Multinational Company (MNC) is a company whose business operations extend beyond the country in which it has been incorporated. Global enterprises have their head office in one country, but they carry on business operations in other countries, known as host countries.

For example, Pepsi and Coca Cola companies are registered in USA, whereas, they operate across the world. MNCs are also known as ‘Supernatural Companies’ or ‘Transnational Companies’.

Multinational corporations have existed since the beginning of the overseas trade and played a pivotal role in the commercial and industrial development of the less developed countries.

Multinational corporations are huge industrial organisations having a wide network of branches and subsidiaries spread over a number of countries, all of which work with the objective of maximising global profits of the parent companies located in some advanced countries.

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Learn about:- 1. Introduction to Multinational Corporations 2. Meaning of Multinational Corporations 3. Concept 4. Present Perspective 5. Growth 6. Features 7. Factors 8. Objectives 9. Role and Importance 10. Examples of Controversies Faced by MNCs 11. Classification 12. Forms 13. Market Imperfections 14. Regulatory Framework 15. Impact 16. Advantages 17. Disadvantages.

Multinational Companies or Corporations in India (MNC) : Meaning, Concept, Reasons for the Growth, Features, Factors, Objectives, Role, Importance and Examples

Multinational Companies or Corporations in India (MNC) – Introduction

Multinational corporations (MNCs) are major actors in the world of international business. The corporation whose activities are spread over more than one nation is known as a multinational corporation. Transnational Corporation, International Corporation or Global Corporation are some of the other names by which these corporations are known. The concept of MNCs is not new rather it is very old. This is evident from the MNCs like The East Indian Company, The Royal African Company and Hindson Bay.

They help in the expansion of the business both in the developed and developing countries. For the proper allocation and utilisation of the world resources, the role of MNCs is quite significant. They use the innovative methods of production which help to stimulate the demand for their products. Some of the MNCs working in our country are Hindustan Liver, KFC, McDonalds, etc.

The United Nations defined MNCs as, “Enterprises whose area of working- factories, mines, sale offices and the like are in two or more countries.”

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In the words of President of I.B.M., a world famous corporation, “Multinational Corporation is one that- (1) Operates in many countries, (2) Carries out research and development, marketing and manufacturing in many countries, (3) has a multinational management, (4) has a multinational stock ownership.”

In short, corporation which have large size and whose headquarters is located in one country but production and trading activities spread over many countries is termed as a multinational corporation. For the transfer of the private foreign investment MNCs have been the major source.

Due to liberalisation of the controls over direct investment by most of the industrialised countries and steps taken by the developing countries to attract the private foreign capital for enhancing the industrial development, the scope of MNCs has increased rapidly after the Second World War.

Multinational Companies or Corporations in India (MNC) – Meaning

Multinational Company (MNC) is a company whose business operations extend beyond the country in which it has been incorporated. Global enterprises have their head office in one country, but they carry on business operations in other countries, known as host countries. For example, Pepsi and Coca Cola companies are registered in USA, whereas, they operate across the world. MNCs are also known as ‘Supernatural Companies’ or ‘Transnational Companies’.

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They extend their industrial and marketing operations through a network of branches (known as ‘Majority Owned Foreign Affiliates’) in several countries.

In the words of W.H. Moreland, “Multinational corporations or companies are those enterprises whose management, ownership and controls are spread in more than one foreign country”.

Global enterprises do not aim to maximise profits from one or two products. Rather, they operate in several areas and produce multiple products. They significantly influence the international economy because of their huge size, large number of products, advanced technology, marketing strategies and network of operations all over the world. After the Economic Reforms of 1991, MNCs have played an important role in the Indian economy.

However, some of the MNCs are slightly exploitative in nature and concentrate more on selling consumer goods and luxury items, which are not always desirable for developing countries.

Multinational Companies or Corporations in India (MNC) – Concept

Multinational Corporations play a critical role in the global economy. Due to the presence of huge market and demand, many multinational corporations are operating in India for expansion of their business. On the one hand, multinational corporations help the emerging economies in their modernisation by transferring technology, know-how and skills, providing access to export markets by intensifying competition, by making quality goods available to the consumers vis-a-vis domestic counterparts. On the other hand anti-competitive practices of multinational corporations may reduce consumer welfare and build consumption patterns not suited for the host countries.

A multinational corporation is corporation doing business in more than one country. According to United Nations, “a multinational corporation is an enterprise which owns and controls production or service facilities outside the country in which it is based”. In the words of W.H. Moreland, “MNCs are those enterprises whose management, ownership and control are spread in more than one foreign country”.

Thus a multinational corporation extends the area of its operations beyond the country in which it is incorporated. Its headquarters are located in one country (home country). They engage in various activities like exporting, importing and manufacturing goods in different countries. Coca-Cola, Pepsi, Ponds, Gillette, etc., are the examples of multinational corporations registered in the USA but have their production and marketing facilities in many countries. An important characteristic of these companies is that they have well established global brands that are widely recognised and influence the consumption patterns of the people in developing countries.

The term ‘multinational’ consists of two different words, ‘multi’ and ‘national’. The prefix ‘multi’ here means many while the word ‘national’ refers to nations or countries. Therefore, a multinational company may be defined as a company that operates in several countries.

Such a company has factories, branches or offices in more than one country. According to the United Nations Commission on Transnational Corporations, a transnational corporation is a corporation which operates, in addition to the country in which it is incorporated, in one or more other countries.

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The operations of a multinational corporation (MNC) extend beyond the country in which it is incorporated. Its headquarters are located in one country (home country) and in addition it carries on business in other countries (host country). For example, Coca Cola Corporation has its headquarters in the U.S.A. and it has branches/subsidiaries in several countries. A multinational corporation controls production and marketing facilities in more than one country. Firms that participate in international business, however large they may be, solely by exporting or by licensing technology are not multinational corporations.

The terms ‘Multinational Corporation’, ‘International Corporation’, ‘transnational corporation’, and ‘global corporation’ are often used interchangeably. But some experts make a distinction between these terms. An ‘International Corporation’ may be defined as a company which has business operations in at least one foreign country. On the other hand, a ‘Multinational Corporation’ is a company which operates in several countries and a considerable share of its total business is from foreign countries.

A ‘Transnational Corporation’ is a multinational, the ownership and control of which are dispersed internationally. It has no principal domicile and no single central source of power. Unilever, Shell and Royal Dutch are examples of transnational, corporations. A global corporation is a company which views the entire world as a single homogenous market and caters to the global market through globally standardised products.

Multinational Companies or Corporations in India (MNC) – Present Perspective

After going slow for long, multinational companies led by Siemens, MICO, ABB, Wartsila India, Denso Corporation are stepping up investment in India, buoyed by increased infrastructure spending and higher consumption from the rural sector. Most of the MNCs were resisting fresh investments for long, but have now changed course to announce big investments, seeing the immense potential.

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The MNCs have renewed their interest in India due to its buoyant economy and huge potential in the infrastructure and engineering sector. Recent announcements include Rs. 1800 crore investment by the Bosch Group’s Indian Arm Motor India Company Ltd. (MICO). The Siemens Ltd., has acquired Hyderabad based Elpro International’s isolator (used in transmission and distribution lines) business and 50 per cent stake in Kharagpur based Flender Ltd.

