations have their own relationship with the changing environment of the business. Organizational survival, growth and success require an effective adjustment with the environment. Regulatory framework of business within the country, promo­tional support and participation of the government also decides the fate of the business organization.

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Continuous increase in the size of business organizations is the law of the day. It is the direct result of improvement in organizational operation’s viability and effectiveness. Structural changes in organizations are effected by the requirement of the business environ­ment.

Movement of organisation from one region to another region and from one country to another country actually governed by the viable opportunities available in that particular region or country. Availability of large customer base, cheap labour force, supply of raw materials and other natural resources actually motivate the business organizations to undertake business operations in that particular country.

Availability of productive and trading facilities and opportunities basically encourage and motivate the foreign companies to exfoliate them in the host countries. Establishment of East India Company in 1600 is the best example in this direction. There are two fundamental ways for companies and individuals to own assets in foreign countries viz. portfolio investment and direct investment.

Portfolio investment gives companies and individuals a claim on profit of companies in foreign countries in which they have purchased shares. However, they do not have right to participate in the management. On the other hand, direct investment is nothing but a sort of buying and management of assets in foreign countries. The major difference between the portfolio investment and direct investment is the management and permanent ownership of assets through foreign outfits.

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Thus, portfolio investment is an investment in foreign assets whereby a company purchases shares in companies that own those assets. But direct investment is an investment in foreign assets whereby a company purchases assets that it manages directly. Eagerness of companies of home countries to purchase, control and manage the assets in host countries is the basis for the development of multinational corporations.

Especially during 19th century, most companies restricted their operations to a single country. They were engaged in domestic business which deals with organizational activities that take place within the borders of one country. “It also included hiring employees, obtaining funds, arranging raw materials, selling finished goods and other businesses that could be performed within the home country. Actually home country is the nation where the company has it’s headquarter. There were certain firms that operated outside their home countries generally sent locally made goods to countries where those products were not available or received needed resources (such as raw material) from countries where such stables were plentiful”.

However, industrial revolution accelerated the pace of modern production systems and in the changed scenario; managers were not only able to make and sell products nationally but eventually to offer them in other countries. “By crossing national borders to acquire resources or to sell products these firms become involved in international business.”

International business is concerned with those activities which take place across national borders in more than one country. Increasing level of business activities encourages the corporate enterprises to move beyond the domestic business activities and cross borders in search of resources or customers to conduct international business.


Multinational Corporation – Definitions Provided by Leonard Gomes, James C. Baker, Bartlett and Ghosal and ILO Report

The multinational corporation (MNC) has now become a household word. Although its definition is still the subject of debate what distinguishes an MNC from its predecessors, companies with foreign subsidiaries or affiliates, is direct investment abroad and direct interest in the business environment in which it has such investments.

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In this context, it is important to say that the hallmarks of an MNC are control and integration of affiliates. In practice, the concept of multi-nationality has different dimensions and due to this there is a problem in having a simple universally agreed definition of the term multinational corporation.

However, “direct investment is characterized by an active involvement in the management of foreign invest­ments typically through a multinational enterprise (MNE), a large corporation with operation and divisions spread over several countries but controlled by a central headquarter.”

According to the ILO Report. “The essential nature of the multinational enterprise lies in the fact that managerial headquarter is located in one country (referred to for convenience as the home country) while the enterprise carries out operations in a number of other countries as well (host countries).”

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Leonard Gomes also defined MNCs as “a corporation that controls production facilities in more than one country and such facilities having been acquired through the process of foreign direct investment. Firms that participate in international business, however large, they may be, soley by exporting or by licensing technology are not multinational enterprises.”

James C. Baker defines a multinational corporation as a company- (i) which has direct investment base in several countries; (ii) which generally derives 20 to 50 per cent of its net profit from foreign operations; and (iii) whose management makes policy decisions based on the alternatives available anywhere in the world.

According to Bartlett and Ghoshal “the multinational organization is defined by the following characteristics- a decentralized federation of assets and responsibilities, a management process defined by simple financial control system overlaid on informal personal coordination and a dominant strategic mentality that viewed the company’s worldwide operations as a portfolio of national business. In a multinational organization the decision obviously are decentralized.”

Thus, on the basis of above definitions Multinational Corporation can be defined as a corpora­tion that produces goods or services in several countries and manages its global activities from organizational headquarter located in one country.


Multinational Corporation – Concept

“The multinational is a business unit which operates simultaneously in different parts of the world. In some cases the manufacturing unit may be in one country, while the marketing and investment may be in other countries. In other cases all the business operations are carried out in different countries, with the strategic headquarters in any part of the world.”

