101

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

9.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:
z Know the characteristics of multinational corporations
z Explain various types of multinational corporations
z Discuss the impact of multinational corporations on origin country and target
country
z Understand the Indian multinational firms
102
Business Environment and Ethics 9.1 INTRODUCTION
It has been said that the multinational Corporation (MNC) is the most powerful
institution in the world today. Indeed, the process of globalization, which is radically
transforming our world, is driven in large part by the rapid growth and spread of
corporations. Since the end of the Cold War in 1991, nearly all nations in the world
have reduced the role of the state in the economy and lowered barriers to the
international movement of goods, services, capital, ideas and technology. As the walls
imposed by nations/states have crumbled, multinational corporations have thrived,
spreading across the globe in search of new markets and factors of production. MNCs
have expanded across national borders in two ways: trade and Foreign Direct
Investment (FDI). Each has contributed to stable, lasting benefits to the world
economy.
Although modern multinational firms date from the late nineteenth century, the term
Multinational Corporation did not appear until 1960. At a conference at Carnegie
Mellon University, David Lilienthal (1960) distinguished between portfolio and direct
investment and then defined ‘Such corporations – which have their home in one
country but which operate and live under the laws of other countries as well..’ as
multinational corporations. It is of interest that from the start the multinational
corporation was defined in terms of jurisdiction and potential jurisdictional conflict.
The modern multinational corporation has its roots in the Dutch and British East India
Companies of the 17th century. These companies imposed some semblance of order,
often forcefully and illegitimately, on the world of commerce, which until then was
ruled by economic anarchy. Where once pirates threatened trade and commerce, the
East India companies assembled armies and erected fortresses to protect their pursuit
of profit. They often gained market share by force – against rivals, including one
another, and against the inhabitants of lands they wished to colonize. Typically, the
companies demanded free trade and local monopoly rights in the markets in which
they operated so as to maximize profits. These predatory practices impacted the
colonized lands for the worse.
Multinationals Corporations are major player in the international business. In an era of
WTO, Regional Groupings, Liberalization, and Globalization role of MNCs have
increased tremendously. Almost ¾ of total GDP of South Korea comes from only 5
MNC of South Korea. Out of 50 largest “economies” 14 are MNCs. In America,
Japan, South Korea, Singapore, Malaysia, etc. There are now approximately 63,000
multinational corporations – defined as firms that engage in international production –
with over 690,000 foreign affiliates. In 1997, these firms controlled $12 trillion in
foreign assets, employed 30 million workers and earned $9.5 trillion in revenues –
larger than the annual GDP of the United States or the European Union (EU). The
rapid growth of MNCs is a direct result of the worldwide liberalization of trade and
investment. Corporations have grown larger because they now compete in much
bigger markets.
Table 9.1: An Overview of the Richest Economic Entities the World Over
Country MNC Revenue / GDP (US$ billions)
1. US 10,417
2. Japan 3,979
3. China 1,237
4. India 515
5. WALMART 287
6. BP 285
7. Exxon Mobil 270
8. Royal Dutch 268
MNC plays a significant role in all aspect of life even they play significant role in a 103
Multinational Corporations
national politics. Most of the MNCs work on the philosophy of that Merchant doesn’t
have any nationality. USA has a maximum number of MNCs. In Asian countries
Japan had maximum number of MNCs.

9.2 MULTINATIONAL CORPORATION (MNCs)

MNCs are defined as and enterprises that is headquartered in one country but has
operations in two or more countries. Sometimes it is difficult to know if a firm is an
MNCs because multinationals often downplay the fact that they are foreign held. For
example most of people in India are unaware that Bata is a Canadian company Bayer
is German company, Nestle is a Swiss company, Cadbury is British company. Various
definitions have been given to describe to MNCs. Sak Onkwist and John J. Shah have
described MNCs in following manner:

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.
104
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.

9.3.1 Multinational Enterprises (MNE)

Multinational enterprises (MNE) is a company that takes a global approach to foreign
markets and production; thus it is willing to consider market and production location
anywhere in the world. The term Multinational Corporations (MNCs) is also
commonly used in the international business arena and often is a synonym for MNE.
Usually most of the authors prefers the MNE there are many international firms which
are not organized as corporations.