Siemen has also announced the setting up of an industrial steam turbine factor at Vadodara, Gujarat Engine maker Cummins India (where Cummins Inc. of the US holds 51 per cent) is setting up an additional manufacturing facility in Pune at an investment of Rs 15 crores while auto parts maker Bosch Chasis system (formerly Kalyani Brakes) has formed a joint venture with Brembo Spa of Italy for two wheelers brakes.

Similarly, Ciba specially Chemicals has announced a Rs. 50 crore manufacturing plant at Goa and another Rs 70 crore investment in Gujarat through its fully owned subsidiary Diamond Dye Chem Ltd. Wartsila India promoted by Wartsila Corporation of Finland has also made fresh investment in India.

On the FMCG front, Nestle India’s new factory at Pantnagar has already started commercial production. The Hindustan Unilever meanwhile is increasing its rural focus further. Procter & Gamble is also expanding in the country though all the fresh investments are bringing done through its wholly owned arm P&G Home products.

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Different studies show that MNCs have showed down their investment between 1996 and 2003 but the scenario began to change from 2003. Many new MNC players have also made fresh investment in the Indian market and have done well while the existing MNCs players were found wanting as they postponed making commitments in terms of investments and exposure “Thinks have begun to change in recent times”, MNCs have not been on the news radar as these companies were focused on exports.

However, with increased expenditure in the infrastructure front and the growing domestic consumption levels the MNCs in infrastructures and the FMCG sector are expanding and doing better. There is a re-rating of the share prices of MNCs happening at the moment, which indicates that investors are willing to pay higher price for the shares of MNC firms in the stock markets.

The rapid rise of multinational corporations has been a topic of concern among intellectuals, activists and laypersons who have seen these MNCs as a threat to Indian Industries. Studies suggest that multinationals create false needs in consumers and have had a long history of interference in the policies of sovereign nation states.

Evidence supporting this belief includes invasive advertising (such as billboards, television ads, adware, spam, telemarketing, child- targeted advertising, guerrilla marketing), massive corporate campaign contributions in demo­cratic elections, and endless global news stories about corporate corruption (Martha Stewart and Enron, for example). Anti-corporate protesters suggest that corporations answer only to shareholders, giving human rights and other issues almost no consideration.

Multinational Companies or Corporations in India (MNC) – Reasons for the Growth of Multinational Companies

In recent years, there has been phenomenal growth of multinationals all over the world.

The reasons for the growth of multinational companies are as follows:

1. Financial Superiorities:

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A multinational corporation enjoys the following financial superiorities:

(a) It has huge financial resources at its disposal. Therefore, it can turn any adverse circumstance in its favour.

(b) It has easier access to capital markets and can raise more international resources than a domestic company.

(c) It enjoys reputation all over the world. The investors of a host country have greater confidence in it and are willing to invest funds in a multinational.

(d) Financial institutions are ready to lend money to it.

(e) Its efficient financial management utilises funds very judiciously to generate surplus which can be easily employed in other countries.

2. Technical Superiorities:

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A multinational possesses the following technical superiorities:

(a) It has high technology in the areas of production, infrastructure and services. It can meet the technical requirements of developing countries and participate in their industrial development programmes.

(b) It has research and development (R&D) facilities for developing new technology and new products.

(c) It has trained personnel in science and technology.

(d) It enjoys economies of large scale production.

(e) It has international quality specifications and standards.

3. Marketing Superiorities:

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A multinational corporation enjoys the following marketing superiorities over the national firms:

(a) It enjoys market reputation and faces no difficulty in selling its products all over the world.

(b) It can adopt more aggressive advertising and sales promotion techniques.

(c) It has more reliable and up-to-date market information system at its command.

(d) It can adapt itself easily to changes in demand.

(e) It has a very wide distribution and dealer network. Therefore, it can ensure greater availability of products and services for local consumers.

4. Managerial Superiorities:

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A multinational enjoys the following superiorities in administration and management:

(a) It employs professional and expert managers.

(b) It possesses a superior management information system.

Multinational Companies or Corporations in India (MNC) – Top 7 Features

Multinational corporation incorporates following features:

1. Multi-Domestic Management:

It is an approach in which a company operating in several countries allows its local units to act independently and does not co-ordinate its interna­tional operations on a global basis. In each country the local organization is self-contained and acts much like a separate domestic business might act. “Multi-domestic management allows local managers to be highly responsive to environmental conditions in the host country.”

2. Host Country:

It is a nation outside the home country where an organization conducts its business activities. Headquarter or head office of a controlling organization is located or based on the home country. Host country is supposed to provide all legal and other environmental framework for external organizations generally called as MNCs. It is also required to formulate necessary guidelines for the purpose of direct investment. Concep­tually, MNCs are also supposed to operate in a certain minimum number of nations five or six etc.

3. Direct Investment:

It is an arrangement in which a business organization acquires an ownership interest in the overseas company or invests in production and marketing facilities in another country called as host country. Direct investment is also characterized by an active involvement in the management of foreign investments. It is the tool by which MNCs develop their business outfits in host countries.

4. Headquarter in Home Country:

It is a country where the company has it’s headquarter. It is the controlling place located in the home country to control different business outfits working in different host countries. Command system over business in the host country is regulated from the home country. It is also the central headquarter to formulate management policies for execution in home country as well as in the host countries. Development of centralized control mechanism is based at in the home country.

5. Bases of Production or Service:

MNCs are required to produce or provide services in host countries through direct investment MNC is interested to gain control over operations, to avoid any problematic trade barriers and to learn firsthand about the needs of its customers. Moreover, producing goods and services in the host countries where they will be sold enables the organization (MNC) to respond rapidly to environmental changes and at the same time, keeping marketing and distribution costs lower.

6. Professional Management Team:

MNCs in host countries are generally managed by professional team having geo centric orientations. It is possible that an organization may be managed by family members in home country but it may be a limiting factor for itself. Due to the limitation MNCs are generally managed by professionals in the host countries.

7. Income and Workforce Criteria:

It is also suggested that a particular organization is to be called as MNC, if it fulfills the minimum percentage of its income and workforce. For example it is suggested that MNCs must derive some minimum percentage of its income from foreign operations like 25 per cent and have a certain minimum ‘ratio of foreign to total number of employees or of foreign total value of assets.

Some Other Salient Features of Multinational Corporations

The salient features of multinational corporations are as follows:

(i) Giant Size – The assets and sales of a multinational are quite large. The sales turnover of some MNCs exceeds the Gross National Product of several developing countries. For example, the physical assets of International Business Machines (IBM) exceed 8 billion dollars.

(ii) International Operations – A multinational corporation has production, marketing and other facilities in several countries. It operates through a network of subsidiaries, branches and affiliates in host countries. It owns and controls assets in foreign countries. For example, ITI has about 800 subsidiaries in more than 70 countries.

(iii) Centralised Control – A multinational corporation has its headquarters in the home country. It exercises control over all branches and subsidiaries. The local managements of branches and subsidiaries operate within the policy framework of the parent corporation.

(iv) Oligopolistic Power – Multinational corporations are generally oligopolistic in nature. Due to their giant size they occupy a dominant position in the market. They also take over other firms to acquire a huge economic power. For example, Hindustan Lever Limited acquired Tata Oil Mills.

