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INTRODUCTION:
Multinational Corporations (MNCs) are giant industrial organizations with their Headquarters
Located in one country, extending heir industrial and marketing operations in several countries
through a network of their branches or their Majority Owned Foreign Affiliates (MOFAs). MNCs
are also known by other names, like/, transnational corporations, global corporations and
international corporations, etc. A multinational corporation (MNC) or transnational
corporation (TNC), also called multinational enterprise (MNE), is a corporation or enterprise
that manages production or delivers services in more than one country. It can also be referred to
as an international corporation.
The first modern MNC is generally thought to be the Dutch East India Company, established in
1602. The key element of transnational corporations was present even back then: the Dutch East
India Company was operating in a different country than the one where it had its headquarters.
Nowadays many corporations have offices, branches or manufacturing plants in different
countries than where their original and main headquarter is located. This is the very definition of
a transnational corporation. Having multiple operation points that all respond to one headquarter.
This often results in very powerful corporations that have budgets that exceed some national
GDPs Multinational corporations can have a powerful influence in local economies as well as the
world economy play an important role in international relationship globalization presence of
such powerful players in the world economy is reason for much controversy.
DEFINITION:
There is mo universally accepter definition of the term multinational corporation. Different
authorities define the term differently.
(1) As ILo Report says, The essential nature of the multinational enterprise lies in the fact
that is managerial Headquarters are located in one country ( home country ) while the
enterprise carries out operations in a number of other countries as well (host countries) 1
(2) Obviously, what is meant is, A corporation that controls production facilities in more
than one country, such facilities having been acquired through the process of foreigndirect investment. Firms that participate in international business however large they may
be, solely by exporting or b hunting technology is not Multinational enterprises.2
(3) The United Nations defines MNCs as, Enterprises which control assets- factories,
mines, sales offices and the like in two or more countries.
GROWTH OF MNCs
The rapidity with the MNCs are growing is indicated by the fact that while according to the
world investment report 1997 there were about 45,000 MNCs with 2,80,000 overseas
affiliates; according to the world investment report 2001, there were over 63,000 of them with
about 8,22,000 overseas affiliates. China was host to about 3.64 lakh of the affiliates (i.e., more
than 44% of the total) compared to more than 1400 in India. The developed countries have les
than 12% if these affiliates.
The possess staggering resources as would be clear from the fact that the sales of 200 top
corporations in1982 were equivalent of 24.2 per cent of the worlds GDP and have risen to 28.3
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per cent of the world GDP in 1998. This shows that 200 top MNCs now control over a quarter of
the worlds economic activity. In fact the combines sales of thee 200 MNCs estimated at &7.1
trillion in 1998 surpass the combined economies of 182 countries. If we subtract the GDP of the
big 9 economies -USA, Japan, Germany, France, Italy, UK, Brazil, Canada and china-from the
worlds GDP, the GDP of the remaining 182 countries of the world comes to $6.9 trillion in 1998
which is less than the sales of the 200 top MNCs. An idea of the giant size of these MNCs can
also be had from the revelation made in a study conducted by the Washington based institute of
policy studies (IPS) that of the 100 largest economies in the world, 51 are corporations; only 49
are countries.
The MNCs are estimated to employ directly, at home and abroad. Around73 billion
people representing nearly 10 per cent of paid employment in non-agricultural activities world
wide and close to 20 per cent in the developed countries considered alone/ in addition , the
indirect employment effect of the TNC activities ate at least equal toy hew direct effects and
probably much larger. For example, the US footwear company Nike currently employs 9000
people; while
nearly 75,000 people are employed by is independent sub- contractors located in different
countries. Based on such information, the total number of jobs associated with TNCs world wide
may have been 150 million at the beginning of the 1990s. 6
5.
6.
7.
8.
9.
agricultural activities for purposes of export. These days, MNCs are mainly engaged in
the development of industries, of their total investment 28 per cent in industries, 40 per
cent in petroleum and 9 per cent in minerals.
Oligopolistic Market: MNCs produce those goods which have small number of
producers or sellers. In other words where oligopolistic marketer condition prevail.
Consequently these conditions have control over the prices of the products. By fixing
high prices they earn mode profits and prevent the entry of mew firms in the market.
Spontaneous evolution: generally, there is spontaneous evolution of multinational
corporations. There is mo need of any pre-planning. Many forms gradually assume
international character. Several factures contribute to the development of MNCs, e.g.,
difference in wage rate in different countries, favorable trade conditioned etc.
Multinational ownership: citizens of many countries have their share in the capital
of multinational corporations. Their shares are bought and sold at international level.
Multinational management: MNCs are managed at international level. Their
managing board is composed of nationals of several countries.