9.3.2 Transnational Companies (TNCs)

Transnational Companies (TNCs) is a termed used by United Nations and most of
developing nations for multinational firms. This term is used in two contexts. Some
writers use this term for a company that is:
1. trying to achieve economies of scale through global integrations of its functional
area while at the same time
2. highly responsive to different locational environment (a newer name is
multicultural multinational).
Business people define transnational company as a firm formed by merger of two
firms of approximately the same size that are from two different countries as Royal
Dutch Shell is a company that is jointly owned in the United Kingdom and the
Netherlands, and its corporate management is split between the two countries. Same
way Unilever is a Dutch and English firm, VFK-Fokker (Germany – Netherland
aircraft company). Though today frequently this term is used as synonymous for
MNE/MNC. MNE as well as any other company can be categorized into two category
that is a Global Company and Multi-domestic Company.

9.3.3 Global Company

The term Global Company is widely used for MNE but every MNE is not a Global
MNE. Global company is company which has a global vision. It is company which
looks for opportunities worldwide, it sources it products, raw material, and financing
and personnel worldwide, it seeks to maintain a presence in key markets of world and
look for similarities not differences among markets. The biggest characteristic of these
company is that it 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. If we go
strictly by this definition then perhaps there is no Global firm as ever firm do some
alteration in its product or functional strategy according to the local condition and if
overseas market is as big as that of India and China and certain modifications are
essential. Though there are firms who two a extent can be classified as Global firms as
Coco Cola, Pepsi, Kellogs, SONY, etc. These are the companies who keep there
product portfolio same and manufacture the product for whole world considering them
as a single market, though they change many times there functional strategy according
to local requirements.

9.3.4 Multi-domestic Company

It is company which treats its every unit operating in different countries as a
independent profit center. It allows its foreign country operations to act fairly
independently such as by designing and producing a product or service in India for the 105
Multinational Corporations
Indian market and in China for the Chinese market.
Check Your Progress 1
Define the following:
1. Multinational Corporations
……………………………………………………………………………….
……………………………………………………………………………….
2. Global Company
……………………………………………………………………………….
……………………………………………………………………………….
3. Multi-domestic Company
……………………………………………………………………………….
……………………………………………………………………………….

9.4 WHY COMPANIES CROSS BORDERS (BENEFITS OF

BEING MNCs)
Undoubtedly firms cross the national boundaries and take the risk of operating in
unknown environment in the hope of earning more profit increasing share holders
wealth, besides this there are many other reasons as survival, new sources of supplies,
cheap human resource, and even just to keep busy nearest rival in its home country.
Some of the key reason of crossing national boundaries are as follows:
1. Survival: Most countries are not as fortunate as that of India, Russia, China or
USA in terms of size, resources, and opportunities. Most European nations are
small in size or most middle east and south east countries are rich in only one or
very few resources. In these countries the organization are bound to do business in
and with other countries to survive. Not only in these countries even in big
countries organization are bound to find new markets for their product and cheap
source of resources to remain competitive and to survive.
2. Growth of Overseas Market (Sales): This is the biggest reason of going abroad.
In the past years. In last 20 years many economies have opened there doors for
world. This resulted in big opportunity in terms of Market. Most of the European
nations, USA, Canada, Japan etc have a stagnant population growth and very low
GDP growth all this led to companies to search for new market. Emerging
economies that is India, China, South East Asia form significant market perhaps
more than 35% of world market give them this opportunity and MNC started
expanding its wings in these areas. India and China are among top five countries
of world in terms of Purchasing Power Parity. All this attracted many organization
to tap new market in emerging economies. Besides this agreement/ groups like
GATT, GATS, ASEAN, EU, SAPTA, NAFTA etc have also created huge
opportunities of business for organizations To tap these opportunities organization
are going abroad.
3. Diversification: No organization wants to keep all its egg in one basket. Every
organization wants to diversify the risk and internationalization is a good manner
to diversify the risk. Through internationalization a organization can diversify its
risk while sticking to its core competency or old business. As different countries
have different trade cycle for same product. When there is a recession in one
106 economy there may be boom in another economy and organization can cover
Business Environment and Ethics
losses in one country by profits in another country. As Ispat group has steel plant
in almost allover world. Which is number two in almost all the countries is
number one in terms of sale in India, Levers which is behind P&G in USA as
much ahead of P&G in India. Thus MNC diversify risk through
internationalization.
4. Source of Resources: In today’s cut throat competition cost cutting is the key to
success. Prices are controlled by consumers and the only thing which can be
manipulated to increase profit is cost. Organizations go abroad in search of
economical source of supply. A truly global firm always locate its processing in
the best available location in world and outsource HR and other physical
resources from best suited in world. It is the reason that more and more companies
are establishing there Call centers in India. Even Wal-Mart the biggest retailer of
world doesn’t have any retail shop in India have a purchase office in India. Nike
get its shoes manufactured in South East Asia. Nokia, IBM, Toyota, Sony, Philips,
Samsung, Mitsihuta, Boeing, Airbus, Addidas, GM, Ford, etc have there
Manufacturing capacities, Research Center, and ancillary unit at the place which
is best suited for them in world. So companies cross the border to have
economical source of resources.
5. To Protect Market Share: Firms also become MNEs in response to increased
foreign competition and a desire to protect their home market share. Using a
“follow the competitor” strategy, a growing number of MNEs now set up
operations in the home countries of their major competitors. This approach serves
dual purpose: - (1) it takes away business from their competitors by offering
customers other choices and (2) it lets competitors know that, if they attack the
MNEs home markets, they will face a similar response.
6. Tariff and Non-Tariff Barrier: Organizations establish there operation overseas
to deal with tariff and non tariff barriers. Many time countries impose tariff and
non tariff restrictions on import in such case organization establish their
production unit in host country so that it can be treated as local company. As in
late 1970 when USA imposes some non tariff restrictions on automobile import of
Japan, Japanese firm started establishing there units in USA so that in terms of
taxes they can be treated at par with US firms. And soon America become the
playground of Japanese firms.
7. Technology Expertise: A reason for becoming an MNE is to take advantage of
technological expertise by manufacturing goods directly (by FDI) rather than
allowing others to do it under a license. Many MNCs feel it unwise to give
another firm access to proprietary information such as patent, trademarks, or
technological expertise.
8. To have an access to Economical Human Resource: Many a times Companies
cross borders to have an access to the economical human resource. As more and
more Organizations which used to import Human Resource from country are now
establishing there operation in India only to take the advantage of economical
human resource. The cost of human resource is rising this is the significant reason
why companies are crossing borders.