(v) Sophisticated Technology – Generally, a multinational corporation has at its command advanced technology so as to provide world class products and services. It employs capital intensive technology not only in manufacturing but in marketing and other areas of business too.

(vi) Professional Management – In order to integrate and manage worldwide operations, a multinational corporation employs professional skills. It employs professionally trained managers to handle advanced technology, huge funds and international business operations.

(vii) International Market – On account of its vast resources and superior marketing skills, a multinational corporation has vast access to international markets. Therefore, it is able to sell whatever product/service it produces in different countries.

(viii) Multiple Objectives – Multinational corporations make investments in different countries with the following aims –

(a) To take advantage of tax benefits in host countries or to circumvent tariff barriers;

(b) To exploit the natural resources of the host country;

(c) To take advantage of Government concessions in host countries;

(d) To mitigate the impact of regulations in the home country;

(e) To reduce costs of production by making use of cheap labour and lower transportation expenses in host countries;

(f) To gain dominance in foreign markets;

(g) To expand activities vertically.

Multinational Companies or Corporations in India (MNC) – Factors that Encourage Companies for Going International

Following factors generally encourage companies for going international:

1. To Gain Access to Cheaper Resources:

Nature of business forces the companies like companies engaged in mining and petroleum business to have an access to more reliable or cheaper supply of raw materials in foreign countries. Similarly, manufacturing enterprises also try for cheap labour in host countries in comparison to costly labour available in the home country. Companies are eager to invest in developing foreign countries to avoid political instability at home or to gain access to a large pool of technological know-how available in the host countries.

2. To Increase Return on Investment:

Companies are interested to increase their return through foreign investment. “Business is like individuals who shift their funds from areas where return on capital are lower to those where they are higher.” Companies also increase their chances for achieving a certain return on investment and stable or growing profits by expanding their overseas business.

3. To Increase Market Share:

According to Ramond Vernn’s product cycle theory, companies that develop attractive new product sell them first in their home markets. Sooner or later, foreigners learn of these products, creating enough demand to justify exporting. If this demand continues to grow, it will eventually become more economical to invest in foreign manufacturing facilities. Oligopolistic positions of companies also positively improve the market share.

According to Stevan Hymer, companies that expand internationally tend to be oligopolistic that is, they tend to dominate their domestic market, either because their products are highly desirable or because their size lets them reap economies of scale. To continue growing, they will have to expand into international markets.

4. To Neutralize Foreign Tariffs and Import Quotas:

Government of host country generally uses tariff or import quotas to protect domestic business enterprises. In this enterprise direct investment plays an important role in solving the problems created through the threat of foreign tariffs and import quotas. MNCs counter these threats by investing more and more in terms of direct investment in host countries.

Multinational Companies or Corporations in India (MNC) – Objectives of MNCs

The following are the objectives of Multinational Corporations:

a. To expand the business beyond the boundaries of the country.

b. Minimize cost of production, especially labour cost.

c. Capture lucrative foreign market against international competitors.

d. Avail of competitive advantage internationally.

Some of the important multinationals are- (i) Samsung, (ii) Coca Cola, (iii) Pepsi, (iv) Maruti Suzuki, (v) Cadbury’s, (vi) Nike, (vii) Nestle, (viii) Adidas, (ix) Sony and (x) Unilever Ltd etc.

Multinational Companies or Corporations in India (MNC) – Role and Importance

Multinational corporations have existed since the beginning of the overseas trade and played a pivotal role in the commercial and industrial development of the less developed countries. Multinational corporations are huge industrial organisations having a wide network of branches and subsidiaries spread over a number of countries, all of which work with the objective of maximising global profits of the parent companies located in some advanced countries.

Due to their huge operations, multinational corporations enjoy a semi-monopolistic power in the markets of these countries and produce a strong force and help in their development process. On the other hand, multinational corporations are characterised as evil monsters and the objects of harm for the growth of the local enterprises. These attitudes, however, have changed in the past few years. They are being increasingly associated with the dramatic innovations that are taking place today.

The multinational corporations are multi-product, multi-process and multi-national enterprises. They are the industrial giants with sound financial and technological base. The operations of Multinational Corporation have been changing over the past two decades.

Instead of making huge investments in the host countries, multinational corporations have been sub-contracting various parts of the value chains by entering into joint ventures with local enterprises in a number of countries. This provides a boost to the economic activities in the host country resulting in increased production, import substitution and greater exports.

Since the introduction of the new economic policy in 1991, India has experienced a dramatic increase in the presence of the multinational corporations and with it a tremendous expansion in the number of multinational corporations as well as foreign direct investment. The multinational corporations in India represent a diversified portfolio of companies from different countries.

The multinational corporations from USA, UK, France, Netherlands, Italy, Germany, Belgium, etc., have come to India or have outsourced their work to our country. They have brought in new technology and products giving consumers the wide choice of products and awareness of international quality standards. India has got a huge market for the brands offered by these companies. The multinational corporations because of the vast pool of resources are able to modify the consumption patterns in their favour through repeated advertising.

Multinational Companies or Corporations in India (MNC) – Examples of Controversies Faced by MNCs

Much of the concern about MNCs stems from their size, which can be formidable. MNCs may impose on their host governments to the advantage of their own shareholders and the disadvantage of citizens and shareholders in the country of operation. Even in India, MNCs have neglected the interests of the minority shareholders in the past.

It can be difficult to manage economies in which MNCs have extensive investments. Since MNCs often have ready access to external sources of finance, they can blunt local monetary policy. When the host government wishes to constrain any economic activity, MNCs may nevertheless expand through foreign borrowing.

Similarly, efforts at economic expansion may be frustrated if MNCs move funds abroad in search of advantages elsewhere. Although it is true that any firm can frustrate plans for economic expansion due to integrated financial markets, MNCs are likely to take advantage of any opportunity to gain profits. As we have seen, MNCs can also shift profits to reduce their total tax burden by showing larger profits in countries with lower tax rates.

Concern has been expressed, especially within the US, that their MNCs can defy the foreign policy objectives of the government through their foreign branches and subsidiaries. An MNC might break a blockade and avoid sanctions by operating through overseas subsidiaries.

This has led to greater concerns in some host countries, as they feel that companies operating within their boundaries may follow orders of the US or any other foreign government.

MNCs present a potential for conflict between national governments, and even within international trade unions. For example, in 1981 Chrysler Corporation was given loan guarantee to continue its operation. The US government insisted on wage and salary rollbacks as a condition. Chrysler workers in Canada did not appreciate the instructions from the US Congress to accept a reduced wage.

The examples below illustrate some of the controversies faced by MNCs:

1. Parke-Davis:

Parke-Davis India is a 40% subsidiary of Parke-Davis Inc, USA which in turn is a division of the US-based company, Warner-Lambert. In 1995 the latter set up a 100% subsidiary. Among other products, it planned to manufacture and market confectionary products, although Parke-Davis India was already operating in this field.

Later the parent company bought the brands of ‘Halls’ and ‘Chiclets’ from Parke-Davis India for about Rs.10 crores, which according to analysts was low price in relation to growth prospects and sales.

Post-transfer, the sales of Parke- Davis grew just 3% in 1995-96 and then fell 1.5% the following year. And revealingly while the Sensex dropped 39% in 17 months from September 1994, Parke-Davis shares plunged almost 70% in the same period. Practically, a loss of about Rs.285 crores in market capitalisation was witnessed during the same period.

