Multinational Corporations | India | Economics

In this article we will discuss about:- 1. Introduction to Multinational Corporations 2. Spread of MNCs 3. Role 4. Adverse Effects 5. Regulations 6. MNCs and India.

Introduction to Multinational Corporations:

An important development in the post-war period is that of the spread of multinational corporations (MNCs) as the vehicle of foreign direct investments. These are also called as Transnational Corporations (TNCs).

Salvatore has defined them in these words, “These are the firms that own, control or manage production facilities in several countries.” Paul Streeten and S. Lal have defined MNCs from economic, organisational and motivational viewpoints. The economic definition of MNCs lays stress on the size, geographical spread and magnitude of investment.

As regards the size or scale of operation, a typical MNC has net sales of 100 million dollars or more. From the geographical viewpoint a MNC is not confined to the national frontiers of the country of its origin. It spreads over two or more countries and therefore has an international character. As regards the magnitude of foreign investment, it varies from 25 percent to 100 percent.

From organisational point of view, MNC is one that acts as an organisation, maximising one overall objective for all its units and one which has the whole world (or parts of it) as its area of operation.

In other words, MNC has its subsidiaries or branches spread over in different countries with single headquarter in the country of origin to co-ordinate the activities of all its branches.

From motivational point of view, they emphasize upon a corporate philosophy and the motivation in specifying criteria for multinationality. Its concern is with the firm as a whole and not with any of its constituent unit or any country of its operation.

J. Dunning has defined a multinational corporation as “any enterprise which owns and controls income generating assets in more than one country.”

The chief characteristics of multinational corporations (MNCs) or transnational corporations (TNCs) are as follows:

(i) They operate on a large scale having assets or sales in billions of dollars.

(ii) They operate internationally through a central office in the country of origin.

(iii) They have an oligopolistic structure and deal in differentiated products.

(iv) They try to bring about a collective transfer of resources like machinery, equipment, technological know-how, materials, finance and managerial services.

Spread of MNCs:

During the last few decades, MNCs have assumed a dominant position in international production, trade, investment and technological transfer. A study made by R. Vernon in 1971 listed 100 large MNCs, the total production of which stood at $ 350 billion a year. A large majority of them was controlled by the U.S.A. followed by the United Kingdom. The total number of MNCs in the early 1970’s was about 7000. Some of them had assumed really gigantic scale of operation.

In 1976, the annual operating revenues of General Motors and Exxon, both of the United States, had exceeded the aggregate GNP of all but 22 countries of the world. They had more than 40 subsidiaries operating in 26 countries. Biggest MNCs at that time was ITT which had 708 subsidiaries operating in 67 countries. Its sales were equivalent to one-third of the U.S. balance of payments account.

The biggest MNC in 1997 was General Motors of the United States with a sales turnover of $178.2 billion. Only 9 of the developing countries (China, India, Mexico, Argentina, Brazil, Russia, South Korea, Turkey and Indonesia), according to World Development Report, had a GNP more than that. According to an UNCTAD study published in 1993, the number of MNCs had risen to 37000 accounting for the foreign direct investments (FDI) of $ 2 trillion. One-third of them were controlled by 100 MNCs.

All the MNCs accounted for the foreign sales worth $ 5.5 trillion. The Report says, “The sheer magnitude of this figure may be gauged by a comparison with the total value of world exports in goods and non- factor services, which amounts to $ 4 trillion. Of the latter, one-third took the form of intra-firm trade between parent companies and their foreign affiliates.”

The Report recognises that MNCs have become a major force in the world economy and control one-third of private productive assets and usher in an integrated international product system.

The Report predicts that with growth picking up in the advanced and the LDCs, the long-term strategies of MNCs and continuing liberalisation of policies would lead to significant expansion of foreign direct investment in the 1990’s. According to the United Nations’ World Investment Report 1998, there were more than 53000 MNCs at that time having more than 4,50,000 affiliates. India also made a small beginning in this field during the 1990’s.

There were 691 wholly owned subsidiaries of Indian companies in the foreign countries in 1998. They had a total equity of over Rs. 2000 crores. Most of these subsidiaries were operating in the fields of trading, marketing, hotel, computer software, consultancy, manufacturing and shipping and hydrocarbons.

