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Multinational corporation (or transnational corporation) (MNC/TNC) is a corporation or enterprise that manages production establishments or delivers services in at least two countries. Very large multinationals have budgets that exceed those of many countries. Multinational corporations can have a powerful influence in international relations and local economies. Multinational corporations play an important role in globalization; some argue that a new form of MNC is evolving in response to globalization: the globally integrated enterprise.'

xIndia Company and Dutch East India companies were there which came to India for trade and by taking advantage of political conditions of India gained power. After adopting new economic policy by government of India in July 1991 many MNCs came in the Indian economic scene because the government of India gave many incentives to the foreign investors. So it is clear that government opened the doors of Indian market to MNCs .Now the question is how the MNCs are affecting Indian economy whether they are useful for our economy or not? Let us analyze some brief impacts of MNCs on different sectors of the economy.

An Indian MNC, a French MNC, a Dutch MNC, etc. what could these terms mean?How can a company, which is said to be a multinational, belong to a specific country? The answer lies in the origin of the company. An MNC may belong to a specificcountry if its inception is in that particular country. By inception we could say the companys basic

ideology and concept originated in the country. E.g. Nestle is a Swiss MNC because its concept of business and ideology originated in Switzerland. A multinational corporation can be defined as one having a subsidiary or a branch or a place of business in two or more countries or operating two or more countries or territories. Therefore, a multinational can be called so by virtue of its physical presencein two or more countries or by virtue of geographical scope of its operations in two or more countries. Multinationals are sometimes also referred to as transnational corporations. The term multinational is more of an American term whereas the term transnational is European. Conservatively counted there are about 63,000 multinational corporations in the World. Among the Fortune 500, all major multinational corporations are either American, Japanese or European, such as Nike, CocaCola, Wal-Mart, AOL, Toshiba, Honda and BMW. On one side, they create jobs and wealth and improve technology in countries that are in need of such development and on the other hand, they may have undue political influence over governments, exploit developing nations and create a loss of jobs in their own home countries. Very large multinationals have budgets that exceed those of many countries. They can be seen as a power in global politics. Wal-Mart is bigger than Norway, Royal Dutch/Shell Group is bigger than South Africa and General Motors is over twice as big as Nigeria. Of the largest 100 economic actors in the World today, 51 are corporations and 49 are countries. It has been estimated that the Worlds 500 largest companies controlled at least 70% of World trade, 80% of foreign investment, and 30% of global GDP. The 100 largest had assets of $28,813 billion, of which 40% were located outside their home countries.

Multinationals World over are termed so due to there are ability to market their products and services in various countries. However, they are binational or national in terms of ownership and mangement personnel. To take an example, Royal Dutch/Shell Group is binational in ownership and managerial personnel but multinational in product/services. The Prolasca in Nicaragua is national in production but multinational in ownership, marketing, finance and management. On the other hand, Unilever, which is now been multinational in terms of ownership as well as product/services is a complete multinational. Thus, multinational companies may have their management as binational and their functions as multinational. We could also have multinational companies based on their pattern adopted in each of the functions such as marketing, production, finance and management. The first multinational appeared in 1602 and was the Dutch East India Company. These corporations originated early in the 20th century and proliferated after World War II. Typically, a multinational corporation develops new products in its native country and manufactures them abroad, often in third World nations, thus gaining trade advantages and economies of scale. India was an appendage of Great Britain and the imperial preference policy of Great Britain converted India into an agricultural hinterland. The East India Company used to import raw materials from India at throwaway prices and export the finished goods at high price leaving their colony impoverished as a debtor country. During the last two decades of the 20th century many smaller corporations also became multinational, some of them in developing nations.


The following are the main features of MNCs: 1. MNCs have managerial headquarters in home countries, while they carry out operations in a number of other (host) countries. 2. A large part of capital assets of the parent company is owned by the citizens of the company's home country. 3. The absolute majority of the members of the Board of Directors are citizens of the home country. 4. Decisions on new investment and the local objectives are taken by the parent company. 5. MNCs are predominantly large-sized and exercise a great degree of economic dominance. 6. MNCs control production activity with large foreign direct investment in more than one developed and developing countries. 7. MNCs are oligopolistic in character. It is sustained by modern technologies, management skill, product differentiation and enormous advertising. 8. MNCs are not just participants in export trade without foreign investments.



The foray of multinationals into a country requires labour

thereby ensuring new job oppurtuities. They will bring in advanced technology and management style. The pressure of competition forces companies to undertake product innovation as a result of which new and better products flock the market. Better logistics management and financial strength enjoyed by multinationals sets new standards in the prevailing markets. Expands and creates new markets. Improves the income to the exchequer by way of direct and indirect taxes. Provides economic support for developing nations


Share of profit remitted to the parent company reduces the

amount of money created. A strict money-making oriented approach of multinationals may prove to be nonbeneficial. High and regulated transfer prices may increase the costs of operations.
The enormous financial strength and influence enjoyed by multinationals may be selfishly utilize Multinationals may abuse resources suchas labour and natural resources to gain competitive advantage in international markets.