DEMERITS:
a) it increases expenses because of duplicity of functions in the producer departments.
b) Resources are misused.
c) This system is suitable for the big concerns
d) There is a difficulty in exercising control at the top hierarchy
to keep in minds the tastes and difficulties of the customers which happen to differ from
region to region and country to country. If the business of a concern is spread all over the
country. The business many be divided into four regions or zones instead of controlling
the business from a single place. For example the division can be like china USA UK at
the International level. Each zone is in itself a complete business unit and for which a
separate zonal manager is appointed. The zonal managers remain in torch with their
customers and understand their problems, so they easily solve them. This structure is also
used by chain stores, power companies restaurant chains, dairy products, banking
companies, insurance companies. Etc. Under each zone departmentation can be done on
the basis of either functions or products which has been made clear in the following
diagram:
Asia
Africa
Europe
North America
Subsidiary Unit
Manufacturing
South America
Sales
a)
Because of the direct contact with the customers their problems can be easily
understood and solved.
b)
Local competition can be easily faced.
c)
Effects regional control is possible.
d)
Such and organization has the benefit of local factors like the raw material labor
market etc.
e)
Information about the local profit and loss position makes more investment
possible in the profit yielding region.
f)The competition to show good profits among the regional managers benefits the concern
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DEMERITS:
a.
Some functions which can be handled more economically at the central level
become expensive at the regional level.
b.
Polities cannot be implemented effectively because of the distance between the
planners and the implementers.
c.
More managerial employees are required which increases expenses.
Control becomes difficult because of the distance between the head office and the regional
offices.
(3) Decentralized Business Unit Structure: Since 1920, the diversified companies have a
trend of grouping activities based on product lines. In diversified firm, each activity is
treated as aloof a business unit. Following diagram show the decentralized line of
business type of organizational structure :
Chief Manager
Business A
Product A
Marketing
Manager
Chief Manager
Business B
Product B
Finance
Manager
Chief Manager
Business C
Product C
Production
Manager
Manager
Human Resources
Product D
Manager
R&D
MERITS:
a)
b)
c)
DEMERITS:
a)
Absence of mechanism for coordinating related activities across business unit
is the major problem of this type of organization.
Working of general manager of each unit independently makes co-ordination
complicated task.
b)
(4) Strategic Business Unit structure: A structure business unit is the grouping of business
subsidiaries based on some common important strategic elements. The business can be
effectively controlled, if the related business are grouped into strategic units. As a single chief
executive cannot control a number of decentralized units, therefore, an efficient and senior
executive is delegated with the authority and responsibility for its management. Following figure
presents the type of organization structure.
Merits:
a.
It reduces the span of control of the corporate headquarters.
b.
Better coordination between divisions with similar missions, products,
c.
d.
Demerits:
a.
Corporate headquarters becomes more distant from the division.
b.
Conflicts in strategic business unit arise as each manager wishes to grab
c.
(5) Matrix Organization Structure: Under this method both the methods on the basis of
functions and on the basis of products- are used in a combined manner. First of all the activities
of a company are divided on the basis of functions and department established. Which happen to
be the permanent departments of the organization? For example the purchase department,
manufacturing department, finance department, research and development department, etc. For
example these department permanent heads of the department are appointed who have the final
authority regarding their departments. After The establishment of these permanent departments
the departmentation on the basis of project or product is done the moment the concerns get and
order. Both functional and project managers exercise authority over organizational activities in
matrix structure. Thus personnel in this structure have two superiors via a project manager and
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the functional manager at the headquarters level. The following chart presents the matrix
organizational structure.
MERITS:
(i)
(ii)
(iii)
(iv)
(v)
The company enjoys the advantages of both project and functional type of
organization structure.
On each project the number of people appointed happens to be according to
the need and remaining persons are put on the routine functions of the
concern. In this way economy in costs is affected by making the optimum
utilization of human resources.
This structure has considerable flexibility. The personal can be transferred
from one project to the depending upon the need of the project.
Each project manager is in charge of a unit. Therefore he can be developed as
a general manager through performing general management functions.
Under the matrix organizational structure the expansion of the concern is
easily possible because the managers can establish department in respect of
each project
DEMERITS:
(i)
(ii)
(iii)
(iv)
1.
2.
3.
4.
MNCs IN INDIA
Most of the MNCs in India had originally entered the Indian market during the
colonial era. The actual umber of MNCs entered in post independence ea was small. The
entry was generally made through collaboration with big Indian business houses. For
example Bajaj tempo and Telco joined hands with Daimler Benz of West Germany: LML
joined hands with Piaggio of Italy: Maruti established joint venture with Suzuki of Japan:
Cyanamid CIBA and Ciba-Geigy jointly established new undertakings with alpha house
Birlas became the spokesmen of Kaisers and ford
At the end of 1990, there were 469 foreign companies in India. There are many Indian
companies with foreign equity participation too. For example Indian outfits of MNCs;
like ponds Johnson and Johnson Colgate Palmolive. Hindustan lever etc. there are
several MNCs in the pharmaceutical industry like Glaxo, Bayer, Sandoz and Hoechst.