9.5 IMPACT OF MNC

Multinational firms play a pivotal role in global economy, linking rich and poor
economies, and transmitting capital, knowledge, ideas and value systems across
borders. Their interaction with institutions, organizations and individuals is generating
positive and negative spillovers for stakeholders in host countries. In consequence
they have become focal points in the popular debate on the merits and dangers of
globalization, especially when it comes to developing countries. MNE are profit
maximizing, and thus naturally not interested in creating benefits for others without 107
Multinational Corporations
obtaining a good price for it.

9.5.1 Impact on the Trade Balance

The second macroeconomic effect of FDI is their impact on the trade balance. MNEs
have a competitive advantage in both accessing global markets in importing their
products to local markets. The ability to produce at central locations with large
economies of scale and supply markets in several countries is a core strategy of in
many manufacturing MNEs. Hence, they frequently export more than domestic firms,
but also import a larger share of their inputs. A large share of both exports and imports
is typically to or from affiliated companies, i.e. intra-firm international trade. Any
analysis of trade impact of FDI has to consider their impact on both exports and
imports.
Table 9.2: Impact on Balance of Payment on Selected Items
Balance of Payment
Capital Outflows Capital Inflows
Imports Exports

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

Service imports Service exports

- Fees for licenses and other services - Tourism and business travel receipts

Capital Import Capital Export

- Initial equity investment - Profit remittance
- Loans from parent to affiliate - Interest payments
- Repayment of loans

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.

9.5.2 Promote Small Scale/Ancillary Industry

MNCs often catalyze the export of complex, technology-intensive products made by
small - and medium-size firms (SMEs) located in host countries. For example,
approximately two-thirds of consumer electronic products made in Korea and Taiwan
are sold to MNCs such as GE, IBM and Toshiba on an “original equipment
manufacture” basis. In India too companies like Maruti Suzuki, Hyundai, Samsung,
LG, etc do most of their purchases from India itself it promotes ancillary industry.
108
Business Environment and Ethics
9.5.3 Knowledge Transfer
Host countries, especially developing economies, aim to create indigenous
technological capabilities”, that is “skills - technical, managerial and institutional -
that allow productive enterprises to utilize equipment and technical information
efficiently. Foreign investors are a potential source for knowledge at the technical and
systemic level. They can contribute not only by transferring information, but also by
stimulating directly or indirectly the generation of new knowledge in the host country.
Multinational firms possess some firm-specific advantages that can be profitably
combined with locational advantages at a site outside their home country. Knowledge
transfer raises the productivity of the subsidiary in the host economy and thus
contributes to tax revenues and national income and, possibly creates spillovers to the
local economy.