When some major Indian business houses established Greenfield manufacturing joint ventures abroad, but most of them, with the exception of the AV Birla group, did not do very well. The Birla groups own ventures abroad were as much the result of business opportunity there, as of the frustration with the denial of industrial licenses in India. The situation has, of course, changed dramatically over the last decade. have slowlyWith each passing day Indian businesses are acquiring companies abroad becoming World-popular suppliers and are recruiting staff cutting across nationalities. While Asian Paints is painting the World red, Tata is rolling out Indicas from Birmingham and Sundram Fasteners nails home the fact that the Indian company is an entity to be reckoned with. The economic reforms that began in the early 1990s brought many large multinational companies to India. A major challenge for these corporations was to manage the interface of global corporate culture and Indias powerful, traditional and widely varying cultural practices.



Organizations now wish to concentrate on their core activities in order to increase market penetration and become more competitive. Therefore, it becomes essential for businesses to concentrate on what they do best and where they can add value in their value chains. With this, outsourcing has become a strategy for forward thinking by managers. It is not only respected for reducing costs, but also as a tool for adding value to business. It enables organizations to concentrate on their core business, carry out business re-engineering and provide information that is valid, timely and adequate to assist decision making at the top management level and quality and cost control at the middle and lower levels.


In the past few years, whenever organizations around the World have outsourced activities to India, the Indian counterparts have helped to cut costs, while maintaining high quality. Moreover, all these cost and quality advantages are coupled with the use of state-of-the-art technologies. Indian companies have created value and thereby helped organizations around the globe gain competitive edge. Many Indian companies themselves are now becoming multinationals. Indian direct investment abroad has now gone past the $10 billion mark. And the driving forces are quite different from what they were during the Permit Raj. The situation has, of course, changed dramatically over the last decade. One can broadly classify Indian foreign direct investment under the following categories: Backward integration: Many large Indian companies in basic industry, steel, viscose fiber, copper and so on, have acquired upstream companies in resource-rich countries such as Canada and Australia. Marketing: Information technology and pharmaceutical sectors have also established a large number of companies outside India.While some of them are trying to develop stand-alone local operations, most act as marketing and market intelligence arms for the parent companies in India. Energy security: Some of the largest foreign investments have been madeby ONGC. Its subsidiary, ONGC Videsh, is now active in 15 countries in oil exploration. Other public sector companies like Indian Oil and Bharat Petroleum Corporation Limited are looking at retailing in Sri Lanka,Singapore and south-east Asia, while Hindustan Petroleum Corporation Limited was looking at an investment in a refinery in Saudi Arabia. Barring a major domestic oil find, Indian imports of oil will keep growing and, clearly, the ministry of petroleum is encouraging investments abroad, including In gas pipelines, to improve Indias energy security. In size, if not in number, the oil

and gas sector will probably remain the largest single foreign investor for the foreseeable future.


The economic reforms that began in the early 1990s brought many large multinational companies to India. A major challenge for these corporations was to manage the interface of global corporate culture and Indias powerful, traditional and widely varying cultural practices. The story of outsourcing is about extremely fast-paced change. It has been affecting the lives of many. Interestingly, it had a quiet beginning in the early 1990s when pioneers such as GE, Citibank, Amex and British Airways set up captive units in India. Now this trend has burgeoned into a huge industry with third party Information Technology Enabled Services (ITES)/Business Process Outsourcing (BPO) company bagging prestigious remote services projects from leading global organizations. In 2003-04 alone, outsourcing in India grew over 25 per cent, and India continued its domination over other competing countries such as China, Ireland, Israel and the Philippines.

Based on these factors, projections are flying thick and fast


The McKinsey Global Institute (MGI) estimates that the volume of offshore outsourcing will increase by 30 to 40 percent a year for the next five years. Forrester Research estimates that 3.3 million white-collar jobs will move overseas by 2015. In one May 2003 survey of chief information officers, 68 percent of IT executives said that their offshore contracts would grow in the subsequent year. The Gartner research firm has estimated that by the end of this year, one out of every ten IT jobs will be offshored. Deloitte Research predicts the outsourcing of two million financial-sector jobs According to business intelligence major International Data Corporation (IDC),1.2 trillion by 2006 end. With growth projected at 11 percent annually, the Information Technology Enabled Services (ITES)/Business Process Outsourcing (BPO) segment will provide one of the most significant business opportunities for the Indian software and services industry. Fortunately, India appears to be in a position to cater to the demands of the market. Its biggest strength is its vast supply of over 2 million graduates and 300,000 post graduates that pass out of its colleges each year. Its vast resource of Englishspeaking college-educated workforce and low-cost labour gives it an edge in the offshoring World.It isnt only the cost factor that continues to make India an attractive outsourcing destination. The quality of manpower combined with an extremely sophisticated vendor base and improvements in local infrastructure have put it ahead of other offshore destinations. A review of Indians in one of the news articles abroad speaks as follows New generation Indians employed in GE and other