The US magazine Forbes published in April 2010 the list of 2000 most powerful companies in the world. They accounted for $ 30 trillion in revenues, $ 1.4 trillion in profits, $ 124 trillion in assets and $ 31 trillion in market value. Out of them 515 belonged to the USA, 210 to Japan, 113 to China, 62 to Canada and 56 to India.

Role of MNCs:

The MNCs have become a very powerful force in the world economy during the last few decades. They have exercised a revolutionary effect on international economic system in general and industrial organisation in particular. It has been truly regarded as a remarkable economic phenomenon of the twentieth century. We assess here the role of MNCs from the point of view of the LDCs. The benefits of these organisations are based upon the theory of foreign direct investments.

These are given below:

(i) Transfer of Capital:

The LDCs are invariably faced with the problem of acute shortage of capital. On account of the paucity of domestic saving, these countries are unable to raise the rate of investment upto a desirable level necessary for their long-term steady growth.

The MNCs have abundance of surplus capital resources which become available for the industrial and commercial development of the poor countries. The MNCs become important conduits through which transfer of capital takes place from the capital-abundant to the capital-scarce countries.

(ii) Undertaking of Risk:

There is risk inherent in the development process especially in LDCs in the initial stages of their development. The shortage of capital, small extent of the market, absence of enterprising groups and undeveloped infrastructure signify a high degree of risk in different fields such as mining, oil exploration, power, transport, capital goods industries etc. The MNCs undertake this risk and remove a major barrier in the development of the LDCs.

(iii) Transfer of Superior Technology:

The LDCs are characterised by obsolete and inefficient techniques of production. They lack resources for research and development of better and more efficient techniques. The MNCs attempt to bridge the widening technological gap between the advanced and the LDCs through the transfer of advanced technical know-how sophisticated manufacturing processes and improved skills.

(iv) Development of Markets:

The growth process in LDCs remains inhibited on account of the small size of market. The MNCs have made a unique contribution in enlarging the market for the products manufactured in the LDCs through concerted advertising and global network of sales organisation. They undertake market research and adopt novel and highly efficient methods of marketing.

(v) Development of Human Resources:

The MNCs wants to make use of cheap labour available in LDCs. They provide training to different categories of workers in advanced techniques. In this way they make a highly useful contribution in the creation of skills. This brings about the development of human resources in these countries and raises their productive capacities. It is on account of this contribution of MNCs that they are sometimes called as carriers of knowledge and experience.

(vi) Fuller Utilisation of Natural Resources:

The LDCs have abundance of natural resources such as lands, minerals and water resources. These countries remain undeveloped because they fail to exploit them efficiently and utilise them economically. The MNCs by setting up projects in mining, manufacturing and plantations attempt to make the best possible use of available natural resources in these countries for maximising production and income.

(vii) Creation of Infrastructure:

The development process in the LDCs remains inhibited on account of under-development of economic and social overheads or basic infra-structure which includes means of transport and communications, means of irrigation and power, education and training and health services. The MNCs assist in the creation of economic and social overheads and stimulate growth process in the developing countries.

(viii) Creation of Industrial Linkages:

The industrial structure in any country is highly integrated. The different industries have forward or backward linkages with other industries. If some linked industries remain undeveloped, the whole process of industrialisation can remain blocked. The MNCs sometimes help create those missing links in industrial chain. The creation of those linked industries greatly accelerates the process of industrial expansion.

(ix) Creation of Employment Opportunities:

The expanding activities of MNCs in industrial and commercial spheres lead to the creation of job opportunities for different categories of workers and there is greater use of available manpower in the LDCs.

(x) Favourable Impact on Balance of Payments:

Many MNCs establish manufacturing units in the LDCs not only for catering to the needs of the host country but also for producing goods and services for exports. They are capable of expanding exports of the host countries to a large extent as they have a global marketing organisation. The earning of large amounts of foreign exchange helps in improving the balance of payments position in the developing countries.

In fact, the MNCs ensure the transfer of a ‘package of resources’ to the LDCs and effectively pave the way for their rapid economic transformation.

Adverse Effects of MNCs:

The MNCs are viewed with much distrust in the LDCs because their operations involve exploitation of men, materials and markets of these countries. They have failed to raise upto their expectations and have many adverse consequences for them.

