5 MNCs and Indian Transnational Companies

MNCs and Indian Transnational Companies

Concept of Multinational Corporation

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 owns and controls production, marketing and service facilities in several countries. 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. For example, coca cola corporation has its headquarters in the USA and it has branches/ subsidiaries in several countries. A multinational corporation controls production and marketing facilities in more than one country.

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 in 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.

Characteristics of Multinational Corporations (MNCs)

The salient features of multinational corporations are as follows:

1. Giant Size : The assets and sales of a multinational are quite large (trillion dollars). The sales turnover of some MNCs exceed the Gross National Product of several developing countries. For example, the physical assets of International Business Machines (IBM) exceed 8billion dollars.
2. 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. There is geographical dispersion of its operations. For example, ITI has about 800 subsidiaries in more than 70 countries.
3. Centralised Control : A multinational corporation has its headquarters in the home country. It exercises control over all branches and subsidiaries through an integrated structure. The local managements of branches and subsidiaries operate within the policy framework of the parent corporation.
4. 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 Unilever Limited acquired Tata Oil Mils, and Modern Foods.
5. Sophisticated Technology : Generally, a multinational patient 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.
6. 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. It operates on the basis of best alternatives available anywhere in the world. Its local affiliates are often managed by nationals of the host country. For example, Indians manage Hindustan Unilever Limited which is the affiliate of Unilever, a Dutch multinational.
7. 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 see whatever products/services it produces in different countries.
8. Multiple Objectives ; Multinational corporations make investments in different countries with the following aims ;
   1. to take advantage of tax benefits in host countries or to circumvent tariff barriers.
   2. to exploit the natural resources of the host country.
   3. to take advantage of Government concessions in host countries.
   4. to mitigate the impact of regulations in the home country.
   5. to reduce costs of production by making use of cheap labour and lower transportation expenses in host countries.
   6. to gain dominance in foreign markets.
   7. to expand activities vertically.
9. Several Forms ; Multinational corporations operate in various forms in host countries, e.g., branches, subsidiaries, joint ventures, etc.

Forms of Multinational Corporations

Multinational corporations operate in the following forms;

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

2. 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 follow the laws and regulations of the country in which it is located. Multinational find it easiest to operate through branches.

3. 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 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.

4. Joint ventures : In this system, international corporation establishes a company in a foreign country in partnership with the 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 Suzuki, the Government of India and Suzuki of Japan jointly supplied the capital and shared profits. Suzuki supplied advanced technology and day-to-day management lied 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.

5. Turn-key Projects : In this method, the multinational corporation undertakes a project in a foreign country. The multinational constructs and operates on individual 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 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.

Reasons for Growth of Multinationals in India

In recent years, there has been phenomenal growth of multinationals all over the world. The reasons for the growth of multinational companies in India are as follows :

1. Financial superiorities : A multinational corporation enjoys the following financial superiorities:

• It has huge financial resources at its disposal. Therefore, it can turn any adverse circumstance in its favour.
• It has easier access to capital markets and can raise more international resources than a domestic company.
• 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.
• Financial institutions are ready to lend money to it.
• It’s efficient financial management utilises funds very judiciously to generate surplus which can be easily employed in other countries.

2. Technical Superiorities : A multinational possesses the following technical Superiorities:

• 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.
• It has research and development (R&D) facilities for developing new technology and new products.
• It has trained personnel in science and technology.
• It enjoys economies of large scale production.
• It has international quality specifications and standards.

3. Marketing Superiorities : A multinational corporation enjoys the following marketing Superiorities over the natural firms :

• It enjoys market reputation and faces no difficulty in selling its products all over the world.
• It can adopt more aggressive advertising and sales promotion techniques.
• It has more reliable and up-to-date market information system as its command.
• It can adapt itself easily to changes in demand.
• 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 : A multinational enjoys the following Superiorities in administration and management :

• It employs professional and expert managers.
• It possesses a superior management information system.