MNCs that grew up in posteconomically liberalised India, are a new breed with a zip in their step. Theyre interviewed so many of these call centre workers. You bring up Pakistan to them say, Pakistan? Kashmir? Theyll say they got better things to do. Its about the global supply chain. You see, when India is part of GEs global supply chain, when they are actually involved in the day-to-day operation of GEs health care, call centers, payroll, they cant take a day off for war. Indian manpower has been reputed as brilliant and educated. They have now taken lead in colonizing cyberspace. India and its millions of World-class engineering, business and medical graduates are becoming enmeshed in the global new economy in ways most people are only beginning to fathom.



Some economists think that MNCs are helpful for Indian industrial sector they think that Indian companies learn new technique of production and new management techniques with the arrival of MNCs in the Indian economic scene. MNCs increase competition in the industrial sector so when Indian companies compete with global giants they also improve in their working. With the entrance of MNCs in India demand for skilled persons increased to a great extent so more and more people are becoming skillful and the problem of skilled persons is solved for Indian industries also. MNCs also bring foreign capital in the country, which help to expand the market and Indian industries also take benefit of it.

There are some economists who have some different opinion according to them the technology transferred by them is not useful for countries like India because MNCs use capital intensive technique and developing countries have scarce capital and labour abundant so the technology they transfer is of little use. The competition increased by MNCs is also disastrous for domestic industries only few strong domestic industries have enough strength to face the competition with global giants. As well as skilled persons are concerned MNCs give higher salaries to the skilled persons and thus able to explore the services of the most skilled persons and the Indian industries are still out of the services of these skilled people. No doubt MNCs bring foreign capital in India but this capital later becomes the cause of reimbursement of profit to the MNC's parent countries, which cause capital flight from the country.



Indian economy is an agrarian economy; a major part of the population depends on agriculture directly or indirectly. If we go back to past few decades Indian agriculture was considered backward but now the time is changing and MNCs such as Mahyco-Monsanto help in modernizing Indian agriculture. They provide modern agricultural inputs such as HYV seeds, pesticides, fertilizers and modern agricultural equipments to the Indian farmers and thus Indian agriculture has turned itself from subsistence level to making profits. MNCs also encourage research activities in the field of agriculture in developing countries like India.

If we see the other part of the picture India with billion plus population, has put agriculture at the heart of its economy and food security at the center of its agriculture policy. In developing countries, MNCs encourage commercial farming because they need cheap raw material. Farmers also get good amount for their crop so the result is danger of food security, which the world is facing these days. A big number of Indian farmers are small and medium farmers who are not able to use expensive agricultural equipments so the gap is widening among rich and poor farmers, which is disastrous for the agriculture. Moreover MNCs are making Indian farmers dependent on HYV seeds provided by them and thus the biodiversity of Indian varieties are in danger.

MNCs from social and moral viewpoint:


MNCs are not fair in their working in the developing countries. Many MNCs are not paying their tax liability, they prefer to establish in that country where tax laws are not strict similarly they prefer to establish in that country where environmental laws are also not much strict and these are mainly developing countries. They even send their toxic waste in these countries by taking advantage of loose environmental laws even the quality of their products vary with country to country we can take the example of coca cola which is of superior quality in USA and is of inferior in India. MNCs also responsible for misallocation of resources in the developing countries. They provide mainly luxurious products because there is more profit in it. Thus demand for these products increase due to demonstration effect and this leads to misallocation of resources towards luxurious goods but the need of developing countries is to produce more and more necessary goods because most of the people belong to poor or middle class.

Another aspect, which judges MNCs morally, is political interference. Generally it is the practice of MNCs to gain the economic power in developing countries and then get political power by giving help to the politicians at the time of elections and then manipulate industrial policies in their favor they also interfere in the important political matters of these countries which can cause a big danger to the sovereignty of developing countries.