9.5.4 Improves the Technology Level of Local Firms

In the era of globalize capital markets, where overseas borrowing can be used to
supplement domestic savings, the importance of FDI perhaps lies less in the quantity
of capital inflow than on its ability to transfer technology and business best practices
to the domestic firms in the host country. Transfer of technology and business best
practices significantly improves the productivity of domestic firms in the recipient
countries, these firms would improve their international competitiveness, and the
impact of this spillover effect on the economy of the recipient country is arguably
much greater than the impact of the FDI itself. To maximize such benefits to local
firms, governments in many developing countries have stipulated that foreign firms
set up business operations in these countries in the form of Joint Ventures (JVs),
assuming that such cooperation among multinational enterprises and their local
partners would facilitate the transfer of technology and business practices.
Technology and business best practices are equally likely to be transferred from
MNEs to domestic firms in developing countries by way of migration of labour from
the former to the latter it is well proven truth for Indian software industry Labor and
executive mobility can thus enhance productivity throughout the economy by
transferring tacit knowledge that could not be transferred through informal contacts
between firms.

9.5.5 Utilization of Resources

Investment by MNEs increased the local development through a more optimum
combination of unemployed production factors and the utilization or upgrading of
resources. It is said that India is rich country, where people lives, only because India is
rich in mineral resources but unfortunately they have not been used. MNE may enable
idle resources to be used. MNE are always in search of new sources of resources.
MNE not only uses idle resource but they also use them at optimum level as they use
modern equipment, technology, and production methods. This increases their
productivity and reduces the production cost.

Development of Infrastructure and Economic Development

FDI is a transfer of capital across borders, which allows the receiving economy to
increase investment beyond its on savings rate. Traditionally, development economics
has focused on this addition to the capital stock as core contribution of foreign
investment to economic development. FDI is a source of capital because it has a more
long-term character than portfolio investment. It cannot be withdrawn quickly if the
volatile environment goes through an economic downturn, such as the exchange rate
crises in Mexico 1995, East Asia 1997 or Russia 1998.
FDI in infrastructure and business services has a direct impact on productivity its
customers. In industries such as telecommunication, foreign investment leads to
substantial improvement of services required by businesses; in other cases, such as 109
Multinational Corporations
accounting or IT services, foreign investors provide services previously not available
locally.
For instance foreign investment in telecom operators leads to major improvements in
technology and competition in the sector. This ultimately reduces firms’
communication costs and thus increases productivity. Similar effects arise from FDI
in other utilities, such as energy distribution, or motorway and airport projects.

9.5.6 Inter-industry Linkage Effects

There is a strong industry linkage in terms of vertical integration. Vertical integration
can be forward and backward. In a forward integration organization goes one step
ahead to customer and in a backward linkage they go one step backward from
customer means that in forward linkage new unit is customer of organization and in
backward linkage old unit, and in backward linkage new unit becomes the supplier of
organization. If a MNC establish any type of relation (forward and backward
integration) with local entity it improves its productivity.

Forward and Backward Linkages

Foreign firms often purchase intermediate goods (backward integration) from
domestic suppliers. These backward linkages create several impacts on domestic
supplier. Foreign investors may transfer knowledge directly to local suppliers by
training and even joint product development. MNEs improve the productivity of
indigenous firms by providing technical assistance and training of employees to
increase the quality of suppliers products’, by helping in management and
organization, and by assisting them in purchasing of raw materials. Moreover, the FDI
may increase demand for intermediate goods, and thus allow local suppliers to realize
scale economies. In India almost all the MNCs like McDonalds, Pepsi, Coco-Cola,
Suzuki, Hyundai, Samsung etc. have transferred technology and imparted training to
personnel to so they that they can supply products of international standards to them.
McDonalds have even appointed agriculture engineer to help farmer to improve their
crop.
Foreign-owned customers (forward integration) may set higher requirements
regarding product quality and service-aspects of the supply relationships, such as just
in time delivery, thus providing incentives for improving product quality and
production processes.
Local firms acting as marketing outlets for foreign investors may receive considerable
support in form of training in sales techniques and supply of sales equipment such as
umbrellas or refrigerators, and by generating more economies of scale.

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.
110
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.