(i) No Commitment to Economic and Social Development:

The LDCs allow MNCs to start and expand their operations in the hope that they will accelerate the development process. In fact the MNCs are highly profit-oriented organisations. They have no commitment to economic and social development of the poor countries. They want only to maximise their profits, no matter the pursuit of this goal involves economic exploitation of these countries.

(ii) Disincentive for Domestic Capital:

The capital-starved poor countries expect that MNCs will contribute in stepping up the rate of their capital formation. No doubt, there is some inflow of capital from abroad but at the same time the domestic capital mobilisation and investment is hit hard and there is not desired increase in the rate of capital formation.

(iii) Low Government Revenues:

It is sometimes thought that the operations of MNCs result in substantial increase in government revenues through different types of taxes. In fact, this benefit does not materialise because MNCs resort to transfer pricing under which the purchases of materials, machinery and equipment are made by them from their branches in other countries at higher prices and manufactured goods transferred to their foreign branches at much lower prices.

These manipulations show lower profits and value of product and cause loss of revenue to the government.

(iv) Low Foreign Exchange Earnings:

It is often supposed that MNCs specialise in exports. They can earn precious foreign exchange for the host countries and relieve their BOP difficulties. In fact, the MNCs do not ensure any substantial increase in the foreign exchange reserves of the host countries. They again resort to the practice of transfer pricing under which the imports of machinery and equipments from their foreign branches are over-priced while at the same time exports from the host country are under-priced. That results in much loss in foreign exchange reserves of the host country.

(v) Unsuited Technology:

The MNCs often make use of highly capital-intensive or labour-saving techniques of production. Such technology may not be in conformity with the resource endowment in the host countries and may aggravate the problem of unemployment. In addition, the host country becomes permanently dependent upon the foreign countries.

(vi) Heavy Cost of Transfer of Technology:

The MNCs charges exorbitant fees, royalties and other charges from the host countries. Thus the LDCs have to bear very heavy cost of transfer of technology.

(vii) No Significant Transfer of Technology:

The LDCs permit the MNCs to operate in the host countries with the expectation that they will promote the transfer of advanced technology. In fact, the MNCs show little interest in the promotion of research and training in the host countries. Key posts are invariably held by the foreigners. They are paid very high salaries and allowances.

Some of the executives of MNCs receive salaries and perquisites even higher than what is received by the heads of state in those countries. The techniques of production are kept as the guarded secrets. They sometimes thrust upon the LDCs a technology which has become out-of-date by their standards. That happens when the turnkey projects are transferred to the less developed countries.

(viii) Drain of Foreign Exchange:

The MNCs are responsible for a persistent heavy drain of foreign exchange from the LDCs in the form of repatriation of capital and remittance of royalties and profits. No such drain is involved when a developing country depends upon the foreign loans.

(iv) Exploitation:

The most serious objection against the MNCs is that these are the agents of exploitation of labour, raw materials and markets at the hands of the foreigners. The MNCs squeeze the famished economies of LDCs for maximising their profits. According to David Korten, these corporations have depleted or destroyed all kinds of capital like natural capital, human capital, social capital and institutional capital.

(v) Harmful for Long-Term Development:

The steady long-term development of the poor countries requires inflow of capital and technology in the modernisation of agriculture, creation of strong capital base and creation of infra-structure. The MNCs, on the other hand, are mostly engaged in consumer goods industries.

The strong MNCs do not permit the other firms to grow. The domestic enterprise remains in a state of demoralisation. It is not possible for the local firms to face stiff competition from the powerful MNCs. The whole situation created by MNCs is clearly detrimental for the long-term sustained and rapid growth of the LDCs.

Regulations of MNCs:

The LDCs feel that MNCs can transfer a package of development inputs such as capital, advanced technology, management etc. and stimulate the process of their development. That is why several tax and other incentives are offered to them to extend their operations. But the exploitation, fear of interference in decision-making and their undesirable activities create serious misgivings about them.

In this connection, it may be suggested that the LDCs, rather than dispensing with MNCs, should regulate their activities according to the following broad guidelines:

(i) The investments from MNCs should be for specified periods.

(ii) The collaborations should be sought with the MNCs only in selective areas.

(iii) The host countries should adopt a multi-tax system so that the MNCs should not be able to evade taxes through transfer pricing or other methods.