In the last 20 years MNCs are contributing strongly to economic growth in developing countries through Foreign Direct Investment but also through knowledge transfer and raising productivity in domestic competitors and suppliers. Foreign Direct Investment which is normally used as an indicator for internationalisation of economies has grown from 10 percent of world GDP in 1990 to 25 percent in 2006 (Hijzen, Alexander, 2008). FDI is not the only way MNCs influence economic growth and therefore labour conditions in developing countries, due to the introduction of modern management and production methods MNCs raise their productivity level compared to domestic competitors. Therefore higher wages and better working conditions can be promoted by MNCs, because overall costs go down due to higher productivity. Furthermore wages of skilled workers are more likely to increase in an industry with an MNC in it because of the competition for skilled labour between the MNC and domestic competitors. As a result productivity increases in those industries and especially wages of high skilled labour. A general figure about wages, which is given by the OECD report Do Multinationals Promote Better Pay and Working Conditions is, that MNCs pay 40 percent more than domestic competitors in developing countries. A reliable comparison is quite difficult because single wages such as for low skilled workers might not be higher in MNCs than in local firms. High skilled jobs are better paid by MNCs than domestic firms and therefore the comparison of general wages is not suitable in many aspects (Hijzen, Swaim, 2008).


Besides the direct improvement of wages and working conditions MNCs could improve them by stimulating local competitors, there are several ways MNCs can stimulate local competitors. Due to higher productivity and lower costs MNCs have a competitive advantage over their local competitors. As a result local competitors must improve their productivity and also working conditions, otherwise they will loose market share to the MNC. Another aspect is a knowledge transfer between MNCs and local suppliers which are incorporated in their value chain. Sometimes MNCs provide technical and training support to local firms incorporated into their supply chains (Hijzen, Alexander, 2008). This aspect is also corresponding with Porters Theory of competitive advantage through clustering and is featured in Porters Diamond. By building clusters in developing countries suppliers are likely to get a knowledge transfer from MNCs to raise productivity and labour conditions by new management and production methods. MNCs demand from their suppliers higher standards for products, raising quality and productivity but also raising labour conditions. Especially labour conditions demanded by MNCs from their suppliers got more important over the recent years due to increased public awareness, which the Nike case of sweatshops is a good example for. Corporate Social Responsibility campaigns and public pressure increased the demand of MNCs for good working conditions not only at their own factories but also at their suppliers (Hijzen, Alexander, 2008). Going back to Porters Diamond we can definitely say MNCs put pressure on suppliers to lift productivity and quality but also labour conditions, otherwise they will not be incorporated in the supply chain of the MNC. Another point raised by the OECD report is a knowledge transfer between MNCs and domestic competitors in developing countries due to the fact that managers which worked for and were trained by the MNC start to work for domestic competitors. They bring of course modern management and production methods to the domestic competitor, raising


productivity and therefore also labour conditions (Hijzen, Swaim, 2008). Furthermore other benefits apart from wages can be increased by MNCs in developing countries, such as insurance, holidays and training. As a result domestic competitors are forced to improve their working conditions in this case their benefits, otherwise they will loose skilled labour to the competition. This scenario is very likely especially for skilled workers, because they can demand better working conditions and benefits due to the fact that they are needed by local competitors. Low skilled workers do not have so much bargaining power over their employer even though MNCs raise benefits and working conditions also for them due to the fact that supply of low skilled workers is higher in developing countries than of high skilled workers (Robertson, Raymond, 2008).


On the other side the appearance of MNCs in developing countries rise much controversy and many social concerns. MNCs have a substantial amount of power that allows them to easily find large quantities of relatively cheap labor as well as influence governments (Close, Romero, 2004). Due to the great mobility of MNCs, they have quick access to cheap labor and are relatively free to leave a country at any time they want. Many times, the countrys economy depends on the jobs given to its laborer by the MNC. If the MNC leaves, that country now has a great unemployment problem where many are suddenly left stranded (Hijzen, Alexander, 2008). Because of this fear governments of developing countries fail to enforce human and labor rights effectively, however MNCs have been accused of infringe workers either human or labor rights. To stop this helplessness of the host countries many OECD countries appealed to MNCs to respect international labor standards anywhere in the world, even if a country has no such norm. The OECD report shows, that MNCs often adopt management style and labor conditions of their host countries, therefore exploiting developing countries, which have not high labor standards, due to the bargaining power of the MNC (Hijzen, Swaim, 2008). MNCs tend not to have a certain loyalty and social responsibility towards the developing country in which they are operating in. Therefore plants will be shut down rather in developing countries than in their home country, because of bad publicity and pressure from the home government. Additionally there is a trend in the recent years that MNCs move from one developing country to another in search for cheap labor. If the labor conditions are getting too expensive to manufacture certain products, MNCs could move on to another developing country, where unskilled labor is cheaper(UN Committee on Trade and Development, 2002).



Since 1991, India has experienced a dramatic increase in the presence of multinational corporations (MNCS), and with it, a tremendous expansion in the amount of foreign direct investment (FDI) inflows to the Indian economy. This paper will analyze the effects which this change has had on Indian society. In particular, three questions will be addressed: How and why did this dramatic change occur? What are the costs and benefits to India associated with this change? and What must India do to continue its development? The overall conclusion reached is that the increased presence of MNCS has had a positive impact on India. However, India has not even come close to reaching its potential, and thus, much more change needs to occur.