Multinational corporations put profits before people

Critics contend that too much emphasis is placed on attaining profits and enhancing
shareholder value. The sharp focus on shareholder value causes firms to undertake
activities that reduce the level of social welfare in order to make a buck It is true that
the sole focus of a corporation is to earn profits. However, the simplicity of the
corporate incentive system facilitates regulation while encouraging efficiency. For
example, a firm will not pollute if the cost (e.g., a fine, for instance) is greater than the
benefit (e.g., money saved by bypassing proper disposal). That is why legislation
based on the “polluter pays” principle is so effective and so efficient. A corporation
will not abuse its workers, consumers or shareholders, lest these parties abandon the
corporation for one of its competitors. Laws, penalties and surveillance are, in most
cases, sufficient to prevent such collusion. Moreover, the rapidly growing capacity of
civil society, particularly NGOs, places a heavy check on corporate practices. The
increasing sophistication of telecommunications and the scope of media coverage
ensure that harmful corporate practices are revealed to millions of people. In this way,
mobilization by citizens, fines levied by governments, class-action lawsuits and
scrutiny in the media all adversely affect the single objective of any multinational
corporation: profit. Consumer boycotts, fines and other penalties cut into a firm’s
bottom line. Consequently, corporations attempt to avoid activities that might draw
the ire of civil society groups, government and consumers. Finally, empirical evidence
shows that multinational corporations typically use the more environmentally-friendly
technology, which can be transferred to developing countries via FDI, even when not
required, and there is little evidence that governments lower environmental standards
in order to attract investment.

9.6.1 Exploitation of Workers

Another contention is that multinational firms are too powerful in relation to workers
and even unions. Worldwide liberalization magnifies this mismatch. Fleet-footed
multinationals can simply pick up and move jobs overseas to a place where unions are
weak or illegal, wages are low and working conditions are horrific. The liberalization
of trade and investment, allows MNCs to move operations from rich countries with
high labor standards to poorer countries with lower or non-existent labor standards.
Workers, on the other hand, cannot just pick up and head overseas in search of better
wages and working conditions. The result, according to this “logic,” is a “race to the 111
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bottom” in terms of labor standards and wages. This is a deeply flawed argument.
First, many, though certainly not all, workers are mobile enough to move about in
search of better work. Second, a firm cannot necessarily reduce labor costs by
trampling labor standards.
IT has been seen that multinationals pay a ‘wage premium’ compared to domestic
wages in the host countries: around 10%. When Modern Foods is purchased by HLL
from Govt. the employ get happy as they feel elevated in becoming part of a MNC.

Oligopoly of MNC (impact on host country)

If local firms are forced to exit (or are taken over) this can lead to oligopolistic market
structures that may hinder endogenous technological development, reverse the
downward pressure on prices, and even trigger adverse political economy effects. In a
worst-case scenario, the foreign investor may attain monopolistic market power and
thus extract rents in imperfectly competitive markets that are transferred out of the
country. This however would only occur in very specific cases, notably if competition
constrained by high barriers to entry.
The entry of foreign firms in the host country market may increase competition and
force inefficient indigenous firms to use existing technology more efficiently, or look
for new technology, while the least efficient firms may be driven out of the market. As
today Indian soft drink market is today totally dominated by MNC. The remaining
domestic firms would recognize that to compete with FDI firms, they have to invest in
advanced technology to increase their productivity. As in India many local
organization improved as lot their quality as they have to compete with MNCs,
companies like Videocon, Onida, Tata Motors, TISCO etc have improved themselves
in all aspect and are continuously among top five player in their respective categories.
This may benefit consumers in terms of lower prices or better quality products.

M&A Activities by MNCs (impact on host country)

Mergers and acquisitions (M&As) have become increasingly important channels of
cross-border industrial restructuring and foreign direct investment all over the world.
In India, the policy liberalization in the 1990s has facilitated M&As including cross-
border M&As. As a result, the M&A activity has boomed over the past few years. In
tune with the worldwide trend, M&As have become an important conduit for FDI
inflows in India in the recent years. Official figures on the relative importance of
M&As in total FDI inflows are not published. However, the figures summarized in
Table suggests that during 1997-99 nearly 40 per cent of FDI inflows in the country
have taken the form of M&As by MNEs of existing Indian enterprises rather than
organic investments. Though up to 1990 most of the FDI was in the organic
establishment. As after 1991 both Coca Cola and Pepsi acquired many Indian players.
Table 9.3: Share of M&As in FDI Inflows in India
Year FDI Inflows M&A Funds Share of M&A Funds in Inflows
($ million) ($million) (%)
1997 3200 1300 40.6
1998 2900 1000 34.5
1999 (Jan-Mar) 1400 500 35.7
Total 7100 2800 39.4
Source: Economic Times, 23rd December 1998 and 21st June 1999.

