Lesson: Multinational Corporations
Lesson: Multinational Corporations
Lesson: Multinational Corporations
9
MULTINATIONAL CORPORATIONS
CONTENTS
9.0 Aims and Objectives
9.1 Introduction
9.2 Multinational Corporation (MNCs)
9.3 Multinational, Global, Multi-Domestic and Transnational
9.3.1 Multinational Enterprises (MNE)
9.3.2 Transnational Companies (TNCs)
9.3.3 Global Company
9.3.4 Multi-domestic Company
9.4 Why Companies Cross Borders (Benefits of Being MNCs)
9.5 Impact of MNC
9.5.1 Impact on the Trade Balance
9.5.2 Promote Small Scale/Ancillary Industry
9.5.3 Knowledge Transfer
9.5.4 Improves the Technology Level of Local Firms
9.5.5 Utilization of Resources
9.5.6 Inter-industry Linkage Effects
9.6 Demerits of MNC
9.6.1 Exploitation of Workers
9.6.2 Transfer Pricing
9.7 MNCs of India
9.8 Let us Sum up
9.9 Lesson End Activities
9.10 Keywords
9.11 Questions for Discussion
9.12 Suggested Readings
Definition by Size
MNCs refer to company which is big in size. Bit this size has many dimensions. One
company may be big in terms of turnover and another may be in terms of Profit and
still another in terms of market value. But corporate size in terms of sales is primarily
used to describe one company as Multinational Corporation. World Investment Report
1997 indicate that there were about 45,000 MNCs with some 2,80,000 affiliates,
according to the World Investment Report 2002 there were about 65000 of them with
about 8.5 Lakh foreign affiliates. But corporate size cant be used as criterion to be
classified as MNC. As GM does not become multinational because it was large but it
became large as a result of going international.
Definition by Structure
Structural definition defines MNC in terms that in how many country firm is operating
and by citizenship of corporate owners and top managers. For example Coca Cola
operates in approx 200 nations and wide spread share holdings. The board room and
top management of top companies is becoming global.
Definitions by Performance
Definitions by performance depends on such characteristics as earnings, sales and
assets. These performance characteristics indicate the extent of the commitment of
corporate resources to foreign operations and the amount of reward from that
commitment. As major junk of revenue of coca cola comes from overseas operations.
In India Ranbaxy is considered as true MNC as half to its turnover comes from
overseas market and this proportions is expected to significantly increase in coming
years.
Human Resource or overseas employees are customarily considered as part of the
performance requirement rather than as part of the structural requirement. Willingness
of company to use overseas personnel is a significant criterion for multinationalism.
Definition by Behavior
According to this definition it is the behavioral characteristics of top management
which decides that firm is a multinational or not. Thus a company becomes more
multinational as its management more internationally. If a management has a
geocentric thinking them this firm is treated as true MNC. In Geocentric approach
firm considers the whole world rather than particular country as its target market.
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Business Environment and Ethics 9.3 MULTINATIONAL, GLOBAL, MULTI-DOMESTIC
AND TRANSNATIONAL
Multinational, Global, International and Transnational are terms which are frequently
used to describe the organizations which are operating in more than one nations.
Though usually theses terms are used interchangeably but these terms have specific
meanings.
Import Export
- Intermediate goods for local assembly and sale - Final goods for global markets
- Machinery for local production facilities - Intermediate goods for global markets
- Investors’ global products for local sale
If a country runs a trade deficit, it must compensate for that deficit by reducing its
reserves or receiving an influx of capital. The more capital inflow a country receives
the more it can import and the more it can run a trade deficit. In recent times FDI
helped a lot to Indian in managing trade deficit.
Moreover, MNEs may open new export markets, and open up new export markets for
local followers that can build on the country of origin reputation that foreign investors
may help building, and use the same trade channels. MNEs are more likely to share
such general knowledge, as it is less industry-specific and not part of their core
capabilities and its diffusion to local businesses does not endanger their own
competitive advantage.
Increases Employment
MNC begets new opportunities of employment in host country. MNC transfers their
routine jobs and non core jobs to the destination where labor is cheap. It is the reason
that lot of jobs from Europe and USA have been transferred to India in last decade.
MNCs also transfers its operation to new and economical destination this also
increases the opportunity for employment. MNC plays a critical role in economic
development and in raising income level of people this also increases, this also
increases level of employment. In last decade directly or indirectly MNC have created
millions of Jobs in India in almost all the sector as infrastructure, software, hardware,
old economy industry, entertainment, media, etc.