1. Regulation of MNCs in India
Different government agencies in India control MNCs. These agencies include: (i)
the department of company affair (ii) The Reserve Bank of India (iii) The Ministry of
Industrial Development and (iv) The ministry of finance. Control over MNCs in India is
not efficient as these agencies have no coordination among themselves. The government
of India imposed certain regulation to control MNCs. These are:
(i)
Permissible period of agreement was reduced from 10 to 5 years.
(ii)
The maximum rate of royalty was imposed in technology imports
for those industries which were allowed to import technology.
(iii)
Those industries were moot allowed to import technology where
domestic companies ate competent.
(iv)
Exports and other marketing restrictions were imposed.
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Some regulations as stated above were imposed. However these regulations are moot adequate
and therefore MNCs be properly regulated to safeguard the interest of the country. Following
suggestions ate given to regulate them.
a) Government interference: Host country government should have its
representatives on the management of thee corporations. Interferences of the
representatives of the government is must on such matters as influence or are
likely to influence the economic development of the country. It should be made
clear to the MNCs that if they do not function in the Interest of the country they
are likely to be nationalized.
b) Local ownership: Majority or 51 per cent shares of the subsidiaries of MNCs
should be held special industries of the host country.
c) Beneficial collaborations: Government should allow collaboration of MNCs
for those special industries where such collaboration is essential.
d) Research of an appropriate technology: MNCs many be compelled to spend a
part of their profit in the development of appropriate R $ D for the benefit of
host country.
e) Substitution of technology: Only in the initial stages of development the
imported technology should be used. Thereafter that technology should be
developed indigenously so that the dependence on MNCs could be reduced.
f) Collaboration in heavy and basic industries: Collaboration with MNCs
should be allowed only in heavy and basic industries. Collaboration in
consumer goods industry should not be allowed as it many hamper the domestic
industry.
g) Check on monopolistic tendencies: Oligopolistic or monopolistic tendencies
of MNCs should be closely watched to safeguard the interest of consumers as
well as of local producers.
2.
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e.
f.
g.
h.
Indianisation a myth: according to Prof. Dali s. swami, on account of the following reasons
Indianisation is a merely a myth.
1. Rate of profitability of MNCs is so large that despite the reduction of share capital from
100 per cent to 74% there has been no fall in the amount remitted to foreign countries
from India.
2. Despite the fall of the share of foreigners in the share capital MNCs will have the right to
appoint top executives in their branches and subsidiaries, the corporation even now
appoint foreigners on senior posts.
3. Rate of taxes are now in respect of public limited company as against private limited
company
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The economists differ in opinion regarding advantages and disadvantage of MNCs for the Indian
economy. Some are in favor of MNCs whereas some are against it. Before reaching to any
conclusion. It is essential to analyze the beneficial as well as harm full effects of MNCs
I.
Beneficial effects
The benefits of MNCs as follows
(i) Globalization of the economy: the MNCs provide managerial skill capital
computerized technology and other resources of world class. the mixture of these
resources with Indian labor and raw material helped increasing the export of Indian
companies.
(ii) Increase in employment: the MNCs caused increase in employment opportunities
through the multiplier effect of investment.
(iii)
Growth of new industries: MNCs have also contributed in the growth of new
industries by providing them managerial skill technical know how and working
capital.
II.
Harmful effects
The following are the major harmful effects of MNCs.
(i) Encouraged demonstration effects : the MNCs made heavy expenditure on
advertisement and publicity .it result in waste full expenditure whose burden is
ultimately to be borne by Indian customers
(ii) Completion with small scale industries: MNCs have entered in the production of
several such items which were exclusively reserved for small scale industries like
potato chips biscuits etc.
(iii)
Providing prohibited goods: profit earning is main objective of MNCs. To
achieve this objective they do not hesitate to indulge in the production and selling of
harm full goods. Many of medicines and consumer durables the production of which
has been prohibited in the foreign countries are being manufactured and sold in India
by MNCs.
(iv)Unfair trade practices: the MNCs also used unfair trade practices .for instance to
save the corporate tax they over in voice the imports and under invoice the exports
(v) Fluctuation In investment: in the initial stages of their establishment the MNCs
have invested their profit in India. But after some time they started to remit their
profits to parent company by way of royalty and dividends.
(vi)Production of profitable consumer goods: the MNCs are interested only in the
profitable consumer goods. They do not prefer to invest in the production of capital
goods liker machines tools engineering etc
Thus it may be concluded the MNCs have both merits as well as demerits. Special precautions
should be undertaken to avoid demerits. in the word of M.P.Todaro, the critics of multination
see this giant corporation not as needed agents of economic change but more as vehicles of anti
development. Multinational Corporation reinforces dualistic economic structures and
accelerates domestic inequalities in to wrong product and inappropriate technologies.
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