DEFINITION OF 'MULTINATIONAL CORPORATION - MNC'

A corporation that has its facilities and other assets in at least one country other than
its home country. Such companies have offices and/or factories in different countries
and usually have a centralized head office where they co-ordinate global management.
Very large multinationals have budgets that exceed those of many small countries.
Sometimes referred to as a "transnational corporation".
Multinational corporations (MNCs in short) are also known as Transnational
Corporations (TNCs), Super National Enterprises, Global companies, cosmocorps and
so on.
According to Prof. John H. Dunning, "A multinational enterprise is one which
undertakes foreign direct investment, i.e., which owns or controls income gathering
assets in more than one country; and in so doing produces goods or services outside
its country of origin, i.e., engages in international production."
A multinational corporation has also been defined as "an enterprise: which owns
and/or controls producing facilities in more than one country such as factories, mines,
oil refineries, distribution channels, offices, etc."'
According to another definition, "Any business corporation in which ownership,
management, production and marketing extend over several national jurisdictions is
called a multinational corporation." Today, in international economic affairs they
constitute the most important institutions. There are four participants in the drama of
multinationals. First, the MNCs themselves; secondly, the host countries ; thirdly, the
home countries ; and fourthly, the international community.
Characteristics of multinational corporations (MNCs):
The multinational corporations have certain characteristics which may be discussed
below :
(1) Giant Size :
The most important feature of these MNCs is their gigantic size. Their assets and sales
run into billions of dollars and they also make supernormal profits. According to one
definition an MNC is one with a sales turnover of f 100 million. The MNCs are also

super powerful organisations. In 1971 out of the top ninety producers of wealth, as
many as 29 were MNCs, and the rest, nations. Besides the operations, most of these
multinationals are spread in a vast number of countries. For instance, in 1973 out of a
total of (,000 firms identified nearly 45 per cent had affiliates in more than 20
countries.
(2) International Operation :
A Fundamental feature of a multinational corporation is that in such a corporation,
control resides in the hands of a single institution. But its interests and operations
sprawl across national boundaries. The Pepsi Cola company of the U.S operates in
114 countries. An MNC operates through a parent corporation in the home country. It
may assume the form or a subsidiary in the host country. If it is a branch, it acts for
the parent corporation without any local capital or management assistance. If it is a
subsidiary, the majority control is still exercised by the foreign parent company,
although it is " incorporated in the host country. The foreign control may range anywhere between the minimum of 51 per cent to the full, 100 per cent. An MNC thus
combines ownership with control. The branches and subsidiaries of MNCs operate
under the unified control of the parent company.
(3) Oligopolistic Structure :
Through the process of merger and takeover, etc., in course of time an MNC comes to
assume awesome power. This coupled with its giant size makes it oligopolistic in
character. So it enjoys a huge amount of profit. This oligopolistic structure has been
the cause of a number of evils of the multinational corporations.
(4) Spontaneous Evolution :
One thing to be observed in the case of the MNCs is that they have usually grown in a
spontaneous and unconscious manner. Very often they developed through "Creeping
incrementalism." Many firms become multinationals by accident. Sometimes a firm
established a subsidiary abroad due to wage differentials and better opportunity
prevailing in the host country.
(5) Collective Transfer of Resources :

An MNC facilitates multilateral transfer of resources Usually this transfer takes place
in the form of a "package" which includes technical know-how, equipment's and
machinery, materials, finished products, managerial services, and soon, "MNCs are
composed of a complex of widely varied modern technology ranging from production
and marketing to management and financing. B.N. Ganguly has remarked in the case
of an MNG "resources are transferred, but not traded in, according to the traditional
norms and practices of international trade."
(6) American dominance :
Another important feature of the world of multinationals is the American dominance.
In 1971, out of the top 25 MNCs, as many as 18 were of U.S. origin. In that year the
U.S. held 52 per cent of the total stock of direct foreign private investment. The U.E.
has assumed more of the role of a foreign investor than the traditional exporter of
home products.
Significance of multinational corporations (MNCs):
The multinational corporations today have a revolutionary effect on the international
economic system. It is so because the growth of international transactions of the
multinationals has affected the more traditional forms of capital flows and
international trade for many economies. Today they constitute a powerful force in the
world economy.
The value of the products sold by the MNCs in 1971 was more than $ 500 billion
which was about one-fifth of the GNP of the entire world, excepting that of socialist
economies. In the host countries, the volume of their production was about $ 330
billion. The present growth rate of their output in the host countries is a spectacular 10
per cent per annum which is almost double the growth rate of the world GNP.
In the field of international trade and international finance, the multinational firms
have come to exercise enormous power. In early seventies the MNCs accounted for
about one-eighth of all international trade- From the nature of their growth it may be
presumed that in the early eighties their share will rise to one-fourth.
Among the developing countries only India had an annual income twice that of
General Motors, which is the biggest multinational corporation. Otherwise the annual