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

Personal Care Products

Jan 1993 - Quest International with Pond’s India
Oct 1995 - Lakme Lever Ltd.
Sep 1996 - Lakme’s manufacturing facilities
Jan 1998 - Pond’s India Ltd. with HLL

Opportunity Loss (impact on host country)

Some critics have claimed that MNEs are making investment that domestic companies
otherwise would have undertaken. The result is the displacement of local
entrepreneurial drive or the bidding up of prices without additional output. MNCs
have ability to raise funds in various countries, MNEs thus can reduce their capital
cost relative to that of local companies and apply the savings wither to attracting the
best personnel or to enticing customers from competitors through greater promotional
efforts.

Key Sector Control (impact on host country)

If foreign ownership dominates key industries, then decision made outside of the
country may have extremely adverse effects on the local economy or may exert an
influence on local politics. MNEs are more loyal to their home country as they have
majority of their assets, sales, employees, managers, and stockholders in their home
counties. Their home country have access to their global financial records and can tax
them on their global earnings, and even influence their decision, which host country
govt. cannot do. IN case of conflict among host and home countries policies of MNEs
reflect the policies of home country as in India during Indo- Pak war an MNE from
USA denied to supply the Air Fuel to Indian Air Force on another occasion MNE
involved in Oil refining denied to refined crude oil produced in India and insist on
importing it. If MNE in key sector is state owned then concern become more serious.
It is the reason that countries restrict the entry of foreign investment in key industries.
India doesn’t allow FDI in railways and Atomic Energy, in United States the President
can halt any foreign investment that endangers national security.
MNE Independence (impact on host country) 113
Multinational Corporations
Companies can by playing one country against another, avoid coming under almost
any unfavorable restriction. For instance if they do not like wage rates, union laws fair
employment requirements or pollution and safety codes in one country, they can move
elsewhere or at least threaten to do so. In addition they can develop structures to
minimize their payment of taxes anywhere.

9.6.2 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.
Companies establishes arbitrary transfer price because of difference in taxation
between countries. If tax is higher in host country than MNE will charge higher price
from its subsidiary in host country for all its export from home to host countries thus it
will earn profit in home country and will evade tax in host country. Companies also
set arbitrary transfer prices for competitive reasons or because of restrictions on
currency flows. As if the parent sells a product at low transfer price to the subsidiary
the subsidiary will be able to sell the product to local consumers for less, thus
improving the competitive position. And if subsidiary’s countries has currency
controls on dividend flows, the parent can get more hard currency out of the country
by shipping in products at a high transfer price or by receiving products at a low
transfer price.

Loss of Job (Home Country)

MNC may be a source of employment generator for host country but they are
responsible for cutting of jobs in home country. Once US senator said that China is
taking our dinner and India is taking out lunch with this he means that the job from
USA are transferring to India and China. MNC from USA and Europe are shifting
there production center from home country to cost effective destination like South
East Asia, China and India, all this resulted loss of job in home country.
Obviously not all the MNEs have same effect on home or host country. It depends
upon type of investment and the policy of Govt. One the one hand MNE creates jobs,
utilizes resources, increase national income, develops infrastructure on the other hand
it may use its power in exploiting consumers and some time even nations. FDI is more
likely to generate growth if the product or process is highly differentiated or foreign
investors have access to scarce resources in the more advance LDCs.
Table 9.4: World’s Largest Corporations (Fortune Global 500)
Rank (2004) Company Revenue ($ million)