Foreign Transnational Corporations

A foreign transnational corporation refers to a large sized company incorporated in a foreign country but having production or marketing facilities in India. For example, Electrolux corporation is a foreign transnational corporation. It entered India by acquiring Kelvinator of India and TVS Washing Machines. Foreign transnational corporations are very large in size with an integrated system of international operations. They have sophisticated technology and large financial resources at their command. Foreign transnational corporations operate in India through their subsidiaries and affiliates. Many of these have collaboration agreements with Indian companies. Under the agreements, foreign transnational corporations provide capital, technology and brand names. Foreign transnational corporations have a considerable influence over the Indian industry as can be seen from the following table.

Role of Multinational Corporations

Multinational Corporations play both positive and negative roles. As a positive force, multinationals can be a dynamic force or instrument for wider distribution of capital, technology and employment. As a negative force, multinationals can be monsters beyond the control of national governments and working against public interest.

Benefits To Host Country

Multinationals can offer the following gains to host countries:

1. Foreign Capital : Developing countries suffer from shortage of capital required for rapid industrialisation. Multinational corporations bring in much needed capital for the development of these countries. These corporations make direct foreign investment thereby speeding up the process of economic development. Since Liberalisation, India has, for example, attracted foreign investment worth several billion dollars.
2. Advanced Technology : Developing countries are technologically backward. They lack sufficient resources to carry on research and development. Multinationals serve as vehicles for the transfer of advanced technology to these countries. Advanced technological know-how, improved skills and consultancy help the developing countries to improve the quality of products and reduce costs. Through continuous research and development, MNCs serve as a source of inventions and innovations.
3. Employment Generation : Multinationals create large scale employment opportunities in host countries. They increase the investment level and thereby the employment and income levels. Multinationals offer excellent pay scales and career opportunities to managers, technical and clerical staff.
4. Foreign Exchange : Multinationals, ,help the host countries to increase their exports and reduce their dependence on imports. As a result, these corporations enable the host economies to improve balance of payment position. Multinationals expand markets beyond the boundaries of the home country. They also add to Government revenues by way of taxes and duties.
5. Managerial Revolution : Multinationals help to professionalise management in host countries. They employ modern management techniques and trained managers. Several concepts and techniques like corporate planning, management by objectives and job enrichment were evolved evolved by multinational corporations. As careers of knowledge and experience, multinationals build up ‘knowledge base’ and thereby assist the development of human resources in host countries. They have contributed to the growth of institutions that impact educating and training in management.
6. Healthy Competition : Multinationals increase competition and thereby break domestic monopolies. They compel the domestic companies to improve their efficiency and quality. For example, many Indian companies acquired ISO-9000 quality certificate due to competition from multinational corporations after liberalization, MNCs break up local monopolies.
7. Growth of Domestic Firms : MNCs stimulate the growth of local enterprises. In order to support its other operations, a multinational may assist domestic suppliers and ancillary units. Multinationals buy materials and components from local industrial units.
8. Standard of Living : By providing superior products and services, MNCs help to improve living standards in host countries. They also introduce foreign products and better life styles in host countries.
9. World Economy : MNCs help to integrate national economics into a world economy. They encourage international brotherhood and cultural exchanges throw international business.
10. Economies of Scale : Multinational produce and sell on a huge scale. Worldwide operations bring economics of large scale and reduce costs.

Benefits To Home Country

Multinationals offer the following advantages to the country of their origin :

• The home country can obtain raw materials and labour at comparatively lower cost.
• It can export components and finished products and thereby market is widened.
• It can earn huge revenue by way of dividends, royality, licensing fees, etc.
• It can increase domestic employment due to higher scale of operations.
• It can acquire technical and managerial expertise of foreign nations.

Criticism of Multinational Corporations

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 for their subsidiaries/affiliates and collaborations 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 industries in host countries.

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. They do not develop local skills.

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 : MNC 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 with no nutritive value, e g., Pepsi Co. And Coca cola selling soft drinks and snacks by Nestle, McDonald. They charge high prices due to their market power.