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For example, the Manhattan based company, Colgate Palmolive Inc., which manufactures and markets dental care, health care, hair care and skin care products, in more than 120 countries. Procter and Gamble, based in Cincinnati also has similar product lines and operates in more than 150 countries.

There are multinationals that have a total turnover exceeding the GDP of many small or developing nations. The Minnesota Mining and Manufacturing Company, called for short, 3M, has more than a thousand product lines. The top three multinationals in the world today, could combine to purchase a small nation.

Few multinationals have a total employee force that is larger than the population of a country and may even have the power to bring down governments. Therefore, multinationals have money power, muscle power, managerial power, technology power and political power through which they influence many economies in the world.

At one time American based multinationals ruled the world. Today, many Japanese, Korean, European and Indian multinationals have spread their wings in many parts of the world.

The strategic nerve centre is the company’s headquarters, where major decisions are taken and policies are formulated.

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The main roles of a typical multinational at headquarters are:

1. Strategic role- It is a policy making entity for operations worldwide.

2. Execution- Decisions on implementation of policies, methods and means of operation, in different countries.

3. Control- Since the operations are vast it is necessary to maintain control over global strategies, costs, systems and operations.

Every multinational has to operate through its satellite units, called subsidiaries. Therefore, multinationals have headquarters and a number of subsidiaries.

As an expansion process, few multinationals are fast expanding their operations in developing countries. While doing so, the Headquarter is involved in a serious risk analysis and finally select the country where they are comfortable to do business. At the headquarters, the experts from political science, economics, accountancy, sociology and diplomacy are advising the top management on different issues prior to entry into any country.

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In most cases the power rests with the main company at its headquarters. However, a few multinationals do give considerable powers to their subsidiaries. Currently, multinationals are motivated solely by revenue wherein profits are the main criteria.


Multinational Corporation – Characteristics: Mode of Transfer, Timing Flexibility and Value

MNCs will always look out for opportunities. They carry out risk analysis, and send their personnel to learn and understand the business climate. They develop expertise in understanding the culture, politics, economy and legal aspects of the country that they are planning to enter.

They look at the global, rather than only local potential. The essential element that distinguishes the true multinational is its commitment to manufacturing, marketing, developing R&D, and financing opportunities throughout the world, rather than just thinking of the domestic situation.

Some of characteristics of MNCs are:

1. Mode of Transfer:

An MNC has considerable freedom in selecting the financial channels through which funds or profits or both are moved. For example, patents and trademarks can be sold outright or transferred in return through contractual binding or royalty payments. Similarly, the MNC can move profits and cash from one unit to another by adjusting transfer prices on intercompany sales and purchases of goods and services.

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MNCs can use these various channels, singly or in combination, to transfer funds internationally, depending on the specific circumstances encountered.

2. Timing Flexibility:

Some of the internationally generated financial claims require a fixed payment schedule; others can be accelerated or delayed. MNCs can extend trade credit to their other subsidiaries through open account terms, say from 90 to 180 days. This gives a major leverage to financial status. In addition, the timing for payment of fees and royalties may be modified when all parties to the agreement are related.

3. Value:

By shifting profits from high-tax to low-tax nations, MNCs can reduce their global tax payments. In addition, they can transfer funds among their various units, which allow them to circumvent currency controls and other regulations and to tap previously inaccessible investment and financing opportunities.


Multinational Corporation – Types: Colonial Companies, Resource Based Companies, Public Utility Companies,Manufacturing Companies,Service Institutions and a Few Others

The multinational corporations may be divided into seven categories depending upon their activities. They may be colonial companies, resource based companies, public utilities companies, manufacturing companies service institutions, licensing and turnkey projects.

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Their brief description is as follows:

1. Colonial Companies- Colonial companies are those companies which are established to procure raw materials for the parental office at native country. They monopolies the purchasing of raw materials. They have rights to operate in different countries. East India Company’s name can be cited in this respect.

2. Resource Based Companies- It is the second category of multinationals. These companies purchase raw resources from several countries. They do not believe in exploitation and purchasing of mineral resources. Many developed and developing countries have propagated such types of companies.

3. Public Utility Companies-The public utility companies are established to help the people of the country. The companies enjoy the position of natural monopoly. The multinational in public utility concerns do not remain longer because of nationalism.

4. Manufacturing Companies-The manufacturing companies are engaged in several manufacturing processes. They produce qualitative and quantitative goods in a huge quantity. They invest adequate capital in foreign countries to get higher rate of return. Whenever multinationals or MNCs are referred they indicate to manufacturing companies.

5. Service Institutions- They know the service technology and provide suitable and sufficient services to the people of the countries where they are established. Banking, Insurance, Hotels, Airways, etc., are the several examples of such companies.