1. Wal-Mart Stores(US) 287,989.0

2. BP (Britain) 285,059.0

3. EXXON Mobil (US) 270,772.0

4. Royal Dutch/Shell (Britain/Dutch) 268,690.0

5. General Motors (US) 193,517.0

6. DaimlerChrysler (Germany) 176,687.5

7. Toyota Motor (Japan) 172,616.3

8. Ford Motor (US) 172,233.0

9. General Electric (US) 153,866.0

10. Total (France) 152,609.5

Contd…
114
Business Environment and Ethics 11. Chevron (US) 147,967.0

12. Conocophillips (US) 121,663.0

13. AXA(France) 121,663.0

14. Allianz (Germany) 118,937.2

15. Volkswagen (Germany) 110,648.7

16. Citigroup (US) 108,276.0

17. ING Group (Netherland) 105,886.0

18. Nippon Telegraph &Telephone (Japan) 100,545.3

19. American International Group (US) 97,987.0

20. International Business Machine (US) 96,293.0

21. Siemens (Germany) 91,493.2

22. Carrefour (France) 90,381.7

23. Hitachi (Japan) 83,993.0

24. Assicurazioni Generali (Italy) 83,267.0

25. Matsushita Electric Industrial (Japan) 81,077.7

26. Mckesson(US) 80,514.6

27. Honda Motor (Japan) 80,486.6

28. Hewlett-Packard (US) 79,905.0

29. Nissan (Japan) 79,799.6

30. Fortis (Belgium/Netherland) 75,518.1

31. Sinopec (China) 75,076.7

32. Berkshire Hathaway (US) 74,382.0

33. ENI (Italy) 74,227.7

34. Home Depot (US) 73,094.0

35. Aviva (Britain), 73,025.2

36. HSBC Holdings (Britain) 72,550.0

37. Deutsche Telekom (Germany) 71,988.9

38. Verizon Communication (US) 71,563.3

39. Samsung Electronics (South Korea) 71,555.9

40. State Grid (China) 71,290.2

41. Peugot (France) 70,641.9

42. Metro (Germany) 70,159.3

43. Nestle (Switzerland) 69,825.7

44. U.S.Postal Service (US) 68,996.0

Contd…
 115
45. BNP Paribas (France) 68,654.4
Multinational Corporations
46. China National Petroleum (China) 67,723.8

47. Sony (Japan) 66,618.0

48. Cardinal Health (US) 65,130.0

49. Royal Ahold (Netherland) 64,675.0

50. Altria Group (US) 64.440.0

India in “Fortune Global 500”

170. Indian Oil 29,643.2

417. Reliance Industries 14,841.0
429. Bharat Petroleum 14,436.9
436. Hindustan Petroleum 14,114.9
454. Oil and Natural Gas 13,751.7

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

Check Your Progress 2

State true and false for the following statements:
1. Bata is a Canadian company.
2. Bayer is British company.
3. Nestle is a Swiss company.
4. Cadbury is British company.
5. 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.
6. Alcatel’s Fraud Management Group (FMG) Subex systems.
7. Essel Propack, is the single largest telecom company in the world
manufacturing laminated and seamless tubes.
116
Business Environment and Ethics 9.7 MNCs OF INDIA
“When the Bangalore based telecom software product company Subex systems
acquired Alcatel’s Fraud Management Group (FMG) it took quite a few in the
industry by surprise. After all, Subex with revenues of 90 crore and Alcatel the C 25
Billion French giant were in totally different leagues. It was a part of Subex’s well
thought out strategy to move centre-stage in the global arena of its chosen space of
telecom fraud management and revenue maximization. With this acquisition, Subex
claims to be the largest vendor, the world over for Fraud Management Systems, based
on the number of installations. It currently has 61 customers with 105 networks spread
across 37 countries.” (Business India December 20, 2004 to January 2, 2005.)
“Not many know that most new generation vehicles that ply the Indian roads have
Moterson’s inputs be it Toyota, Honda, Mercedes, Ford, Hyundai or even the
homegrown Maruti. From wiring harnessing to cockpits to door trims to bumpers and
plastic components, it chips in with its produce, not just for the cars rolled out in India
but also for those rolled out in the Far East. Group has 13 plants including at Sharjah
and Ireland. (Business India. September 26-October 9, 2005.”)
“If you were to ask which Indian company leads the world in a given product/
segment, chances are that you would get wrong hit. It is neither Reliance nor a
company from the stable of TATA or the Birlas or even Infosys or the Wipros of the
country. The right answer is Subhash Chandra’s Essel Propack (EPL), the single
largest speciality packaging company in the world manufacturing laminated and
seamless tubes catering to oral care, cosmetics, personal care, pharmaceuticals, food,
and industrial sectors. With an estimated 32% market share in laminated tubes
globally, EPL is multinational with manufacturing facilities in 13 countries through 21
plants, including the US, the UK, Russia, Germany, Mexico, Colombia, Venezuela,
Philippines, Indonesia, Egypt, Nepal and China besides India. EPL which was
established in 1984, ventured out to become a global player in 1993 by setting its first
overseas venture in Egypt. Four years later it formed a wholly owned subsidiary in
Guanghou, China. In 2000 it acquired Switzerland’s Propack A.G. then the world’s
fourth largest laminated tubes company. This helped Essel gain access to markets in
Latin America, Indonesia, and China”. (October10-23, 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.
118
Business Environment and Ethics Deal Mechanics
Company What Vidiocon Invested

Thomson CPT euro 240 million

Quid Pro Quo: Thomson to invest $ 195 - million in Vidiocon Industries, and get a
15% stake in Videocon Industries, plus two board seats.