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Business Environment and Ethics 9.6 DEMERITS OF MNC
Multinational corporations have become too powerful in absolute terms as well as
relative to governments
The enormous resources controlled by multinational corporations give them a
tremendous amount of power, especially relative to individuals and governments. The
ongoing reduction of national barriers to trade and investment enables these firms to
close shop and head overseas if government, workers or NGOs place restrictions (e.g.,
minimum wage, taxation, labor standards, fines for pollution, etc.) on them or
otherwise inhibit their ability to earn profits. Certainly, there is a danger that any
organization that controls resources and market share on a par with giant
conglomerates like HLL, Reliance or TATA, AV Birla, may abuse its power, perhaps
in ways that undermine democratic processes or hurt consumers. But these
corporations earn their profits through efficiency and innovation, without which they
would quickly lose market share to rivals. They employ millions of workers with
competitive wages, provide relatively low-cost/high-quality goods and services to
consumers and enrich shareholders. Moreover, they must accomplish all of this
without stepping beyond the boundaries of Competition/ Antitrust Law/ Consumer
Act in the countries in which they operate. In light of the profit motive, firm spend
money to influence legislation to its favor if doing so is likely to enhance profitability.
After 1991 HLL choose the inorganic rout for growth and acquired many firms, some
of them as follows:
112 Food and Beverages
Business Environment and Ethics
Mar 1993 - Kothari General Foods
Jun 1993 - Merger of Doom Dooma India
Jun 1993 - Merger of Tea Estates India
Jun 1993 - Merger of Brooke Bond India and Lipton India to form Brooke
Bond Lipton India (BBLIL)
Jun 1993 - Kissan Products (BBLIL)
Jul 1993 - Cadbury’s Dollops (Ice creams)
Mar 1994 - Tata Oil Mills Company (TOMCO)
May 1994 - Merryweather Food Products
Dec 1994 - Kwality Ice Creams
Apr 1995 - Milkfood Ice Creams
Jan 1996 - Merger of BBLIL into HLL
Jan 1998 - Kwality Frozen Foods
Dec 1999 - Rossell Industries Ltd. (Tea plantations)
Jan 2000 - Modern Foods Industries
2. BP (Britain) 285,059.0
176 companies of Fortune Global 500 companies are from USA followed by Japan who has 81
companies. Following list shows the country wise distribution of few Fortune Global 500
corporations:
Country No. of Corporation (country wise )
in Fortune Global 500
USA 176
Japan 81
France 39
Germany 37
Britain 35
China 16
Canada 13
Switzerland 11
Australia 9
Italy 8
Spain 8
Sweden 7
India 5
Source: Fortune, August 1, 2005
Sundaram Fasteners
Global Measures:
z Signed an MoU to acquire Precision Forging Unit of Dana Spicer Europe to
manufacture cold forged products for automotive applications
z Plans to set up a factory in Haiyan Economic Development Zone (HEDZ), Haiyan
County, Zhejiang province in South China to manufacture and sell High Tensile
Fasteners to the Chinese automobile industry. The commencement of the
production is slated for the first half of 2004.The market demand for automobile
components is vast in china as the country produces 1.6mn commercial vehicles
and buses, 1mn cars and 5mn two wheelers.
Asian Paint India Ltd. was set up in 1942 by four young men Champaklal H.
Choksey, Chimanlal Choksy, S.C. Dani, A. Vakil, in Bombay. In 1999 it acquired
76% stake in Sri Lanka’s paint company “Delmege Forsyth & Co. In November 2000
it started its operations in partnership with Al Hassan group of companies in Oman. In
November 2002 it bought 50.1% controlling stake in Berger International of
Singapore ” which has a manufacturing capacity in 11 locations. In December 2002
Asian paints purchased 60% stake in SCIB chemicals AE Egypt. In September 2003 it
acquired Taumbmans Paint (Fiji) Ltd.
Today Asian Paints is largest Paint company of India and among top ten decorative 117
Multinational Corporations
company in world. It has manufacturing location in 23 countries which includes
Australia, China, Fiji, Solomon Island, Myanmar, Thailand, Malaysia, India,
Singapore, Bangladesh, Nepal, Srilanka, Bahrain, Egypt, Mauritius, Malta, etc
Incorporated in the year 1961, Ranbaxy Laboratories Limited crossed a sales turnover
of Rs 5 billion by the year 1997. In India, Ranbaxy is the largest pharmaceutical
Company by sales with a domestic market share of 4.83% and is ranked third on the
retail market.