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6. Licensing-The multinationals grant licenses to some domestic companies to use their trademarks and technical know-how. The license is granted to exploit potential market in the host countries who pay license fees annually to the multinationals to use their know-how for a fixed period. The license fee may be in lump sum to purchase the know-how.

7. Turnkey Project -Turnkey project is taken up by the multinationals to complete a specific job within a fixed period. The contract for a turnkey project is made on open tender or on the basis of cost plus fee for the services. There may be limit on the total cost. If the multinational exceeds the cost, it has to bear the excess cost.


Multinational Corporation – Strategic Approaches: Innovation Based Multinationals, The Mature Multinationals and The Senescent Multinationals

In order to uncover new and potentially profitable projects, a good understanding of multinational strategies is necessary.

The three broad categories of multinational corporations and their associated strategies are examined below:

1. Innovation Based Multinationals:

Firms such as IBM, Philips and Sony create barriers to entry for others by continually introducing new products and differentiating existing ones, both domestically and internationally. Firms in this category spend large amounts of money on R&D and have a high ratio of technical to factory personnel.

Their products are typically designed to fill a need perceived locally that often exists abroad as well. In the field of chemicals and pharmaceuticals Hopkins and E. Merck adopt the same strategy.

2. The Mature Multinationals:

The principal approach in such firms is the presence of economies of scale. It exists whenever there is an increase in the scale of production, marketing and distribution costs could be increased in order to retain the existing position or more aggressive.

The existence of economies of scale means there are inherent cost advantages of being large. The more significant these economies of scale are, the greater will be the cost disadvantage faced by a new entrant in the same field in a given market.

(a) Reduction in Promotion Costs:

Some companies such as Coca Cola and Proctor & Gamble take advantage of the fact that potential entrants are wary of the high costs involved in advertising and marketing a new product. Such firms are able to exploit the premium associated with their strong brand names. MNCs can use single campaign and visual aspects in all the countries simultaneously with different languages like Nestle’s Nescafe.

(b) Cost Advantage through Multiple Activities:

Other firms take advantage of economies of scope. Economies of scope exist whenever the same investment can support multi-profitable activities, which are less expensive. Examples abound of the cost advantages of producing and selling multiple products related to common technology, production facilities and distribution network.

For example, Honda has increased its investment in small engine technology in the automobile, motorcycle, lawn mower, marine engine, chain saw and generator business.

3. The Senescent Multinationals:

There are some product lines where the competitive advantages erode very fast.

The strategies followed in such cases are given below:

(a) One possibility is to enter new markets where little competition currently exists. For example Crown Cork & Seal, the Philadelphia-based maker of bottle tops and cans, reacted to the slowing of growth and heightened competition in business in the United States by expanding overseas.

It sets up subsidiaries in such countries as Thailand, Malaysia, Zambia and Peru, estimating correctly that in these developing and urbanizing societies, people would eventually switch from home grown produce to food in cans and drinks in bottles.

(b) Another strategy often followed when senescence sets in is to use the firm’s global scanning capability to seek out lower cost production sites. Costs can then be minimised by integration of the firm’s manufacturing facilities worldwide. Many electronics and textile firms in the US shifted their production facilities to Asian locations such as Taiwan and Hong Kong, to take advantage of the lower labour costs.


Multinational Corporation Regulations of MNCs

In view of the fact that MNCs do possess a potential that can be gainfully exploited, most of the UDCs have cho­sen to regulate their activities rather than to dispense with them altogether-an effort to separate the gold from the dross.

Threat of nationalization is an effective tool of regu­lation. Although nationalization should be restored to only in the extreme situations, the very fact that it can be ex­ercised makes the corporations act in a disciplined man­ner.

The Government may allow collaboration in certain selected industries or certain selected regions where the operation of MNC is felt highly suitable. Similarly, the Government may deny permission in specific cases. The right of self-determination in economic matters is not a myth.

Recently, France refused to give Governmental permission to a Korean firm which had, through legiti­mate means, sought to acquire a controlling interest in the French electronic company, Thompson.

MNCs may be allowed to invest for specific periods. Thus, after a certain period of time restrictions may be imposed on foreign holdings, or there may be provision for gradual disinvestment.

The Indian economy is going through a transition phase where the restructuring of industries and firms takes place in the form of privatization, globalization and liber­alization after the implementation of the Structural Ad­justment Programmes (SAP) in the Indian economy.

With the rapid rate of the integration of Indian economy with the rest of the world and with the ongoing attempts of privatization, globalization and liberalization, the subject matter of International Business has been getting more and more acceptance even in developing countries like India.