2. Pfizer:

There is undeniable attraction for an MNC to retain all the profits of a venture, rather than sharing them with minority shareholders. Obviously such a prospect is attractive to the MNC and alarming to the retail investor, especially since the regulatory framework cannot control corporate action in this matter.

Although not having to share the profits may be the real reason, MNCs cite other factors, including lack of stringent patent and copyright laws in India for their actions. Often it is also the high cost of acquiring the additional shares to take the parent company’s holding above 51%.

For example the additional 11% equity stake required for Pfizer would set the parent company back some Rs.290 crore at the current valuation, and to buy out the remaining 60% from the other shareholders, would cost it Rs.775 crore. Setting up a 100% subsidiary is possible.

3. SmithKline Beecham:

This case gives us an insight into the royalty issues. In 1997, SmithKline Beecham India announced its plan to pay 5% of net revenues earned from the sale of Horlicks to its parent company for using the brand name.

At that point Horlicks accounted for 80% of the company’s Rs.430 crore net sales. Although it paid about Rs.5 crore in 1996, the estimated annual outgoings worked out to about Rs.20 crore, against a net profit of Rs.45.6 crore in the same year.

The immediate impact on the SmithKline Beecham Consumer Healthcare stock was drastic, as the stock price fell by almost Rs.100 from Rs.365 in Feb 1997 in just 10 days, reflecting a loss of about 27% or about Rs.275 crore in terms of market capitalisation.

Here, the main issue for investors was whether royalty payment needed to be paid to the parent company at all. Although the Indian company does not own the brand and is only its licensed user, it has nevertheless spent a huge amount on brand promotion and advertisement expenses for Horlicks, over the last four decades, and approximately Rs.175 crores over the past 10 years. Critics feel that the company could have used this money to promote a brand of its own, with considerable success.

4. Philips:

On 1st December 2001, the parent company of Philips announced that it wanted to buy out the other shareholders of its 51% subsidiary Philips India, and delist it from the stock markets. It offered to pay Rs.105 for each share. The deadline for accepting the offer was 14th December.

The beauty of the strategy was that Philips did not need to persuade every individual shareholder to sell to achieve its goal. According to the SEBI regulations, Philips needed to increase its shareholding to 90% in Philips India to apply for delisting the latter. Since Philips owned 51% shares, it needed to pick up only 39% more.

When the offer opened, three financial institutions- GIC, LIC and UTI- together held 22% of the shares, while another 27% were held by the minority shareholders. Within days of the announcement, most minority shareholders started worrying about what would happen to anyone who did not sell his shares if the Foreign Investors (FIs) decided to take up the offer.

If the FIs did sell their entire stake, Philips would need to pick up only another 17% of the shares to reach a level of 90%. So, if Philips managed to pick up only 90% of the shares, all those who held out would be trapped. They would agree to buy them after the deadline was over, provided it already had the 90% it needed.

This fear reportedly led to many minority shareholders selling out, even though the FIs had not announced their decision. Finally the FIs did announce that they too were taking up the offer. A major factor influencing their decision was that, if enough minority shareholders sold out, the liquidity of the Philips India stock would be drastically reduced. In that case, they would find it impossible to sell later because there would not be enough buyers.

For a majority of the shareholders, the offer price was not the critical factor in their decision to sell. In fact, many of them thought the price was too low and that Philips had timed its offer cleverly. Royal Philips had strictly followed SEBI guidelines which state that the offer price should not be less than the average price of the past six months.

Since the stock markets had been in a bear grip for the past six months, Philips made sure that most shareholders would sell out even if it was not the most attractive option.

Multinational Companies or Corporations in India (MNC) Classification – Pyramidal Model, Umbrella Model and Inter-Conglomerate 

Depending upon the relationship between the headquarters and subsidiaries, multinationals can be classified into three broad categories:

Classification # 1. Pyramidal Model Multinationals:

A pyramid indicates a broad bottom and narrow top. According to the typical pyramid model, the multinational operates as follows:

(a) It has strong headquarters and weak subsidiaries.

(b) All decisions are made at the headquarters and imposed on the subsidiaries.

(c) Major decisions related to new product development, plant location and managerial decisions are taken only at the headquarters. At times, the head­quarters may be quite autocratic towards its subsidiaries.

(d) They may be quite old fashioned in their day-to-day functioning.

(e) They do not bring sentiments and emotions for the local population into their dealings.

(f) They exercise complete control in their deals.

(g) They run their business through power.

Due to rigidity in their style of functioning, such organisations may invite opposition from citizens in developing countries at any time.

Classification # 2. Umbrella Model Multinationals:

Here the headquarters acts as a facilitator.

Such MNCs believe in:

(a) Mutual exchange of knowledge and technology.

(b) Constant motivation of subsidiaries.

(c) Building an image for both headquarters and the subsidiary.

(d) Harmony between employees at different levels, and between employees and employers.

(e) High respect for the sovereignty of the country where they operate.

Such organisations are concerned about their image, goodwill and reputation. For them doing business is a way of life. They invite representatives from the subsidiaries to the headquarters for strategic decisions. They do not practice favoritism, nepotism, parochialism and racial superiority. Merit is the only consideration for growth and career enhancement.

Classification # 3. Inter-Conglomerate Multinationals:

Conglomerate indicates grouping of business activities aiming at high profits and revenue generation, whether it is related to existing core business or not. Inter-conglomerate multinationals are aggressive in expansion and achieving a high turnover. Such multinationals enter into any business where the profits are exponentially high. They generally do not consider any other aspect, except high profits, as a performance indicator.

(a) High profit motivation.

(b) They do not restrict themselves to their core competency.

(c) A ‘hire and fire’ policy is very common.

(d) They set high targets for themselves.

(e) No social consideration in the country of their operation.

The investments are high and are made with expectations of high returns, which will be used for aggressive expansion, diversification and takeovers.

Although multinationals can be classified on the above basis, today the classification is not rigid. Hence, multinationals have become flexible over the past two decades. As the indigenous forces become strong in any developing country, the pure pyramidal model will not work.

An organisation, which works under a pure umbrella model cannot generate sufficient revenue to sustain itself and it is also difficult for such organisations to face stiff competition. Organisations, which function under the inter-conglomerate model cannot focus only on profit, considerations for social causes and sensitivity towards the host country have to be maintained.

Classification of Multinationals Depending upon Their Origin:

1. Ethnocentric:

Such multinationals concentrate more on their place of origin. Since they understand their own socio-cultural background, it is easy for them to succeed in their home country. Instead of taking high risks in other countries, they first succeed in their home country and then slowly move abroad with few changes in the product and mode of functioning.

2. Regio-Centric:

Few multinationals focus their activities only in a particular region like South East Asia or the Gulf region. There are certain practices that are uniform in nature in a specific region, and hence they succeed. A region covers many nations, hence the organisation operates in all parts of the region to get the title ‘multinational’.

3. Continental:

There are multinationals that are very successful in a particular continent for their specific product ranges. The cost of storing and warehousing can be brought down if the product is distributed in the whole continent. There are hundreds of multinationals doing exceedingly well only in Europe, but are not able to face cross-cultural challenges in other continents. Therefore, they remain as continental multinationals.