In the case of Ranbaxy, 2 surveillance audits in 2000, renewed the ISO 9002
Certification for Mumbai and Baroda locations. The Company is working towards
getting the ISO 14001 Certification, which includes all processes, besides ensuring
safety and environmental protection. The successful establishment of Ranbaxy in US
can be explained by the following sequence of events:
1. In 1988, Ranbaxy’s plant at Toansa, Punjab got US FDA approval.
2. In 1990 and 1991, Ranbaxy was granted a US patents for its products
3. In 1995, it acquired Ohm Laboratories, a manufacturing facility in the US.
4. In 1998, Ranbaxy entered USA, world’s largest pharmaceuticals market, with
products under its own name.
5. Located at Gurgaon (Haryana), near New Delhi, and set amidst 17 acres of land,
the Ranbaxy Research Centre is one of the finest R&D facilities in India.
6. Ranbaxy is ranked amongst the top 100 pharmaceutical companies in the world
(9th largest generic company worldwide ), it has ground operations in 25
Countries and products sold in over 70 countries, manufacturing in 7. With an annual
net global sales of USD 764 million reflecting a growth of 39% for the year 2002 and
a workforce of over 8000 professionals across the globe, Ranbaxy Laboratories Ltd.
reaffirms its status as a potential MNC.
In ten days from Rs. 7,200 crore Indian company to a Rs. 17,500 crore global one
without spending a rupee.
In November 2004, when Videocon enters the race for the colour picture tubes
manufacturing capacity (19 million units a year across four plants in Europe, Asia, and
North America) of Thomson SA, not to many people gave the company a chance
against the likes of LG Philips display, Samsung and Matsushita. Yet not just has CMD
Venugopal Dhoot (Videocon) pulled off the deal, he has done so on terms that are
favorable to his company. “the world is out in the world that India and Indian
companies are not just a good by themselves, but also a hedge against China.” Fact is
Dhoot agreed to pay the asking price of euro 240 million (Rs. 1,248 crore) without
batting an eyelid (and net of cash and debt, which continue to be Thomson’s ); the deal
was completed through a special purpose vehicle, Eagle Electronics. Then he managed
to sell his oil and gas story to Thomson as a great investment. Sure enough, after due
diligence study by UBS, Thomson agreed to invest $ 295 million (Rs 1,298 crore) in
Videocon Industries for a 15 percent stake. The Electrolux deal was stuck pretty much
the same way; in return for taking over the company’s 91.85% stake in its loss making
Indian subsidiary (losses as of December 2005: Rs. 118 crore) Dhoot got the Swedish
major to agree to invest $94 million (Rs.413.6 crore) in Vidocon industries for around
5% stake. And since Electrolux wanted to stick to its business of consumer products, he
agreed to merge Vidocon International with Videocon Industries.
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Business Environment and Ethics Deal Mechanics
Company What Vidiocon Invested
After this deal Videocon group has a manufacturing foot print across four continents.
And half of its sale will be coming from global operations. As list below shows:
9.10 KEYWORDS
Transfer Pricing: A transfer price is price on goods and services sold by one member
of a corporate family to another, such as from a parent to its subsidiary in a foreign
country.
Global company: Global company is a company which takes the whole world as
single market and it standardize operations and its product worldwide in one or more
of the firm’s functional areas.
Multi-domestic Company: It is company which treats its every unit operating in
different countries as a independent profit center. Thus all the operations in this
organizations are highly decentralized.
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Business Environment and Ethics 9.11 QUESTIONS FOR DISCUSSION
1. What is Multinational Corporations? What is difference between TNCs, MNCs,
MNEs, Multi-domestic firm and Global firm?
2. Describe the various approaches to international business. Discuss the reasons
because of which an organization crosses the border.
3. Discuss the impact of MNCs on host country.
4. Discuss the impact of MNCs on home country.
5. Analyze the impact of MNCs on local business organization.
6. “Multinational corporations have become too powerful in abso lute terms as well
as relative to governments.” Critically evaluate the statement.
CYP 2
1. True, 2. False, 3. True, 4. True,
5. True, 6. False, 7. False.