The liberalized approach towards foreign direct investment was initiated in India in the first half of the 1990s as part of the structural adjustment programme. This is evident from the policy changes on (a) sectors open to foreign direct investment; (b) level of foreign equity participation; and (c) approval procedures.

Today, as a result of these policy reforms, India is also one among the developing countries that try to attract more foreign direct investment and attempt to increase the volume of foreign trade.


Multinational Corporation – Market Imperfections of MNCs

It may seem strange that a corporation can decide to do business in a different country, where it doesn’t know the laws, local customs or business practices. Why is it not more efficient to combine assets of value overseas with local factors of production at lower costs by renting or selling them to local investors?

One reason is that the use of the market for coordi­nating the behaviour of agents located in different coun­tries is less efficient than coordinating them by a multina­tional enterprise as an institution The additional costs caused by the entrance in foreign markets are of less interest for the local enterprise.

According to Hymer, Kindle Berger and Caves, the existence of MNEs is rea­soned by structural market imperfections for final prod­ucts. In Hymer’s example, there are considered two firms as monopolists in their own market and isolated from competition by transportation costs and other tariff and non-tariff barriers.

If these costs decrease, both are forced to competition; which will reduce their profits. The firms can maximize their joint income by a merger or acquisi­tion which will lower the competition in the shared mar­ket. Due to the transformation of two separated compa­nies into one MNE the pecuniary externalities are going to be internalized. However, this doesn’t mean that there is an improvement for the society.

This could also be the case if there are few substi­tutes or limited licenses in a foreign market. The consoli­dation is often established by acquisition, merger or the vertical integration of the potential licensee into overseas manufacturing. This makes it easy for the MNE to en­force price discrimination schemes in various countries.

Therefore, Hymer considered the emergence of multi­national firms as “an (negative) instrument for restrain­ing competition between firms of different nations”.

Market imperfections had been considered by Hymer as structural and caused by the deviations from perfect competition in the final product markets. Further reasons are originated from the control of proprietary technology and distribution systems, scale economies, privileged ac­cess to inputs and product differentiation.

In the absence of these factors, market is fully efficient. The transaction costs theories of MNEs had been developed simulta­neously and independently by McManus (1972), Buckley & Casson (1976) Brown (1976) and Hennart (1977, 1982).

All these authors claimed that market imperfec­tions are inherent conditions in markets and MNEs are institutions which try to bypass these imperfections. The imperfections in markets are natural as the neoclassical assumptions like full knowledge and enforcement don’t exist in real markets.


Multinational Corporation International Power: Tax Competition, Market Withdrawal, Lobbying, Patents, Government Power, Micro-Multinationals and a Few Others

i. Tax Competition:

Multinational corporations have played an important role in globalization. Countries and sometimes subnational regions must compete against one another for the estab­lishment of MNC facilities and the subsequent tax rev­enue, employment and economic activity.

To compete, countries and regional political districts sometimes offer incentives to MNCs such as tax breaks, pledges of gov­ernmental assistance or improved infrastructure, or lax environmental and labor standards enforcement. This process of becoming more attractive to foreign invest­ment can be characterized as a race to the bottom, a push towards greater autonomy for corporate bodies, or both.

However, some scholars for instance the Columbia economist Jagdish Bhagwati, have argued that multina­tionals are engaged in a ‘race to the top.’ While multina­tionals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of lax environmental regulation or poor labour standards.

As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardization. Thus, MNCs are likely to tai­lor production processes in all of their operations in con­formity to those jurisdictions where they operate (which will almost always include one or more of the US, Japan or EU) which has the most rigorous standards.

As for labor costs, while MNCs clearly pay workers in, e.g., Vietnam, much less than they would in the US (though it is worth noting that higher American productivity—linked to technology—means that any comparison is tricky, since in America the same company would probably hire far fewer people and automate whatever process they per­formed in Vietnam with manual labour), it is also the case that they tend to pay a premium of between 10% and 100% on local labor rates.

Finally, depending on the na­ture of the MNC, investment in any country reflects a desire for a long-term return. Costs associated with es­tablishing plant, training workers, etc., can be very high; once established in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as, e.g., expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of unnecessary ‘li­censes,’ etc.

Thus, both the negotiating power of MNCs and the supposed ‘race to the bottom’ may be overstated, while the substantial benefits which MNCs bring (tax revenues aside) are often understated.

ii. Market Withdrawal:

Because of their size, multinationals can have a sig­nificant impact on government policy, primarily through the threat of market withdrawal. For example, in an ef­fort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price.

When faced with that threat, multinational pharmaceutical firms have sim­ply withdrawn from the market, which often leads to lim­ited availability of advanced drugs. In these cases, gov­ernments have been forced to back down from their ef­forts. Similar corporate and government confrontations have occurred when governments tried to force MNCs to make their intellectual property public in an effort to gain technology for local entrepreneurs.