4. Polycentric:

The majority of multinationals have to simultaneously enter different countries. It is not possible to adopt a ‘wait and watch’ policy to enter different countries and commence operations. Once a company invests in an innovation, it has to spread its activities everywhere, otherwise it will lose the opportunity, and competitors will step in to get the business.

Therefore, companies like Proctor & Gamble, Unilever, Sony, Electrolux, Henkel and Colgate-Palmolive are present in almost every part of the world.

5. Trans-national:

Multinationals like Hewlett Packard has set up sub-headquarters close to the subsidiaries for easy accessibility. The sub-headquarters are located in Singapore or Hong Kong but the main office remains in California. The trans-national multinationals solve problems arising from nearby countries through their sub headquarter.

6. Global Organisations:

These organisations have a physical presence in other parts of the world and cater to customers in different countries through standardised products by consolidating resources from any part of the world. Today, every company dreams of becoming a global company.

Companies shift their manufacturing bases to more profitable locations, open up warehouses in special economic zones and train people to be multilingual, multi-strategic and multi-functional in order to manage the business successfully.

The difference between polycentric and global multinationals is that the latter is very close to the customer and does not give extra weightage to the headquarters. Global organisations take into account customer tastes and preferences.

They employ cost cutting techniques and are able to provide customers with good quality, low-priced items. They have enormous respect for the country in which they operate and integrate themselves into the society.

Multinational Companies or Corporations in India (MNC) Forms – Franchising, Branches, Subsidiaries, Joint Ventures and Turn-Key Projects 

Multinational corporations operate in the following forms:

(i) Franchising:

In this form, a multinational corporation grants firms in foreign countries the right (franchise) to use its trademarks, brand names, patents, technology, etc. The firms getting the right or license operate as per the terms and conditions of the franchise agreement. They pay a periodical royalty or license fee to the multinational corporation. In case the firm holding franchise violate the terms of the agreement, the license may be cancelled. This system is popular for products which enjoy good demand in host countries.

(ii) Branches:

A multinational corporation may open branches in different countries. These branches work under the direction and control of the head office. The headquarters lay down policy guidelines to be followed by the branches. Every branch follows the laws and regulations of the country in which it is located. Multinationals find it easiest to operate through branches.

(iii) Subsidiaries:

A multinational corporation may establish wholly owned subsidiaries in foreign countries. In case of partly owned subsidiaries people in the host country also own shares. The multinational controls the Board of Directors of the subsidiary company and the subsidiary follows the policies laid down by the parent company. The holding company undertakes responsibility for the management and working of the subsidiaries. Subsidiaries are considered to be more profitable than franchising. A multinational can expand its business operations through subsidiaries all over the world.

(iv) Joint Ventures:

In this system, a multinational corporation establishes a company in a foreign country in partnership with a local firm for manufacturing or marketing some product. The multinational and foreign firms share the ownership and control of the business. Generally the multinational provides the technical know-how and managerial expertise whereas day to day management is left to the local partner.

For example, in Maruti Udyog, the Government of India and Suzuki of Japan have jointly supplied the capital and are sharing profits. Suzuki supplies advanced technology and day-to-day management lies mainly with people nominated by the Government of India. The multinational corporation contributes capital for the joint venture and shares profits as per the agreement.

The main advantages of joint ventures are:

(a) The resources of foreign and local firms are pooled together to complement each other.

(b) Joint ventures are preferable when the multinational lacks necessary resources to expand its international operations or wants to enter overseas markets where wholly owned subsidiaries are prohibited.

(c) The multinational can make use of the management skills and market position of the local partner.

(d) The multinational need not exercise complete control on the venture.

(e) The privileges and influence of local authorities and special tax benefits of host country can be utilised.

(f) Risk involved due to economic and political circumstances of the host country is reduced.

A joint venture may, however, face the problem of conflicts between partners over policy matters. A multinational may not be able to carry out specific manufacturing and marketing policies on a worldwide basis due to joint ownership and control. Disputes between partners may arise on management styles, profit sharing and expansion of the joint venture.

(v) Turn-Key Projects:

In this method, the multinational corporation undertakes a project in a foreign country. The multinational constructs and operates an industrial plant from beginning to end. The local client does not participate actively at various stages of construction. The personnel of the corporation have technical expertise in the concerned industry and they may train the client’s staff in the operation of the plant.

The multinational may guarantee the quantity and quality of production over a long period of time. When the project is complete, it is handed over to the host country. This form is used by under developed countries to complete projects which require high technical skill and experience. Underdeveloped countries invite multinationals to construct huge projects involving technical and managerial expertise and huge financial resources.

Multinational Companies or Corporations in India (MNC) – 2 Kinds of Market Imperfections

Broadly, two kinds of imperfections are relevant:

1. Structural Imperfections:

These may be natural or manmade. Government regulations on investment, imports, taxes and subsidies, capital markets and monopoly aspects create imperfections. This kind of imperfection is now disappearing from industrial countries, but is appearing in developing countries.

2. Imperfections in Transactions and Markets:

Uncertainty in delivery, the volatility of exchange rates; the difficulty that customers face in evaluating unfamiliar products; the costs of negotiating deals, economies of scale in production, purchasing, research and developments and distribution give advantages to existing firms and impose barriers against newcomers.

Due to these and other imperfections, firms locate their production and other operations internationally. As these market imperfections disappear, the importance of MNCs may diminish. The days for this may not be far off due to the international apex body, WTO and its regulatory norms.

Multinational Companies or Corporations in India (MNC) – Regulatory Framework of Multinational Corporations in India

The liberalization, privatization and globalization (LPG) era, no serious efforts were made to attract foreign investment in India. Major thrust was given to the public sector industries in India. Even during the plan period, steel plants, etc. were set up with the help of foreign collaborations and direct financial support of foreign countries. Government policy was also not conducive in favour of direct investment.

The Foreign Exchange Regulation Act, (FERA) 1973 required the foreign companies in India to dilute their foreign equity to 40 per cent. However, certain exceptions were allowed in certain cases where high technology and export oriented sectors were considered in the interest of national economy. 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.

With the liberalization of foreign direct investment and removal of FERA restriction since 1991 a large number of MNCs have hiked their equity stake to 51 per cent and acquired majority control in their Indian affiliates or outfits/subsidiaries. With the hike in equity, they acquire several strategic advantages. Enactment of Foreign Exchange Management Act, 1999 further provided a liberal environment for the entry of MNCs in India. At present about 700 MNCs are working in different sectors of Indian Economy.

It is also important to note that Hindustan Lever, ITC, Bata India, ABB, P&G, Cadbury were the dominant MNCs working in our country. But after 1991, more and more MNCs are coming up in the country. Automobiles, Computers and Electronic equipments, Finance and Banks are the important emerging sectors where MNCs are taking growing interest due to liberalized framework of foreign direct investment.

These MNCs also investing more and more in the sector like power and telecommunications. General Motors, Ford, Compaq, Motorola, Suzuki etc. have already joined the Indian Corporate Sector. The economic reforms have given considerable impetus for MNCs investment in India. Continuous relaxation in the maximum cap of foreign direct investment may attract more and more MNCs to have strategic partner­ship with Indian entrepreneurs.