Electrolux AB’s 91.85% in Electrolux Kelvinator Cash less deal

Quid Pro Quid: Electrolux to invest $ 94 million in Vidiocon Industries and get a 5
Percent stake plus one seat on the board. (Business Today, July 31, 2005, P.53)

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:

Country Facility /Interest

1. India 12 consumer electronics and appliances plants. CPT glass.
2. Italy 2 million CPTs Nicci compressor plant.
3. Poland 4 million CPTs four million CPT glass shells.
4. China 10 million CPTs compressor plant.
5. Mexico 5 Million CPT
6. Oman Consumer Durable manufacturing.
7. South Africa Consumer Durable/electronics New plant coming up.
8. Sudan Prospecting one Oil and gas field
9. Jordan Prospecting four oil and gas fields.

Global Advertising Agency (Law and Kenneth)

“It’s a global advertising agency starting in 2005, not 1945”, maverick adman Andy
Law on founding Law and Kenneth in partnership with Indian adman, Praveen
Kenneth. Andy Law says it is a global agency no in the sense of just having operations
in multiple countries, but in that it has no global head quarter. “you don’t want 250
people each sitting London, Paris an Mumbai doing the same thing,” says Law. Law
and Kenneth will have nodal structure, with each country run by a local entrepreneur,
with a majority stake in the business, and a team of 35-40.
Rolled out almost simultaneously across London, Mumbai, Dubai, Stolkholm, Sydney
and Paris, Law and Kenneth will soon enter China, the USA and Japan.. As a truly
global agency it will allows clients to tap London for strategic inputs, India for
creative execution and Stockholm for the interactive edge. (Business Today, July 31,
2005, P.24)
Bharat Forge India Ltd. Is India’s only forging company supplying globally and the
country’s largest exporter of auto components. Bharat Forge has the largest single
location commercial forging facility in the world. With the acquisition of German
forging company in 2004 it became the second largest forging company in the world.
Mr. B.N. Kalyani Chairman and MD, Bharat Forge Ltd. Gave ten basics to compete in
the global market.
 119
Multinational Corporations
9.8 LET US SUM UP
It has been said that the multinational corporation (MNC) is the most powerful
institution in the world today. Multinationals Corporations are major player in the
international business. MNCs have expanded across national borders in two ways:
trade and Foreign Direct Investment (FDI). Each has contributed to stable, lasting
benefits to the world economy.
In an era of WTO, Regional Groupings, Liberalization, and Globalization role of
MNCs have increased tremendously. MNCs are defined as and enterprises that is
headquartered in one country but has operations in one or more countries.
Multinational Enterprises (MNEs) is a company that takes a global approach to
foreign markets and production; Transnational Companies (TNCs) is a termed used by
United Nations and most of developing nations for multinational firms. Business
people define transnational company as a firm formed by merger of two firms of
approximately the same size that are from two different countries. The biggest
characteristic of Global company is that it 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 is a company which treats its every unit
operating in different countries as a independent profit center.
Some of the key reason of crossing national boundaries are Survival, Growth of
Overseas Market (Sales), Diversification, access to more Source of Resources, To
Protect Market Share at home and to increase market share overseas, to have access to
technology expertise etc.
There is wide range of impact of MNC on both that is host an home countries. MNCs
influences trade balance of country, Promote Small Scale/ancillary Industry as they
use them as a suppliers, MNCs transfer knowledge and improves the technology of
local firms. MNCs help in Economic Development, and development of
Infrastructure.
But all this advantages MNCs all MNCs are also considered responsible for putting
profit before people, for exploitation of workers, engaging in M&A Activities instead
of Greenfield projects. Some time they become so big that controls the key sectors of
the economy.

9.9 LESSON END ACTIVITIES

1. Pick an Indian MNC and see how they are performing in all over world.
2. Prepare a report on the global operations of Mahindra.
3. Prepare a assignment on the impact of MNC on Indian firms.

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.
120
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.

Check Your Progress: Model Answers

CYP 1
1. MNCs are defined as and enterprises that is headquartered in one country
but has operations in two or more countries.
2. 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.
3. 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.

CYP 2
1. True, 2. False, 3. True, 4. True,
5. True, 6. False, 7. False.

9.12 SUGGESTED READINGS

Mittal Vivek (2007) Business Environment, Excel Books.
Bedi Suresh (2006) Business Environment, Excel Books.
Mishra, Puri (2006) Economic Environment of Business, Himalaya Publications
House.
Spiro George W. (1993) The Legal Environment of Business, Englewood Cliffs, NJ
Prentice Hall.
Starling, Grower (1996) The Changing Environment of Business, Cincinnati, OH,
South Western College Publishing.
Weidenbaum, Marray L. (1999) Business and Government in the Global Market
Place, Upper Saddle River, NJ Prentice Hall.