When compa­nies are faced with the option of losing a core competi­tive technological advantage or withdrawing from a na­tional market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of con­frontation with multinational corporations are large coun­tries such as United States and Brazil, which have viable indigenous market competitors.

iii. Lobbying:

Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environ­mental regulations. There is no unified multinational per­spective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position.

Corporations lobby tariffs to restrict competition of for­eign industries. For every tariff category that one multi­national wants to have reduced, there is another multina­tional that wants the tariff raised.

Even within the U.S. auto industry, the fraction of a company’s imported com­ponents will vary, so some firms favor tighter import re­strictions, while others favor looser ones, says, Ely Oliveira, Manager Director of the MCT/IR: This is very serious and is very hard and takes a lot of work for the owner.

Multinational corporations such as Wall-mart and McDonald’s benefit from government zoning laws, to create barriers to entry.

Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly.

iv. Patents:

Many multinational corporations hold patents to pre­vent competitors from arising. For example, Adidas holds patents on shoe designs, Siemens A.G holds many pat­ents on equipment and infrastructure and Microsoft ben­efits from software patents. The pharmaceutical compa­nies lobby international agreements to enforce patent laws on others.

v. Government Power:

In addition to efforts by multinational corporations to affect governments, there is much government action intended to affect corporate behavior. The threat of na­tionalization (forcing a company to sell its local assets to the government or to other local nationals) or changes in local business laws and regulations can limit a multinational’s power. These issues become of increas­ing importance because of the emergence of MNCs in developing countries.

vi. Micro-Multinationals:

Enabled by Internet based communication tools, a new breed of multinational companies is growing in num­bers. These multinationals start operating in different countries from the very early stages. These companies are being called micro-multinationals. What differentiates micro-multinationals from the large MNCs is the fact that they are small businesses.

Some of these micro-multina­tionals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries. Internet tools like Google, Yahoo, MSN, Ebay and Amazon make it easier for the micro-multinationals to reach potential cus­tomers in other countries.

Service sector micro-multinationals, like Facebook, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various coun­tries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities.


Multinational Corporation – Organizational Framework: Branches, Subsidiaries, Joint Venture Companies, Franchise Holders and a Few Others

A multinational corporation can organize its operation in different countries through the following methods:

1. Branches:

The easiest form of expanding business operations is to set up overseas branches. These branches are generally foreign outfits of the parent company located in the host countries. Legally, these branches are dependent on their parent company. As per the Indian Companies Act, 1956, all those companies, which are incorporated outside India and have developed business interest in India, are called as foreign companies.

2. Subsidiaries:

It is the popular method of direct investment generally used to start up or overtake total ownership and control of another company making the second company as a wholly owned subsidiary (developed in host country) of the parent company (headquartered in the home country).

“Wholly owned subsidiary involves more invest­ment, ownership control and risk than having only a partial interest in another company. But it can also allow the parent company the freedom to take whatever actions are necessary to make subsidiary perform as expected and to provide the parent with needed resources to improve its performance.”

3. Joint Venture Companies:

“A joint venture is an arrangement in which two or more organizations cooperatively develop, produce or sell goods or services. The parent firms are independently of each other but share control over the joint venture. In some cases one company supplies the materials and the products expertise, while the other supplies the knowledge to do business in the country they are targeting.”

Thus, joint venture is a business enterprise or system in which domestic and foreign companies share the cost of developing new products or building production facilities in a foreign country. “A joint venture may be the only way to enter certain countries. Where by law, foreigners cannot own business. In other situations, joint ventures let companies pool technological knowl­edge and share the expense and risk of research that may not produce marketable goods.”

4. Franchise Holders:

It is fastest growing form of international licensing in which the licensor supplies a complete package of goods, services and materials generally accompanied by a well-known brand name to the licensee. It is also a special kind of arrangement by which an affiliate working in the host country produces or markets the products of a multina­tional corporation after obtaining a license from it.

5. Global Strategic Partnership:

It is an alliance formed by an organization with one or more foreign countries generally with an eye towards exploiting the other countries opportu­nities and towards assuming leadership in either supply or production.

For the successful operations of global strategic partnership following conditions are to be fulfilled:

(i) Each partner must believe the other has something it needs.

(ii) The partners must choose a strategy before they start to do business not afterward.

(iii) They must share the same attitude towards control of new business.

(iv) Working of partners should be effective in terms of operating styles, corporate cultures and moral values.

(v) They must agree to discard whatever organization forms that do not work

(vi) There must be some ultimate decision maker and some of making decision stick. Otherwise, the new venture suffers from unclear lines of authority, poor communi­cation and slow decision making.