MNCs have no doubt playing very important role in the economic development of our country. Over the years MNCs have perfected not only their products and services but also inculcate professional management in their activities. However, these MNCs are providing tough competition to Indian companies and they are not able to face these competition.

These MNCs are also buying our popular Indian brands and companies and taking over production facilities created over-years by them. Brands like Limca, ThumsUp etc. from Parle of Ramesh Chaouhan and Jai, Ok etc. from Tata Oil Mill Ltd. can be cited as an example. MNCs in India are not interested to invest in infrastructure sector which is at present needed urgently.

Similarly, their entry into such areas as fast food and elite consumer’s goods does not have any rationale. In spite of above criticism in Indian context, it can be stated that in the face of stiff competition from MNCs, now Indian companies are being forced to upgrade their technology and quality of products for their survival in new business environment.

In the era of economic reforms, Government of India itself providing liberal environment to them and they are entering in the country in big way. However, there should be some checks and counter checks on the operations of MNCs to protect the interest of Indian economy in general and Indian entrepre­neurs in particular.

Multinational Companies or Corporations in India (MNC) – Opportunities for Developing Economies, Indian Exports and The Impact of an MNC in Bhopal, India

Till 1991, India was more or less a closed Economy. The rate of growth of the economy was limited. The contri­bution of the local industries to the country’s GDP was limited that were the main cause of shortage of funds for various development projects initiated by the government.

In an effort to revive the industries and to bring the country back on the right track, the government began to open various sectors such as Infrastructure, Automobile, Tourism, Information Technology, Food and Beverages, etc. to the Multinational Corporations.

The MNCs slowly but reluctantly began to pour capital investment, technol­ogy and other valuable resources in the country causing a surge in GDP and upliftment of the economy as a whole. This was the post 1991 era where the government began to invite and welcome giant MNCs into the country.

Opportunities for Developing Economies:

The opportunities for developing economies are sig­nificant as well. Through the application of capital, tech­nology and a range of skills, multinational companies’ overseas investments have created positive economic value in host countries, across different industries and within different policy regimes.

The single biggest effect evidenced was the improve­ment in the standards of living of the country’s popula­tion, as consumers have directly benefited from lower prices, higher quality goods and broader selection. Im­proved productivity and output in the sector and its sup­pliers indirectly contributed to increasing national income. And despite often-cited worries, the impact on employ­ment was either neutral or positive in two-thirds of the cases.

Impact on Developing Economies and Policy Im­plications:

Investments by multinational companies (MNC) al­low developing economies to share in the considerable benefits of the global economy. Official incentives, trade barriers and other regulatory policies, though, can result in inefficiency and waste.

Case studies reveal that in virtually all cases, MNC investment had a positive to very positive impact on the host country. Rather than leading to the exploitation of lower-wage workers, as some critics have charged, the investments fostered innovation, productivity and an im­proved living standard. Therefore, government seeking those advantages would be advised to favor policies of openness, rather than regulation, when it comes to for­eign direct investment.

Indian Exports:

In 2007, exports stood at US$ 145 billion and imports were around US$217 billion. Textiles, jewellery, engineering goods and software are major export commodities while crude oil, machineries, fertilizers and chemicals are ma­jor imports. India’s most important trading partners are the United States, the European Union and China.

Gross Domestic Product (GDP):

India is the world’s most-populous democracy and has one of the fastest economic growth rates in the world (8.9 percent GDP increase in 2007, the second-fastest major economy in the world after China).

The Impact of an MNC in Bhopal, India:

More than 20 years after the Union Carbide gas disaster in Bhopal, upwards of 100,000 people in the city are still seriously ill and the drinking water of a further 20,000 has been poisoned by chemicals leaking from the aban­doned plant. Union Carbide and its 100% owner Dow Chemical, refuse to clean their factory.

The Bhopal Medical Appeal began in Britain as a joint effort of ordinary individuals to bring free medical relief to the victims of the gas and water disasters. There are now supporters across the world. At the Sambhavna Clinic in Bhopal all consultations, treat­ments, therapies and medicines are completely free.

More than 16,000 people have been treated there and in 2002 the clinic won the Margaret Mead Award which is given to small groups who make a big difference in the world.

In April 2005 a new clinic was opened, still with sup­port of donations to help keep the clinic running.

How the Disaster Happened?

On the night of Dec. 2nd and 3rd, 1984, a Union Carbide plant in Bhopal, India, began leaking 27 tons of the deadly gas methyl isocyanate.

None of the six safety systems designed to contain such a leak were operational, allowing the gas to spread throughout the city of Bhopal.

Regular maintenance had fallen into disrepair that on the night of December 2nd, when an employee was flush­ing a corroded pipe, multiple stopcocks failed and allowed water to flow freely into the largest tank of MIC.

Exposure to this water soon led to an uncontrolled reaction; the tank was blown out of its concrete sarcopha­gus and spewed a deadly cloud of MIC, hydrogen cya­nide, mono methyl amine and other chemicals that hugged the ground.

Blown by the prevailing winds, this cloud settled over much of Bhopal.

Soon thereafter, people began to die.

Survivors Memories:

Survivor, Champa Devi Shukla, remembers that & quote; It felt like somebody had filled our bodies up with red chillies, our eyes tears coming out, noses were wa­tering, we had froth in our mouths. The coughing was so bad that people were writhing in pain. Some people just got up and ran in whatever they were wearing or even if they were wearing nothing at all.

Somebody was running this way and somebody was running that way, some people were just running in their underclothes. People were only concerned as to how they would save their lives so they just ran.

Those who fell were not picked up by anybody, they just kept falling and were trampled on by other people. People climbed and scrambled over each other to save their lives – even cows were running and trying to save their lives and crushing people as they ran fast. In those apocalyptic moments no one knew what was happening. People simply started dying in the most hideous ways.

Some vomited uncontrollably, went into convulsions and fell dead. Others choked to death, drowning in their own body fluids. Many died in the stampedes through narrow gullies where street lamps burned a dim brown through clouds of gas. The force of the human torrent wrenched children. Families were whirled, reported the Bhopal Medical Appeal in 1994.

The poison cloud was so dense and searing that people were reduced to near blindness. As they gasped for breath its effects grew ever more suffocating. The gases burned the tissues of their eyes and lungs and attacked their ner­vous systems. People lost control of their bodies. Urine and feces ran down their legs.

Women lost their unborn children as they ran, their wombs spontaneously opening in bloody abortion; According to Rashida Bi, a survivor who lost five gas-exposed family members to cancers, those who escaped with their lives are the unlucky ones; the lucky ones are those who died on that night.

The Effects?

Half a million people were exposed to the gas and 20,000 died as a result of their exposure. More than 120,000 people still suffer from ailments caused by the accident and the subsequent pollution at the plant site.

These ailments include blindness, extreme difficulty in breathing and gynecological disorders.

The site has never been properly cleaned up and continues to poison the residents of Bhopal.

In 1999, local groundwater and well water testing near the site of the accident revealed mercury at levels between 20,000 and 6 million times those expected.

Cancer and brain-damage- and birth-defect-causing chemicals were found in the water; trichloroethene, a chemical that has been shown to impair fetal develop­ment, was found at levels 50 times higher than EPA safety limits.