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

Government Policy Towards Multinational Corporations

India has adopted and open-arm welcome policy towards MNCs. But experience reveals that the hopes with which MNCs were permitted in India have not been fulfilled. Most of the MNCs have entered in low tech areas like soft drinks, toilet goods, electronics, etc. Several Indian companies were forced either to sell out or to serve as affiliates of MNCs. Therefore, it is necessary to safeguard the country’s interests. Some of the measures that may be adopted for this purpose are as follows :

• MNCs should be allowed entry only in high tech industries such as telecommunications, petrochemicals, etc.
• Steps must be taken to ensure that MNCs bring in the latest technology.
• MNCs should be required to bring direct foreign investment and contribute to export promotion/import substitution.
• Wherever necessary a level playing field should be provided so as to enable the domestic enterprises to complete with MNCs.

Indian Transnational Companies

An Indian Transnational Company is a company incorporated in India and having subsidiary/affiliate in a foreign country. Some big business houses,e.g., Birlas, Tatas have subsidiaries and joint ventures abroad. Bharti Airtel, UB Group, Arvind Mills, Ispat Group, Amtrix Corporation, Dalmias, ITC, etc. have in recent years set up joint ventures in foreign countries. Even public sector enterprises, e.g., HMT, BHEL, Engineers India, IRCON have started projects aboard.

The main characters of Indian transnational companies are given below:

1. Smaller Size : Indian transnational companies are small in terms of assets and sales turnover as compared to foreign transnational corporations. This is because the former are new entrants to international business and they posses few distinctive advantages.

2. Narrow Spread : Most of the Indian transnational companies are located in a few developing countries like Indonesia, Thailand, Senegal, Nigeria, Ethiopia, Kenya, Sri Lanka, UAE, Europe, etc.

3. Adopted Technology : The technology of Indian transnational companies is largely an adaption of the technology which they used to import earlier.

4. Skewed Ownership : A few big business houses own most of the Indian transnational companies. A broadbased participation of Indian firms in international business is lacking. For instance, Birlas alone control one-fourth share of Indian joint ventures abroad.

5. Minority Owner : Majority of the Indian transnational companies operate in the form of joint ventures with foreign firms. Until 1978, Indian Government did not permit major shareholding abroad. But now Indian companies have set up their subsidiaries in foreign countries.

Indian transnationals have instead abroad mainly in the form of joint ventures with domestic firms of host countries due to the following reasons:

1. In a joint venture the local partner can better deal with the Government and public of the host country. There is less public hostility when there is a local partner.
2. The Indian company can enter a foreign market with limited investment in a joint venture. Considerable investment will be necessary for setting up wholly owned subsidiary.
3. Joint Venture is the only alternative in those countries which do not allow fully owned foreign forms.

6. Wide Range of Industries : Indian transnational corporations are involved in a wide range of industries, e.g., trading, marketing, consultancy, hotel, computer software, shipping, construction, iron and steel, textile, paper, etc. Appreciation of rupee and race for larger projects are pushing Indian forms to be globalise.

7. High Mortality Rate : A large number of Indian transnational corporations have failed due to unclear objectives, incomplete project proposals, poor understanding of foreign markets, small size, excessive gestation period and legal restrictions.

8. Multiple Objectives : Exploitation of foreign markets has been the main motive of Indian transnational corporations. But many of them are also inspired by the goals of export promotion, technology/finance and benefits of large scale operations.

SUMMARY

Multinational Corporation : A multinational corporations is a corporation which carriers on business activities in more than one country.

Characteristics of Multinational Corporations : Giant size, international operations, centralised control, oligopoly power, advanced technology, professional management and world market are the main characteristics of multinational corporations.

Benefits for Host Countries : Multinationals help host countries through foreign capital, advanced technology, export promotion, employment generation, professionalisation of management, better living standards, etc.

Disadvantages of Host Countries : Multinationals cause harm to host nations through outdated technology, export promotion, excessive remittance, monopoly, alien culture, resource depletion and threat to sovereignty.

Indian Multinationals : Indian transnationals are comparatively small in size, with narrow spread, adopted technology, skewed ownership, high mortality rate etc.

meaning of MNCs and Indian Transnational Companies /