CHAPTER 26

MULTINATIONAL CORPORATIONS
ORIGIN

• Multinational business operation is not a new concept. It emerged

from mercantilist philosophy.

• The British East India Company, Hudson’s Bay Corporation, and

Royal Africa Company are examples of multinational companies
(MNCs) of the mercantilist era.

• The post–World War II period has, however, witnessed a

changing hand in colonialism, and there emerged a new thrust
for industrial and technological development, as well as the rise of
the United States as the largest industrial power.
MEANING

MNCs are considered as giant firms, which are

engaged in productive activities of a corporate
nature, with headquarters located in one definite
country and having business operations in
different countries.
DEFINITION
There is no universally accepted definition for the term
“multinational corporation”. However, definitions by Jacques
Maisonrouge, President, IMB World Trade Corporation, describes
an MNC as a company that meets five criteria as follows:
1. It operates in many countries at different levels of
economic development.
2. Its local subsidiaries are managed by the nationals.
3. It maintains the complete industrial organisation
including research and development (R&D) facilities in
several countries.
4. It has a multinational Central management.
5. It has a multinational stock ownership.
Aurthor James C Baker defines MNC as a company:

[Link] has a direct investment based in several countries

[Link] generally derives 20 per cent to 50 per cent or more

of its net profits
from foreign operations

[Link] management makes policy decisions based on the

alternatives available anywhere in the world
Hence MNCs are,
[Link] enterprises with huge resources and potentiality

[Link] organization having management, production,

marketing and holdings extended over several countries

[Link] of vitality for international operations

[Link] that encourage a collective transfer of

resources among various countries, at least from the host
countries to the home country and vice versa

[Link] concerns of centralized ownership and control

OBJECTIVES
Generally speaking, MNCs consider international investments to accomplish the
following objectives:
1. To expand the business beyond the boundaries of the home country,
where they were originally established.
2. Minimise the cost of production, especially the labour cost.
3. Capture the lucrative foreign market against international competitors.
4. Avail the competitive advantage internationally.
5. Achieve greater efficiency by producing in local markets and then
exporting the products.
6. Make the diversification intentionally effective so that a steady growth
of business could be achieved.
7. To safeguard the company’s interest in order to get behind the tariff
walls.
8. Make the best use of technological advantages by setting up production
facilities abroad.
9. Establish an international corporate image.
10. Counter the regulatory measures in the parent country.
REASONS FOR THE GROWTH OF MNCs
The important reasons behind the growth of MNCs include the
following:
1. Expansion of the market territory beyond the boundary of the
country due to their international image.
2. Marketing superiorities arising out of its up-to-date market
information system, market reputation, effective advertisements and
sales-promotion techniques, and warehousing facilities.
3. Financial superiorities over national firms.
4. Technological superiority over the national companies of the
underdeveloped countries.
5. Effective product innovations due to its superior R&D facilities.
FAVOURABLE IMPACT OF MNCs
There are a number of arguments in favour of MNCs :
1. MNCs help to increase the investment level and there by, the
income and employment in the host country.
2. They become vehicles for transfering technology especially to
developing countries.
3. MNCs enable the host countries to increase their exports and
decrease their import requirements.
4. They work to equalise the cost of factors of production around
the world.
5. MNCs provide an efficient means of integrating national
economies.
6. MNCs make commendable contribution to R&D due to their
enormous resources.
7. They also stimulate domestic enterprises. To support their own
operations, they encourage and assist domestic suppliers.
8. They help to increase competition and break domestic
monopolies.
9. MNCs help to improve the standard of living in their host
countries.
10. MNCs provide impetus in diversification.
11. They substantially contribute towards professionalisation of
management in the host countries.
12. They contribute substantially to improve the balance of payment
(BoP) position in the host countries.
13. MNCs contribute towards the national exchequer by way of
duties and taxes.
14. MNCs play a vital role in developing the ancillaries in host
counties.
15. MNCs are profit-making enterprises which pay high dividends,
motivating resource mobilisation among the investors in host
countries.
HARMFUL EFFECTS OF THE OPERATIONS OF
MNCs ON INDIAN ECONOMY
The operations of MNCs have had some harmful effects on the Indian economy.
These include the following:
1. Th e main objective of MNCs is profit maximisation and not the
development needs of poor countries; in particular, the
employment needs and relative factor scarcities in these countries.
2. Through their power and fl exibility MNCs inflict heavy damage
on the host countries through suppression of domestic
entrepreneurship, extension of oligopolistic practices, passing on
unsuitable technology and unsuitable products, worsening income
distribution, and so on.
3. MNCs can have an unfavourable effect on the BoP position of the
country through an out- flow of large sums of money in the form
of dividends, profits, royalties, interests, technical fees, and so on,
leading to an increasing volume of remittance which rose from
Rs 72.25 crore in 1969–70 to Rs 813.5 crore in 1989.
4. MNCs cause distraction of competition and acquire monopoly
powers in the long run.
5. The tremendous power of the global corporations may pose a
threat to the sovereignty of the nations in which they do their
business.
6. MNCs retard the growth of employment in the home country.
7. MNCs interfere directly and indirectly in the internal political
affairs and affairs of other sort too, of the host country.
8. They cause harm by faulty technology transfer to capital-
intensive nature, affecting the employment in a labour-supply
economy.
9. They cause a fast depletion of some of the non-renewable natural
resources in the host country.
10. Transfer pricing enables MNCs to avoid taxes by manipulating
prices on the intra-company transactions.
LIBERALISATION AND MNCs
• The liberalization movement was started in 1973. The process
was gradually carried forward to the liberalization measures
initiated in 1991 to attract massive foreign investments.

• In India, liberalization measures initiated in 1991 opened up the

entry of MNCs.

• In India, the provision restricting the acquisition or transfer of

shares of MRTP undertakings in both MRTP Act and the
Companies Act were deleted.

• India had taken different measures to encourage MNCs, i.e.,

removal of import restrictions, LERMS, memorandum to IMF,
FERA and MRTP relaxation, GATT agreements, etc.
ASSESSMENT
• The value added by each of the top 10 MNCs would be in excess
of $3 bn of the GNP of over 80 countries.

• Two-thirds of the total FDI is concentrated in the developed

market economies, where as the remaining one-third in the LDCs.

• Transfer pricing is one of the methods which MNCs use for

carrying over effective transactions for intermediate products
and other current inputs imported by their affiliates.

• Multinationals are able to make any investment for sales promotion and
advertising, and hence, can easily penetrate more into the market and capture a
major share.

• There would not be any harm if MNCs operated in India within

the framework of legal and statutory control.
FUTURE OF MNCs
1) MNCs make substantial contribution in capital formation and
technology development, which are scarce factors in the
underdeveloped countries.

2) The host government’s policies and approaches to foreign

investment, monetary and fiscal policies, manpower availability,
industrial climate, etc., are vital issues for MNCs to take an
investment decision.

3) There were 37,000 multinationals with over 1.7 lakh foreign

affiliates functioning in the world in 1992.