In 2001, Michigan-based chemical corporation Dow Chemical purchased Union Carbide, thereby acquiring its assets and liabilities. However Dow Chemical has steadfastly refused to clean up the site, provide safe drink­ing water, compensate the victims, or disclose the com­position of the gas leak, information that doctors could use to properly treat the victims.

The Union Carbide factory in Bhopal built the pesti­cide factory there in the 1970s, thinking that India repre­sented a huge untapped market for its pest control prod­ucts.

But sales never met the company’s expectations; Indian farmers, struggling to cope with droughts and floods, did not have the money to buy Union Carbide’s pesticides. The plant, which never reached its full capac­ity, proved to be a losing venture and ceased active pro­duction in the early 1980s.

However vast quantities of dangerous chemicals re­mained; three tanks continued to hold over 60 tons of methyl isocyanate (MIC).

The management’s reasoning seemed to be that since the plant had ceased all production, no threat remained. Every safety system that had been installed to prevent a leak of MIC (at least six) ultimately proved inoperative.

The gas-affected people of Bhopal continue to suc­cumb to injuries sustained during the disaster, dying at the rate of one each day. Treatment protocols are ham­pered by the company’ continuing refusal to share infor­mation it holds on the toxic effects of MIC.

Both Union Carbide and its new owner Dow Chemi­cal claim the data is a trade secret; frustrating the efforts of doctors to treat gas-affected victims. The site itself has never been cleaned up and a new generation is being poisoned by the chemicals that Union Carbide left be­hind.

It was not until 1989 that Union Carbide, in a partial settlement with the Indian government, agreed to pay out some $470 million in compensation.

The victims were not consulted in the settlement dis­cussions and many felt cheated by their compensation – $300-$500 – or about five years’ worth of medical ex­penses.

Today, those who were awarded compensation are hardly better off than those who were not.

In 1991, the local government in Bhopal charged Warren Anderson, Union Carbide’s CEO at the time of the disaster, with manslaughter. If tried in India and con­victed, he faced a maximum of ten years in prison.

However Mr. Anderson never stood trial before an Indian court; he instead, evaded an international arrest warrant and a summons to appear before a US Court. For years Mr. Anderson’s whereabouts were unknown and it was not until August of 2002 that Green peace found him, living a life of luxury in the Hamptons.

Neither the American nor the Indian government seem interested in disturbing him with an extradition, de­spite the recent scandals over corporate crime. This is unfortunate: Mr. Anderson’s decisions did not just wipe out retirement plans, they killed people.

The Union Carbide Corporation itself was charged with culpable homicide, a criminal charge whose penalty has no upper limit. These charges have never been re­solved, as Union Carbide, like its former CEO, has re­fused to appear before an Indian court.

Union Carbide also remains liable for the environ­mental devastation its operations have caused. Environ­mental damages were never addressed in the 1989 settle­ment and the contamination that Union Carbide left be­hind continues to spread. These liabilities became the property of the Dow Corporation, following its 2001 pur­chase of Union Carbide.

The deal was completed much to the chagrin of a number of Dow stockholders, who filed suit in a desper­ate attempt to stop it. Dow was quick to pay off an out­standing claim against Union Carbide soon after it ac­quired the company, setting aside $2.2 billion to pay off former Union Carbide asbestos workers in Texas. How­ever, has consistently and stringently maintained that it is not liable for the Bhopal accident.

Bhopal Medical Appeal:

The Bhopal Medical Appeal was launched in 1994, when a man from Bhopal came to Britain to tell whoever would listen about the calamitous condition of the still suffering victims of the Union Carbide gas disaster.

Those who met him learned that after ten years, the survivors had received no meaningful medical help.

Survivors realised that they must help themselves, because nobody else would. They wanted to open their own free clinic for gas victims.

They were joined in the UK by a few individuals who put the mechanics of the Appeal together. They were in turn joined in this effort by other likeminded people.

The International Campaign for Justice in Bhopal (ICJB) PAN-UK is a member of the ICJB, which seeks to obtain justice for the survivors in Bhopal and many of whose aims have medical significance – for example, the provision of proper medical relief, including for people born since the disaster who suffer from gas- and water- poisoning, adequate compensation for past medical bills and loss of livelihood, the clean-up of the factory, which continues to poison nearby land and drinking water sup­plies.

Today:

Victims in Bhopal have been left in the lurch, told to fend for themselves as corporate executives elude jus­tice and big corporations elude the blame.

Dow’s unwillingness to fulfill its legal and moral obli­gations in Bhopal represents only the latest chapter in this horrifying humanitarian disaster.

For twenty years, the victims of Bhopal have contin­ued to demand justice.

Achievements of the new clinic (2002)…

Have developed safe, effective and inexpensive treat­ment methods for particular symptoms or symptom com­plexes.

At Sambhavna they provide free treatment to the gas victims on the basis of their symptoms or symptom complexes. Those coming for medical care can chose to be treated through allopathy, Ayurveda and Yoga.

Constant efforts are being made towards developing treatment protocols for specific symptom complexes.

An MNC is one which undertakes foreign direct in­vestment, i.e., it owns or controls income generation as­sets in more than one country and in so doing produces good or services outside its country of origin, i.e., en­gages in international production.

Multinational Companies or Corporations in India (MNC) – 12 Main Advantages of the MNCs

MNCs are diversifying the market of their products in various countries due to their possession of large financial resources, advance technology, marketing facilities, reputed brand and image. Due to this MNCs are in a position to expand the market of their products in other countries.

Main advantages of the MNCs which help in the development of a country like India are listed below:

Advantage # 1. Large Financial Resources:

Developing or underdeveloped countries often face the problem of lack of capital which is solved by the MNCs. Lack of capital leads to slow rate of economic growth. MNCs help them to achieve the objective of higher economic growth by investing in these countries.

Advantage # 2. Foreign Exchange:

The capital of MNCs comes in foreign currency. The inflow of the foreign currency in the home country is increased which helps the country to maintain a balanced balance of payment position.

Advantage # 3. Marketing Services:

Marketing services related to export marketing, advertising, market research, branding etc. are made available by the MNCs. These services are performed efficiently by these corporations.

Advantage # 4. Modern Techniques and Management:

The resources are being fully utilised and productivity tends to increase because of the use of modern technology and managerial services provided by the MNCs. They transfer the advance technology, managerial and technical skills to the developing and under developed countries.

Advantage # 5. Employment Opportunities:

The countries in which the subsidiaries of the MNCs establish, employment opportunities tend to increase. Increase in investment leads to increase in employment in a country.

Advantage # 6. Exports:

Cheap domestic labour is used to convert raw materials into finished goods by MNCs. Good quality products are produced due to improved technology, better research and development. Exports of the country tend to increase because of the increased demand of good quality products.

Advantage # 7. Competition:

Competition in the domestic market tends to increase because of the MNCs. Prices of the product decreases due to increased competition. For instance entry of LG, Sony, Samsung, Panasonic, Whirlpool etc. in the Indian electronics market has increased the competition resulting in a fall in the prices of electronic goods.

Advantage # 8. Knowledge:

Training regarding the use of modern technology and other managerial, marketing skills is given to the employees of the local markets by the MNCs. This enhances their level of knowledge, skill and ability so that they are in a position to manage their activities efficiently.