While it can be argued that Indian liberalization began before the 1990s, most will agree that it was in 1991 that the Indian government first began in earnest to adopt policies of liberalization. However, the reason for which these policies of liberalization were embraced is not always clear. There were, in fact, three distinct forces which guided India to this watershed moment in its history, two of which were external forces, and one which was an internal force. The internal factor which directed India toward liberalization was the severe economic situation it was faced with at the time. The central problems were soaring inflation, a rising fiscal

deficit, a trade deficit, and an enormous foreign debt (India and Pakistan, 16) In fact, India was on the verge of default on its foreign loan, but was saved that humiliation by the IMF . Now, these economic problems were all rooted in one fundamental problem, namely, inefficiency. India was inefficient because of such things as inadequate infrastructure, various bottle necks, allocation of resources, imbalanced regional development, the presence of parallel economy, the urban-rural development gap, and the demand-supply gap Indias dire economic situation forced its government to accept the fact that major structural changes were needed in India. One of the external factors was the success of exportpromotion (EP) Industrialization along with the failure of import-substitution (IS) industrialization . industrialization is an economic path to development which came to prominence in the 70s and 80s, largely through the stunning performance of those countries which embraced such a policy. The greatest success stories were Southeast Asias newly industrialized countries (NCS), many of which have averaged growth rates of more than 8% a year for the past thirty years Asian Miracle, 1997, p.23).. This began with the fall of the Soviet Union in 1991, which signal the end of the Soviet Union as a beacon for centralization and quickly resulted in the global retreat of socia1ism( The impact this had on India was huge. Since 1947, when India gained its independence, Indian government policy had been one of strong socialism (olen modelled, in fact, after the USSR), and central to this policy was IS industiialization. Thus, the collapse of the USSR caused India to rethink its wellentrenched socialist policies. The combined evidence often success of the Asian NICs and the failure of Soviet socialism forced India to reluctantly conclude that EP was better than IS industrialization. Another external force which was challenging Indias tradition of centralized and inwarddirected business policy(Howe11, p.37) is what is termed globalization, that is, the


internationalization of the world economy(Foreign, 34). It became clear to developing countries (LDCs), such as India that, with the worldeconomy becoming increasingly interdependent, it was vital that they devote greater efforts to linking economy(Foreign, 34). Now, at the heart of globalization are the MNCS, which have brought about global diffusion of production technology and worldwide of markets. In fact, it can be argued that, the worldwide resources at their command, it is the MNCs which have spawned an integrated international economic system. Consequently, India realized that, in order to link itself with the world economy, it was essential that it first link itself to the driving force behind globalization, namely, the multinationals. So, it was through its economic problems that India became open to the need for change, and it was through the changing patterns of the global economy that India came to realize what changes needed to be made, Thus, India concluded that liberalization was the solution. As Indias finance minister put it, the time had come to convert India fiom a regulated and contro1-bou.nd, inward-1ooking economy into market-friendly, outward-looking one). As well as changing its attitude toward EP industrialization, India also changed its attitude toward FDI, as MNCS were now seen as legitimate and effective agents of change for Indias economy .



One cause of Indias changed attitude toward MNCS was that there had been a positive change in the perception of the MNCS across the MNCS which did not bring with them the historical baggage of neocolonialism, as well as the United Nations involvement in the development of the Code of Conduct for MNCs . More important, however, are the sound economic arguments in support of MNCS, many of which can be applied to Indias situation. The most basic argument in favour of MNCs is the need for investment. Domestic savings are often inadequate to support the amount of investment that is required for development, and this is true for India . When the economic crisis came to a head in 1991, the central and State governments of India were forced to cut back on their torrid spending, which meant that they had to choose between public investment which is useful for patronage purposes and subsidies which are useful for reelection .Thus, there occurred a shortage of investment, and this necessarily meant turning to the private sector and foreign investors to take care of investment.In this way, MNCS are seen as a way of filling the gap in savings, by bringing saving from abroad so that domestic investment can be larger than domestic saving. Now, the foreign investors supply of capital to the LDC, which the domestic investors were unable to supply before. This extra investment in the economy leads to an increased need for labour, which results in a rise in wages paid to labour, equal to ECG. Notice also that GCDH of income is transferred from the domestic capitalists to the labours , implying a move toward income equality. Thus, there are two principal benefits of FDI for an LDC such as India: increased aggregate income, and income equality.