(iv) The MNCs should help the host countries in the promotion of exports and the development of import-substitution industries.

(v) There should be clear cut specification about the transfer of technology. The MNCs should be required to specify annual expenditure on research and training.

(vi) After a certain limit, there should be check on the repatriation of capital and remittance of profits by them to the country of origin.

(vii) There should not be a perpetual threat of nationalisation. However, if they are found to be engaged in activities detrimental to the economic and political interests of the host countries, these should be nationalised.

MNCs and India:

In view of the serious shortage of capital, India followed a liberal policy right since the early 1950’s to attract foreign capital and enterprise. The MNCs had secured a strong foothold in the Indian economy by the 1960’s. According to the Industrial Licensing Policy Enquiry Committee, there were 112 companies in India in 1966 with assets of Rs. 10 crores or more. Of these 48 companies were either branches of foreign companies or they were their subsidiaries.

Of those 112 companies, the foreign control was explicit in atleast 62 companies. The MNCs even in 1966 had control over 53.7 percent assets of the giant sector in Indian industries. It is clear that the top of the industrial pyramid in the country was under the effective control of the foreigners as early as 1966.

The prime reason for which the MNCs are invited to the LDCs in general is that they will bring a larger inflow of foreign capital. An interesting and rather negative feature of the operations of MNCs in India has been that they have raised a major part of investment resources from within the country.

A study related to 1956-75 period conducted by S. Chaudhury revealed that the foreign sources contributed only 5.4 percent of the financial resources of the foreign subsidiaries. 94.6 percent of the financial resources had been obtained by them from the domestic sources.

Another study made by John Martinussen showed that the amount of capital issues consented with foreign participation declined from 61.5 percent of all consents to public limited companies in 1976 to a mere 29.5 percent in 1980. According to this study, 20 MNCs affiliated enterprises had even reduced their foreign funding. Several of these companies obtained no foreign funds at all during 1974-83 period. This fact totally explodes the myth that MNCs bring large amounts of foreign capital to the developing countries.

Another feature related to MNC investment in India is that foreign direct investment in general and MNC investment in particular declined in plantation, mining and petroleum sectors during 1948-1980 period and there was a significant rise in investment in the manufacturing sector. Martinussen pointed out that investment in foreign branches and subsidiaries has been concentrating increasingly in the manufacturing industries.

A common form of MNC participation in Indian industries is through collaboration with Indian companies. The Indian industrialists enter in foreign collaborations for the sake of advanced technology, foreign brand names and for having easy access to the foreign markets. The policy of liberalisation initiated in 1980’s resulted in a substantial spurt in foreign collaborations. Between 1948 and 1986, 10981 collaboration agreements had been approved.

Out of them about 49 percent had been approved between 1980-86 periods. The agreements with foreign enterprises took place predominantly in the areas of electrical equipments, industrial machinery, chemicals, pharmaceuticals, transport, precision instruments, metallurgical machinery, machine tools, glass and ceramics.

The liberalisation policy adopted by the government during the last few years for encouraging larger inflow of foreign investments is likely to induce MNCs to expand their operations in a big way. Already about 500 projects are under active consideration of the MNCs belonging to different advanced countries. During 1990’s, several foreign and indigenous enterprises underwent the process of restructuring and mergers.

The restructuring had become necessary in view of impending increased competition. The different amalgamating companies integrate their marketing and distribution set up to face effectively their competitors in the Indian market. The merger also enables them to economise in respect of overheads. The MNCs through their experience elsewhere are well aware that mergers and strategic alliances are route to competitive success.

In 2003, top executives of major transnational corporations have assigned high ranking to India as a highly preferred destination for foreign direct investments. The global management consultancy firm A.T. Kearney gave A.T. Kearney FDI Index, based on an annual survey of executives from world’s largest companies who are asked to rank countries on various parameters of FDI attractiveness.

Manufacturing investors ranked India among the top six most preferred investment locations and nearly a one-third were most optimistic about the Indian market. India was ranked ahead of apparently more developed countries such as the United Kingdom, Italy, Canada, Japan, Brazil and Indonesia. China was ranked at the top. Services sector investors ranked India as the fourth most attractive investment destination up from the 14th place in 2002. At present India is the second most preferred investment destination of the foreign investors, next only to China.