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Monday, November 16, 2009

Multinational Companies/Corporations

Q1: What are the merits and demerits of MNC’s?

Ans: Jacques Maisonrouge, president of IBM world trade corporations defines an MNC as a company that meets five criteria:
1) It operates in many countries at different levels of economic developments.
2) Nationals manage its local subsidiaries.
3) It maintains complete industrial organizations, including R and d and manufacturing facilities in several countries.
4) It has a multinational central management.
5) It has multinational stock ownership.

James C. Baker also defines MNC’s as a company:
1) Which has direct investment base in several countries.
2) Which generally derives from 20% to 50% or more its net profits from foreign operations.
3) Whose management makes policy decisions based on the alternatives available anywhere in the world.

A significant share of the world’s industrial investment, production, employment and trade are accounted for by these more than 65000 MNC’s with over 8,00,000 affiliates.


Multinationals offer advantages to host countries as well as to the countries of their origin as explained below:

Advantages of the MNC’s to the host countries: -
1) Raise the rate of investment: - MNC’s 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. MNC’s are rightly called “ messengers of progress”.
4) Promote export and reduce imports: - MNC’s help the host countries to reduce the imports and promote the exports by raising domestic production. Marketing facilities at global level are provided by MNC’s due to their global business contacts.
5) Provide services to professionals: - MNC’s 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. MNC’s 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: - MNC’s support to enterprises in the host countries in order to support their own operations indirectly. This is how MNC’s support enterprises in the host countries to grow. Even consumers get new goods and services due to the operations of MNC’s.
9) Break domestic monopolies: - MNC’s raise competition in the host countries and thereby break domestic monopolies.

1) Facilitate inflow of foreign exchange: - MNC’s 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. MNC’s make their home countries rich by facilitating inflow of foreign exchange from other countries.
2) Promote global co-operations: - MNC’s 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: -MNC’s ensure optimum utilization of natural and other resources available in their home countries. This is possible due to their worldwide business contacts.
4) Promote bilateral trade relations: -MNC’s facilitate bilateral trade relations between their home countries and the other countries with which they have business relations.

1) Provide outdated technologies: - MNC’s design the technologies, which can be used in different countries. They don’t supply technology to poor countries for industrial development but for profit maximization. The technologies designed for profit maximization and not purely for meeting the needs of developing countries. The technologies supplied may be costly and may be outdated and obsolete or may not be suitable for the needs of developing countries.
2) Harm the national interests: - the activities of MNC’s in the host countries may be harmful to the national interests as MNC’s are solely guided by the profit maximization. They ignore the interests of host countries. MNC’s even make profits at the cost of developing countries.
3) Charge heavy fees: - MNC’s charge heavy fees and service charges from the enterprises in the host countries. They repatriate profits of their subsidiaries to their home countries. This leads the outflow of countries.
4) Develop monopolies: - MNC’s restrict competition and acquire monopoly power in certain areas in the host countries.
5) Use resources recklessly: -MNC’s use the resources in the host countries in a very reckless manner, which leads to fast reduction of non-renewable natural resources.
6) Dominate domestic policies: -MNC’s use their money power for political purposes. They take undue interest in political matters in the host countries. MNC’s are being openly termed as an extension of the imperialistic forces.
7) Adverse effects on life style/culture in the host countries: - MNC’s create demand for goods and services in developing countries through advertising and sales promotion techniques. As a result, people purchase costly/ luxury goods which are not really useful nor within their capacity to purchase. MNC’s create adverse effects on the cultural background of many developing countries.
8) Interfere in economic and political systems: - they put indirectly pressures for the formulation of policies that are favorable to them. They even topple the government in the host countries if its policies are against the MNC’s and their operations.
9) Avoid tax liabilities: - transfer pricing enables multinational corporations to avoid taxes by manipulating prices in the case of intra company transactions.
10) Lead to brain drain in developing countries: - multinationals are now entering in countries like India in a bigger way. They hire qualified technocrats and managerial experts. These people work for a few years in India, acquire experience and relocated as experts in Singapore, Korea or the United States for managing the activities of MNC’s. This leads to brain drain in developing countries.

MNC’S have helped and also harmed the developing countries. It is a peculiar mixture of virtues and vices, boons and banes. However no country can afford to avoid MNC’s only because it has dangers associated with them. It may be concluded that MNC’s constitute a mixed blessing to developing countries. They are helping as well as harming the developing countries. It is rightly said “MNC’s are bound to exist and  eveloping countries have to learn to live with Them”.



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 MNC’s are Japanese. T
He 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 India’s 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 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.

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.


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