The second major argument for FDI is concerned with technology transfer. Economic growth in DCs is increasingly dependent on new technologies, and most LDCs are in danger of falling even further behind unless they can gain access to this new technology and learn how to apply it But where all LDCs get the new technology from? Again the answer lies in FDI. In fact, MNCS have been prominent in the development and dissemination of new technologies in both the nature of products and methods of production Along with new technology, MNCS bring the skills which LDCs learn to duplicate, such as managerial ability, organizational competence, and the capacity to avoid inefficiencies . However, the ability of an LDC to absorb new technology depends considerably on the level of education and skills of their labour force, and the existence of institutions . capable of providing the training needed Indias labour force is one of the most highly trained and skilled of all LDCs, and therefore, India is able to effectively absorb new technologies and benefit from FDI in this way. next major argument in favour of MNCS is the close connection between FDI and exports. First, the benefits of exporting, with reference to India, will be considered, and then the connection between MNCS and exports will be explained. There are many economic theories which support the growth of exports, and one of the oldest and most renowned theories is Adam Smiths theory of gains from trade . argues that the narrowness of domestic markets does not permit a high degree of specialization, which serves to limit production possibilities. However, trade opens a countrys economy to a more extensive market, which leads to a greater division of labour, increased efficiency, and therefore a rise in production. Now, Indias domestic market is anything but narrow, so it can be argued that Indiaslabour is sufficiently specialized. However, relative to the world market, Indias market is small, and thus, greater specialization is possible.


The evidence of this is the chronic inefficiency of Indias economy, which has been discussed. Thus, it can be argued that, in Indias case an increasing focus on export production would lead to greater efficiency and increased GNP as a result Now, as LDCs, such as India, have come to see the advantages of placing a greater emphasis on exports as part of their development strategies, they have looked to transnational corporations to aid them in doing so. But why is this so? The reason lies in the unique advantages which MNCS have to offer, such as management skills, technology and linkages with world markets). In fact, MNCS can often export more easily from the LDCs because of their distribution and marketing networks. Thus, through MNCS, LDCs gain better access to external markets, which increases their efficiency and therefore makes them more competitive internationally. Now, in 1991, India was aware that it had the potential to become an important centre of international economic activity, as it is located at the crossroads between Asia, the Middle East and Europe. Thus, it was clear for India that a policy of EP was needed, and IS was to be discarded. The effects of the last two arguments, technology transfer and EP industrialization, can be illustrated by a production possibility curve (PPC) in Figure 3. Thus, through the increased efficiency technology brings, as well as the increased efficiency exporting brings through greater specialization, the productivity of Indias existing resources increases, and therefore, its production possibilities expand. The final argument in support of MNCS compares foreign investment to borrowing. The simple fact is it is cheaper to service FDI than borrowing. Even when profit is repayment . no outflow will occur unless a profit is actually earned by the MNCS, whereas with debt servicing, the outflow of interest and repayment of principal will occur in good times or bad As well, even if profits are made by MNCS, they may not all be repatriated, as some of the profits may be reinvested, and some


may be used in buying local inputs, . Another advantage of FDI over borrowing is that, with FDI, the host counties are less vulnerable to economic shocks, and the debt crisis of the 1980s attests to this fact. some of the profits may be reinvested, and some may be used in buying local inputs, . Another advantage of FDI over borrowing is that, with FDI, the host counties are less vulnerable to economic shocks, and the debt crisis of the 1980s attests to this fact.



The effects of liberalization on Indias economy have been overwhelmingly positive, and the statistics confirm this. Due to the crisis of 1991, the growth rate that year was only 1,2% (Shanna, 108). Three years later, a growth rate of 5.5% was reached, and then the economy took off in 1995 and 1996, achieving growth of 7. 1% and 7.5% respectively). In fact, since 1994, the Indian economy has grown at an average of 7% per year, placing India among the worlds leaders in economic growth. However, because of Indias high population growth rate it is necessary to consider the GNP per capita flgures. In 1991, real GNP per capita, adjusted for purchasing power, was $1,150). In 1997, it had grown to $1,385, (India and Pakistan, 18) and by the end of 1998 it is projected to be $1,500 (Sidhva, 59). Thus, Indias high growth has been large enough not only to balance the population growth (http://w\x'w.indiawor1d.coin) are the decline of Indias death rate, from 10.1 per 1000in 1991, to 9.0 per 1000 in 1994, and the increase in life expectancy, from 55.9 in 1990, to 63.5 in 1995. The question which remains, is to what degree can the improvements in Indias economic situation can be attributed to the MNCS? The benefits and advantages which MNCS bring to host countries have already been discussed, and it was argued that MN Cs could have a significant impact on Indias economy. Thus, it can be presumed that MNCS played a vital role in the economic development India has experienced over the past several years. However, rather than speculating on how much of Indias progress can be credited to the multinationals, the essay will turn instead to the tangible and direct benefits which India has gained through MNCs.