Multinational Corporation Rationale of MNCs: Financial Strength, Product Innovation, Effective Technological Background, Marketing Strength and Market Explanation

Rationales of MNCs are as follows:

1. Financial Strength:

Finance is the lifeblood of a company; huge financial resources are available with the MNCs. They are quite efficient in generation of funds in one country and investing them in another country. Thus, by this action, they are able to improve the level of investment in the host country. They are also successful in raising resources at international level as they hold good reputation in the market.

2. Product Innovation:

Product innovation is necessary to remain stay in the market for a long period. MNCs incur huge expenditure on developing R&D facilities in the host country as R&D facilities are required to provide for developing new products and superior design of existing products. Consumers can also be satisfied with the products and services being provided by the MNCs in the host country.

3. Effective Technological Background:

In most of the cases host countries are the underde­veloped or developing economies. They need accelerated pace of technological develop­ment in the country. Host countries need transfer of technology from MNCs to exploit their local resources in profitable way. In practice, MNCs are quite sensitive to these requirements and they transfer their technology to produce goods and services in the host countries.

4. Marketing Strength:

Since, MNCs are professionally managed; they hold more reliable and latest market information system. Market reputation of MNCs is also generally good and they feel less problem in selling their products. Effective advertising and sales promotion techniques also provide an additional advantage to these MNCs in marketing of their product or service in the host country.

5. Market Expansion:

Generally, MNCs operate their activities on large-scale basis and having a large sized structure, they try to build up international image of the host countries. With the help of their production bases and service network in the host country, they provide better export potentialities for the product being produced in the host countries. Thus, MNCs help the host country in its expansion of market territory.


Multinational CorporationBusiness Strategies: Market Imperfection, Tax Competition, Market Withdrawal, Lobbying, Patents, Micro Multinationals and a Few Others

Following are the major business strategies of Multinational Corporations:

1. Market Imperfections:

MNCs generally create market imperfections. The use of the market for coordinating the behaviour of agents located in different countries is less efficient than coordinating them by a multinational enterprise as an institution. The additional costs caused by the entrance in foreign markets are of less interest for the local enterprise.

The existence of MNEs is reasoned by structural market imperfections for final products. The firms can maximize their joint income by a merger or acquisition which will lower the competition in the shared market. Due to the transformation of two separated companies into one MNE the pecuniary externalities are going to be internalized.

However, this doesn’t mean that there is an improvement for the society. This could also be the case if there are few substitutes or limited licenses in a foreign market. The consolidation is often established by acquisition, merger or the vertical integration of the potential licensee into overseas manufacturing. This makes it easy for the MNE to enforce price discrimination schemes in various countries. Therefore, there is opportunity for the emergence of multinational firms as “an (negative) instrument for restraining competition between firms of different nations”.

Market imperfections are generally considered as structural and caused by the deviations from perfect competition in the final product markets. Imperfections are originated from the control of proprietary technology and distribution systems, scale economies, privi­leged access to inputs and product differentiation.

In the absence of these factors, markets are fully efficient. It is claimed that market imperfections are inherent conditions in markets and MNEs are institutions that try to bypass these imperfections. The imperfec­tions in markets are natural as the neoclassical assumptions like full knowledge and enforcement don’t exist in real markets.

2. Tax Competition:

Multinational corporations have played an important role in globaliza­tion. Countries and sometimes sub-national regions must compete against one another for the establishment of MNC facilities, and the subsequent tax revenue, employment, and economic activity.

To compete, countries and regional political districts sometimes offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labour standards enforcement. This process of becoming more attractive to foreign investment can be characterized as a race to the bottom, a push towards greater autonomy for corporate bodies, or both.

While multinationals certainly regard a low tax burden or low labour costs as an element of comparative advantage, studies suggest that MNCs deliberately avail themselves of tax environmental regulation or poor labour standards. Basically, MNC profits are tied to operational efficiency, which includes a high degree of standardisation. Thus, MNCs are likely to tailor production processes in all of their operations in conformity to those jurisdictions where they operate and maintain most rigorous standards.

As for labour costs, while MNCs clearly pay workers in, e.g. Vietnam, much less than they would in the US it is also the case that they tend to pay a premium of between 10% and 100% on local labour rates. Finally, depending on the nature of the MNC, investment in any country reflects a desire for a long-term return.

Costs associated with establishing plant, training workers, etc., can be very high; once established in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as, e.g., expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of unnecessary ‘licenses,’ etc. Thus, both the negotiating power of MNCs and the supposed ‘race to the bottom’ may be overstated, while the substantial benefits that MNCs bring (tax revenues aside) are often understated.

3. Market Withdrawal:

Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal. For example, in an effort to reduce healthcare costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price.