Advantage # 9. Industrialisation:

MNCs helps in the growth of industrialisation in the developing countries. Managerial skills, adequate funds and technical know-how required for starting a new project is provided by the MNCs. Many industries such as Philips, Proctor and Gamble, BPL are set up by MNCs in India.

Advantage # 10. Standard of Living:

Purchasing power of the people increases due to increase in the employment opportunities. Standard of living of the people also tends to rise when all the people are in a position to buy all types of goods.

Advantage # 11. Availability of Products:

MNCs ensure the availability of all types of goods in the economy.

Advantage # 12. World Economic Unity:

Yet another advantage of MNCs is that it encourages world economic unity by establishing better economic relations.

Multinational Companies or Corporations in India (MNC) – Disadvantages

Since the main motive of MNCs is profit maximisation rather than social welfare, they are considered as the exploiters.

They are considered so because of the reasons listed below:

1. Flow of Funds:

Subsidiaries are set by the MNCs in the host country. They invest in these countries with the aim of making money. They also succeed it achieving this aim. But this is not beneficial for the host country as MNCs take back these profits back to their own countries. This results into the outflow of foreign exchange and hence may result into unfavourable balance of payment in the host country.

2. Unbalanced Growth:

MNCs leads to regional imbalance in the host country. Industries are usually set by the MNCs in the areas where the trade facilities are already available i.e. developed areas resulting in the development of already developed areas. This results into regional variation in growth as the backward areas remain untouched.

3. Political Interference:

MNCs tries to influence the political environment of the host country. They provide financial help to a political party to win the election so that the policies made by them are beneficial for them. So in other words these corporations prove to be a hindrance in the political freedom of a country.

4. Evasion of Taxes:

Corporation tax is imposed by the host country on the income of the companies and corporations. The policy of transfer pricing is used by the MNCs to reduce their profit so as to avoid payment of the taxes. Under this policy, intermediate goods are purchased at a high price from the subsidiaries of the MNCs which reduces their profits. Likewise products are exported at low prices to their subsidiaries, so as to show low export income. So in order to show low profits MNCs over invoice the imports and under invoice the\exports. Thus, MNCs manipulated their bills in order to evade taxes.

5. Threat to the Indigenous Producers:

Because of the competitive strength, advance technology, better research and development facilities, MNCs proves to be a major threat to the indigenous producers. They are in a position to charge low price for their products because of the use of new techniques of production. This results in throwing the indigenous producers out of the market.

6. Production of Prohibited Goods:

To achieve the objective of profit maximisation MNCs do not hesitate to compromise the health of its customers. In India, many goods which are prohibited are manufactured and sold by MNCs. They produce even those goods which are harmful for the health of the consumers.

7. Small Scale Industries:

MNCs prove a threat to the small scale industries as they usually produce similar goods, for instance pickles, chips, jams, etc. Since MNCs have large resources they spend a lot on the advertisement and due to their brand image, they are in a position to throw these small scale industries out of the market.

8. Brain Drain:

MNCs lead to brain drain. They hire the services of skilled technicians, engineers, experts in the host country but after sometime they are sent abroad in their subsidiaries. So in this way host country’s talent is used for the development of the home country.

9. Non-Essential Goods:

The stress by the MNCs is on the production of consumer durable goods which helps them to earn huge profits. They are not bothered with the production of the capital goods or the goods which are scarce in the host country or goods which are essential for the economic development of a country. They produce only those goods that can be produced with the local technology and helps them to earn profits.

10. Inappropriate Technology:

Inappropriate technology is transferred by the MNCs. For instance, in a labour intensive country like India, capital intensive technology brought by MNCs is quite inappropriate and unsuitable.

11. Bargaining Power:

Bargaining power of the producers of the host country is quite less. Thus, MNCs form agreements which serve their own interests.

12. Monopoly:

Sometimes MNCs join hands with large business houses resulting into monopolistic practices. This is possible because MNCs have huge financial resources, technical knowhow, R & D etc.

13. Exploitation of Resources:

The resources of the host country are wasted or over utilised by the MNCs which have an adverse effect in the future. The MNCs exploit the human resources also by providing them with low wages and also they evade taxes while obtaining huge profits.

14. Loss of Culture:

The most dangerous effect of the MNCs is the loss of the culture of the host country. MNCs bring along with them, their own dress and food habits which are usually adopted by the youth of the host countries.

15. Profit Oriented:

MNCs work on the basic objective of profit maximisation by using the resources of the host country. They do not bother themselves with the growth and development of these countries.

To conclude, one can say that MNCs have both merits and demerits. In today’s world their role in the growth and development of an underdeveloped country cannot be ignored. So, special policy measures should be taken by the host country’s government to minimise their exploitation.

Some of the Other Disadvantages of MNcs

The disadvantages of multinationals are given below:

1. Disregard of National Goals:

MNCs invest in most profitable sectors, e.g., consumer goods disregarding the goals and priorities of host countries. They do very little for underdeveloped strategic sectors and backward regions. Due to their capital intensive technology and profit-mindedness, they create relatively few jobs and fail to solve the chronic problems, e.g., unemployment and poverty of host nations.

2. Obsolete Technology:

MNCs often transfer outdated technology to their collaborators in host countries. In many cases technology transferred was unsuitable causing waste of scarce capital. Repetitive imports of similar technology led to excessive royalty payments without adding to technical knowledge in host countries. Sometimes, machinery available locally was imported or it remained idle for want of repairs and maintenance facilities. MNCs have failed to develop local skills and talents. MNCs use capital intensive technology which may reduce jobs.

3. Excessive Remittance:

MNCs squeeze out maximum payment from their subsidiaries/ affiliates and collaborators in the form of royalty, technical fee, dividend, etc. By repatriating profits, MNCs put severe pressures on the foreign exchange reserves and balance of payments of host countries.

4. Creation of Monopoly:

MNCs join hands with big business houses and give rise to monopoly and concentration of economic power in host countries. They kill indigenous enterprises through strategic advantages like patents, superior technology, etc. For example, Pearl Soft Drinks and Kwality Ice Cream Co., had to sell themselves to foreign MNCs in India. MNCs pose a threat to small scale industries.

5. Restrictive Clauses:

Due to their strong bargaining power, MNCs introduce restrictive clauses in collaboration agreements, e.g., technology cannot be passed to third parties, pricing of products will be by the MNC, exports from host country will be restricted and managerial posts will be filled by parent company. MNCs do not transfer R&D, training and other facilities to host countries.

6. Threat to National Sovereignty:

MNCs pose a danger to the independence of host countries. These corporations tend to interfere in the political affairs of host nations. Some MNCs like ITI are accused of overthrowing Governments in countries such as Chile.

7. Alien Culture:

MNCs tend to vitiate the cultural heritage of local people and propagate their own culture to sell their products. For instance, MNCs have encouraged the consumption of synthetic food, soft drinks, etc. in India.

8. Depletion of Natural Resources:

MNCs cause rapid depletion of some of the non-­renewable natural resources in host countries.

9. Disregard to Consumer Welfare:

Their main objective of coming to India is to exploit the big market available here. Most of them are in FMCG selling fast food (junk food) with no nutritive value e.g. Pepsi Co. and Coca-cola selling soft drinks and snacks, Nestle, McDonald.

Thus, multinationals are a mixed blessing as they play both positive and negative roles.