An emerging trend of increased multinational presence in India is that about 2,000 Indians leave India annually to take up middle and senior management jobs elsewhere in Asia). As MNCS expand operations all over Asia, they eventually experience shortages of qualified people to fill managerial positions, and Indias business schools have come to be seen as a good source of managerial skill .The reason for this is Indias good education system, its above average English-language skills, and its business students, who are quite enterpreneurial in their outlook). The positive this has on India include increased incomes for those Indians which Itake these managerial positions, and increased incomes for Indians in general, as much of the income would be brought back into India as repatated eamings and would trickle down through the economy. Another emerging trend resulting from rising FDI is that instead of Indias federal government inviting foreign investment and then allocating inflows to the states, the initiative now lies with the states themselves, and as a result, attracting foreign capital has become top priority on every state govemments agenda . The result is that Indias states are now competing with each other for FDL and among the few progressive states, this has led to a battle of incentives and the abolishment of many bureaucratic delays .Now, the benefits of this are not just the increased level of FDI which can be expected to result from these changes in state policies toward MNCS. As well, state govanments are free to identify the industries in which they want private investment, although they must stay within the national objectives (Thus, FDI is more eifectively allocated, as state governments understand better than the

federal government where the FDI should be directed so that the benets to the people of that state . Another benefit concerns Indias growing middle class. Estimates ofthe size of the middle class are wide ranging, but evm modest estimates such as 200,000,000 still indicate that over 20% of Indias population can afford durable and semi-durable goods, such as household appliances and cars. The role here for MNCS is obvious: to supply India with the international brand name consumer goods it wants. The central economic benefit of this is that Indian consumption is now able to expand, rather than being limited as it was when only domestic producers were supplying consumer goods, and this implies that Indian consumers gain utility, or satisfaction. Connected to this is the fact that many MNCS rely on India as a source of inputs). India has a huge reservoir of trained,skilled and relatively inexpensive labour, such as engineering talent, (Indian is not Mexico, 160) as well as an even larger supply of unskilled workers. In addition to supplying labour, India also provides MNCS with other inputs to production such as intermediate manufactures. In fact, Japanese MNCS in India rely on local sourcing for 77% of their inputs, as compared to 50% in China . Thus, MNCs are effective in stimulating Indias domestic production, which oen leads to greater competition, increased efficiency, and hence, a rise in production. An example of an MNC which benefits India in this way is MacDonalds . Since entering the Indian market in 1996, this franchise has made a point of projecting itself as a local enterprise, in that it relies entirely on local sours for its ingredients, and control of management is equally split between foreigners and Indians.


MNCs have also played a crucial role in helping to supply Indias ever increasing demand for infrastructure. Electricity is one of these critical sectors, as Indias demand for power is simply massive. Since Indias government opened this sector to private investment, 41 contracts have been awarded, the most notable of which is the enormous $2.8 billion, 2,015-megawatt plant by Enron which began construction in 1997. Despite these advances, the Indian government estimates that it will require $170 billion in investment over the next 15 years, in order to meet its demand for power, most of which is expected to be FDI. Another sector in which FDI has helped to fill the investment gap is telecommunications. In the next decade, India expects foreign investor to provide it with $50 billion, and approvals for FDIin cellular phones alone total $5 billion). Thus, MNCS have played, and will continue to play a pivotal role in India in terms of infrastructure development.



There are those who argue, however, that MNCS have brought significant disadvantages to India. While such views may not be based on reality,they are nonetheless a strong fonce opposing the expansion of FDI in India. The first criticism which is usually made is that MNCS bring inappropriate products to India. Here, theargument is usually made that non-durable products, such as foodstuffs, are better left to the domestic market, which is more in touch with Indian tastes and needs. As a result, some MNCs, such as Pepsico, Kentucky Fried Chicken, Pizza Hut and MacDonalds, have experienced opposition over the years). As well, the argument is made that Western brand names frequently mask products which are inferior imitations, and unknowing Indian consumers waste their money, sincerely believing that these goods can make them happy or beautiful). Now, the common economic argument which counters these two views is that consumers are free to make choices; consumers are, in fact, all-powerful, and what they do not want to buy will not be produced. Thus, the MNCS argue, they are meeting a demand which the Indian domestic market cannot provide, and are therefore helping to raise the utility of Indian consumers. Connected to the power of brand names in India is the criticism that MNCS often crowd out Indias domestic industries. It is true that brand name goods are more popular in India, and in fact, the top three brands in 17 categories of consumer products hold a market share of more than 50% .The general tendency for MNCS to adopt non-price methods of competition, which domestic are unable to afford, raises baniers to entry for new firms, and the result is that monopolistic or oligopolistic market structures oen exist. The negative effect which this has


on consumers is that prices will tend to be higher than nonnal, and the MNCS reap the benefits in terms of greater profits repatated To counter this, some argue that it is good for the Indian economy to weed out those inefficient producers which have been protected from competition for too long, as this will lead, in the to increased productivity and lower prices for consumers. Another criticism of MNCS in India concerns child labour, According to the International Labor Organization, at least 100 million children are at work in factories and fields around the world, and India alone has about 55 million of these . This criticism, however, does not take into account the fact that, in most of Indias cases, the children are only working because their families depend on them for survival. Also, schooling is not an option for many Indian children, as education in many Indian states remains limited. Another criticism is that Indian workers are often exploited and paid low wages by MNCS. This argument, however, is not backed up by evidence. In fact, the statistics show that workers in MNCS facilities earn around four times Indias minimum wage .