When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when govern­ments tried to force MNCs to make their intellectual rights public in an effort to gain technology for local entrepreneurs.

When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. Some MNCs like Coca Cola and IBM even left India in the late 1970s specially during Janta Party Government (after the announcement of Industrial Policy 1977) because these MNCs were not ready to accept the conditions as given in the New Industrial Policy of 1977.

This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil which have viable indigenous market competi­tors.

4. Lobbying:

Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations. There is no unified multinational perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position.

Corporations lobby tariffs to restrict competition of foreign industries. For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Thus, it is quite serious and very hard and takes a lot of work for the owner. Multinational corporations such as Wal-mart and McDonald’s benefit from government zoning laws, to create barriers to entry. Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly.

5. Patents:

Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefits from software patents. The pharmaceutical companies lobby international agreements to enforce patent laws on others. Multinational companies through their subsidiaries are always trying to own these patents for penetrating in the foreign market.

6. Adjustments with Government Power:

MNCs are generally interested to mould the governmental policies in their own favour. However, they always conscious enough to adjust with the government policies and programmes in case of need. Thus, in addition to efforts by multinational corporations to affect governments, there is much government action intended to affect corporate behaviour.

The threat of nationalization (forcing a company to sell its local assets to the government or to other local nationals) or changes in local business laws and regulations can limit a multinational’s power. These issues become of increasing importance because of the emergence of MNCs in developing countries.

7. Micro Multinationals:

Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers. These multinationals start operating in different countries from the very early stages. These companies are being called micro- multinationals. The point which differentiates micro-multinationals from the large MNCs is the fact that they are small businesses.

Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries. Internet tools like Google, Yahoo, MSN, EBay and Amazon make it easier for the micro-multinationals to reach potential customers in other countries.

Service sector micro-multinationals, like Facebook, Alibaba, etc., started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower travelling costs to create unique business opportunities.

Low cost SaaS (Software as a Service) suites make it easier for these companies to operate without a physical office. There’s no longer a brain drain but brain circulation. People now doing startups understand what opportunities are available to them around the world and work to harness it from a distance rather than move people from one place to another.


Multinational CorporationReasons for Growth: Non-Transferrable Knowledge, Protecting Reputations, Exploiting Reputations and a Few Others

1. Non-Transferable Knowledge:

It is often possible for an MNC to sell its knowledge in the form of patent rights and to license a foreign producer. This relieves the MNC the need to make foreign direct investment. However, sometimes an MNC that has a production process or product patent can make a larger profit by carrying out the production in a foreign country itself.

The reason for this is that some kinds of knowledge cannot be sold and which are the result of years of experience.

2. Protecting Reputations:

Products develop a good or bad name, which transcends international boundaries. It would be very difficult for an MNC to protect its reputation if a foreign licensee does an inferior job. Therefore, MNCs prefer to invest in a country rather than licensing and transfer expertise, to ensure the maintenance of their good name.

3. Exploiting Reputations:

Sometimes, MNCs invest to exploit their reputation rather than protect their reputation. This motive is of particular importance in the case of foreign direct investment by banks, because in the banking business an international reputation can attract deposits. If the goodwill is established the bank can expand and build a strong customer base.

Quality service to a large number of customers is bound to ensure success. This probably explains the tremendous growth of foreign banks such as Citibank, Grindlays and Standard Chartered in India.

4. Protecting Secrecy:

MNCs prefer direct investment, rather than granting a license to a foreign company if protecting the secrecy of the product is important. While it may be true that a licensee will take precautions to protect patent rights, it is equally true that it may be less conscientious than the original owner of the patent.

5. Product Life Cycle Hypothesis:

It has been argued that opportunities for further gains at home eventually dry up. To maintain the growth of profits, a corporation must venture abroad where markets are not so well penetrated and where there is perhaps less competition.

This hypothesis perfectly explains the growth of American MNCs in other countries where they can fully exploit all the stages of the life cycle of a product. A prime example would be Gillette, which has revolutionised the shaving systems industry.

6. Availability of Capital:

The fact that MNCs have access to capital markets, has been advocated as another reason why firms themselves move abroad. A firm operating in only one country does not have the same access to cheaper funds as a larger firm. However, this argument, which has been put forward for the growth of MNCs has been rejected by many critics.

7. Strategic FDI:

The strategic motive for making investments has been advocated as another reason for the growth of MNCs. MNCs enter foreign markets to protect their market share when this is being threatened by the potential entry of indigenous firms or multinationals from other countries.

8. Avoiding Tariffs and Quotas:

MNCs prefer to invest directly in a country in order to avoid import tariffs and quotas that the firm may have to face if it produces the goods at home and ship them. For example, a number of foreign automobile and truck producers opened plants in the US to avoid restrictions on selling foreign made cars.