Although MNCs help distribute Foreign Direct Investment and therefore catalyse economic growth in developing countries, they are particularly notorious for exploiting countries causing problems regarding aspects of human rights, environment and working conditions (UN Committee on Trade and Development, 2002, p. 6). As a result, workers are exposed to risky conditions, exhaustion and overall exploitation by MNCs. To oppose this issue the United Nations Conference on Trade and Development should create a council which regulates working conditions especially in developing countries. Local governments in developing countries must be encouraged by the United Nations to apply international labour standards to MNCs and domestic competitors to raise working conditions and overall wages (Hijzen, Swaim, 2008). In addition international non-governmental organizations must monitor and create public awareness for the exploitation of human labour, to create an environment for MNCs and governments to act upon international labour standards. As a result real improvement on labour conditions and wages can only happen, if MNCs are closely monitored and the bargaining power towards local governments in developing countries is reduced to enforce higher labour standards (Hijzen, Swaim, 2008). The OECD created codes of conducts for various industries and also NGOs were created to monitor MNCs, a problem is of course that certain business data is confidential. For example the locations of plants or pay grades are normally not offered to the general public. Another problem is the monitoring and auditing of MNCs taken out by business and auditing firms, which could find a conflict of interest towards their customers, because they profist from future company growth of their customers (Brown, Deardorff, Stern 2002). On the one hand there has been movement towards a voluntary monitoring and certifying system by many MNCs,

because they see the impacts of bad publicity directly on their sales and profits. A good example is Nike which was accused of using sweatshops in Asia by the general public and as a reaction enforced a monitoring system through a Corporate Social Responsibility campaign (Hijzen, Swaim, 2008). On the other hand the monitoring system is far from perfect and it is not binding for the MNCs. Furthermore many suppliers of MNCs in developing countries are not monitored at all (Brown, Deardorff, Stern 2002). With the Nike incident there was a big discussion in the public if Nike is also responsible for working conditions at their suppliers in developing countries. So far the international community has failed to take up the challenge to monitor and control the impact of MNCs activities efficiently. In addition many governments especially in developing countries claim that human rights law does not apply to non-state actors like MNCs (Close, Romero, 2004). Only with the assistance of economic growth from globalisation true improvements in labour conditions are possible. Some opponents of core labour standards, mostly the developing countries, object that such standards are merely another form of protectionism on the part of the developed world (Global Trade Negotiation Summary, 2004). As exports of developing countries are almost always labour-intensive, due to the fact that labour costs are low, they think that the developed countries try to keep them away from the worlds markets by restricting their trades due to high labour standards (Global Trade Negotiation Summary, 2004). This argument is even more controversial in the light of the ongoing economic crisis, where governments resolve in protectionist measures to keep jobs in their home country. These protectionist measures include raising tariffs in the WTO barriers and engaging in anti dumping-cases. Therefore governments see cheaper labor costs in developing countries as a thread for local jobs and there could be an enhancement of affords for better labor conditions in developing countries by governments of developed countries. To sum it up MNCs are very important for the economic growth and prosperity in developing countries, because of FDI,


knowledge-transfer and modern management methods to enhance the productivity of suppliers, but also local competitors. Wages and overall labour conditions have improved in developing countries due to MNCs, however an international monitoring system run by NGOs is very important to impose international labour standards to MNCs operating in developing countries. Furthermore local governments in developing countries must engage in monitoring and imposing international labor standards to make sure that the workforce is not exploited by MNCs, but also by domestic competitors.


Internet Global Trade Negotiation Summary, 2004, "Labor", 26.11.2009 Hijzen, A., 2008, "Working conditions in the foreign operations of multinational enterprises" , 17.11.2009 Hijzen, A. and Swaim, P., 2008, "Do multinationals promote better pay and and working conditions?", OECD Observer No. 269, ationals_promote_better_pay_and_working_conditions_.html, 15.11.2009 International Finance Corporation, "Promoting Corporate Social Responsibility in Emerging Markets", cRespBrochure/$FILE/SocResp_6pbrochure.pdf, 25.11.2009 International Labor Organization, 1998, "Labor Standards", 24.11.2009 International Labour Organization,2004: A Fair Globalization: Creating opportunities for all, Report of the World Commission on the Social Dimension of Globalization, p. 143. ion/lang--en/index.htm, 10.11.2009