Automobile giants like Fiat, Volkswagen, Hyundai, Honda and Mazda are entering different countries not with the products but with technology and money.

9. Symbiotic Relationships:

Some firms have followed clients who have made foreign direct investment. This is especially true in the case of accountancy and consulting firms. Large US accounting firms, which know the parent companies’ special needs and practices, have opened offices in countries where their clients have opened subsidiaries.

These US accounting firms have an advantage over local firms because of their knowledge of the parent company and because the client may prefer to engage only one firm in order to reduce the number of people with access to sensitive information. Templeton, Goldman Sachs and Ernst and Young are moving with their clients even to small countries like Panama, Mauritius, Malta and Sri Lanka.


Multinational Corporation – Criticism

1. They do not give enough importance to the society in which they operate. An example is Union Carbide, which did not show concern for the people of Bhopal.

2. While many Indian companies, such as the Tatas and Birlas allocate funds for charitable works like hospitals, temples and scholarships for higher studies, not many MNCs do so.

3. They generate profits when the situation is favourable, but will close their business if any risk is anticipated. E.g., many multinationals pulled out of South East Asia during the currency crisis.

4. Active participation is needed in developing countries for infrastructure, especially roads, ports, power plants etc.

However, most multinationals in India deal in non-essential products such as soaps, shampoos, lotions and other consumer products. Hardly any multinational is getting involved in developing activities such as infrastructure.

5. There is a misconception that MNCs generate employment. However the managerial cadre and the sales force personnel do not represent real employment in developing countries.

6. Due to aggressive promotion and money power, MNCs can venture into small towns in all parts of the country, leading to the decline of small industries.

7. One Union Carbide could cost the life of thousands of living beings in Bhopal due to sheer negligence and disrespect for the pollution control norms. It shows that just for earning money such a multinational never had a concern for valuable human lives.


Multinational CorporationSuggestions Implemented by MNCs to Avoid Criticism

Following suggestions are required to be implemented by MNCs to avoid criticism:

(i) They should honour the national sovereignty of host countries and work as per the their regulatory framework of business and national ethos.

(ii) They should help in achieving the economic goals, development objectives and socio- cultural values of the host countries.

(iii) They should adopt business ethics and best business practices like timely payment of required taxes, abstention from involvement in anticompetitive practices, consumer and environmental protection and to work as a model employer.

(iv) They should be sensitive to human rights, corporate reporting, corporate governance, better competition etc.

(v) They should contribute in the development of science and technology in the host country. They should also work for the development of R&D facilities in the host country rather than transferring obsolete technology for production in the host country.


Multinational Corporation in India

Following are the reasons for Multinational Companies to consider India as a preferred destination for business in Future:

1. Huge Market Potential:

India is a developing economy. Per capita income is increasing due to high growth rate in gross domestic product. Levels of saving, investment and employ­ment opportunities are increasing at a faster rate. Rate of literacy is also improving. Life style is also under change.

Due to these factors, MNCs are considering India as an emerging market for their products and services. Drugs and pharmaceuticals, capital goods, white goods automobiles, banking and financial services, food products and beverages are the major sectors where MNCs are playing their important roles.

2. FDI Attractiveness:

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 foreign investments by relaxing many of its policies. As a result, a number of multinational companies have shown interest in Indian market.

Since 1991 Government of India has started the economic reform process in the economy. Liberalisation, privatization and globalization have created conducive environment for foreign investment specially foreign direct investment. Several sectors have been opened for FDI investment in terms of different scales. It has given favourable opportunities to multinational companies to invest huge fund under direct investment programme. The India as destination for FDI has been attracting huge amount for accelerating the pace of economic development.

3. Labour Competitiveness:

Developing economy specially India is quite labour competitive in comparison to developed economies like USA. Availability of knowledge workers have also motivated MNCs to select India as an investment destination. With the result MNCs are quite motivated to set up their production and service base in India in place of their host countries.

Since labour is quite cheap here, MNCs are able to reduce their overall cost of production. Suzuki Motors Corporation is best example which is quite successful in producing more motor car than in Japan. It is also successful in its export efforts of Suzuki Motor Car to developed nations.

4. Macro-Economic Stability:

Socio economic and political culture of India is quite harmo­nious and stable. Political stability of the country is good enough for attracting FDI. Availability of raw materials, labour, demand for products, capital formation, saving, investment ratio etc., are quite favourable. Economic policies are suitable and favourable for MNCs Continuous evaluation; monitoring and consequential adjustments in economic reforms process actually encourage the MNCs to treat India as their best investment destination.