income of the other less developed countries is much less than that of the giant
MNCs. By their sheer size the MNGs can disrupt the economies of the less developed
countries, and may even threaten their political sovereignty.
We may comprehend the relative economic power of the MNCs vis-a-vis the nationstates by ranking them together according to gross annual sales and gross national
product respectively. As Lester R. Brown has shown, out of 100 entries in the merged
list 56 were nation-states and as many as 44 were MNCs.
According to one estimate by early eighties some 300 large MNCs will come to
control 75 per cent of the world's manufacturing assets.
The Basic Characteristics Of Multinational Corporations Economics Essay
A multinational corporation is a corporation or an enterprise that manages production
or delivers services in more than one country. MNC is a corporation that has its
management headquarters in one country known as the home country and operates in
several other countries known as host countries. A multinational corporation (MNC) is
an enterprise that engages in foreign direct investment (FDI) and that owns or controls
value-added activities in more than one country. A firm is not really multinational if it
just engages in overseas trade or serves as a contractor to foreign firms. Firms are
considered to be more multinational if they have many foreign affiliates or
subsidiaries in foreign countries, they operate in a wide variety of countries around
the globe, the proportion of assets, revenues or profits accounted for by overseas
operations relative to total assets, revenues, or profits is high; their employees,
stockholders, owners and managers are from many different countries; and their
overseas operations are much more ambitious than just sales offices, including a full
range of manufacturing and research and development activities.
Multinational corporations are firms engaged in productive activities in several
countries. The majority of them are rich and developed countries and much of their
investment goes to other rich nations. They go overseas because they have some
special advantages they want to exploit.
Multinational corporations finance some portion of their overseas operations by
transfering funds from the country of the parent firm to the country of host firm. This

transfer is called foreign direct investment. The purpose of the transfer is to own or
control overseas assets.
Foreign direct investment is not new phenomenon. Foreign commercial investment
reached high level with the development of large mercantilist companies like British
East India Company. In eighteenth century, foreign direct investment occur in
agriculture, mining, manufacturing etc. In 1890, large US manufacturing firms are
Singer Sewing Machines, American Bell, General Electric and Standard Oil had large
investments abroad.
On the other hand, foreign direct investment is a new phenomenon. The nature of
international business changed after 1945. After WWII, the investments of U.S. firms
abroad experienced a major expansion. After WWII, manufacturing corporations like
GM, Ford, Siemens, Sony, and Philips Electronics dominated FDI. And, business
became more globalized in the 1980s and 1990s. By 2001, over 60,000 MNCs had
820,000 overseas affiliates in fifty-five host countries. Even the communist countries
promoted inflows of FDI after 1989.
Multinational corporations are among the worlds largest firms. In 2000, the top fifty
multinationals had revenues over 50 billion dollars and Exxon Mobile had revenues
over 210 billion dollars. MNCs were firms that sent abroad a package of capital,
technology, managerial talent, and marketing skills to carry out production in foreign
countries. Their production is worldwide with different stages of production carried
out in different countries. Marketing also is international. Goods produced in one or
more countries and sold throughout the world. And 80 percent of all foreign
subsidiaries are US corporations.
Moreover, joint ventures, licensing and strategic alliances are options available to
multinationals who wanted to do business abroad without being the sole owner of a
foreign subsidiary. In a joint venture, the various partners owned less than 100 percent
of equity of the joint venture firm. Licensing involved the granting of usage rights for
intellectual property like patents, copyrights, and trademarks. And, strategic alliances
are partnerships between separate, sometimes competing companies. The companies
are drawn together because each needs the complementary technology, skills, or
facilities of the other.

Finally, some powerful MNCs can significantly influence political economy of small
and poor countries. Although US MNCs still dominate international economic activity
because they have accumulated a large stock of foreign assets over many decades of
FDI.
There are two disputing view about the effects of MNCs. Firstly, I will examine the
positive view of MNCs, after than I will continue with the negative effects.
THE POSITIVE VIEW
HOST COUNTRY EFFECTS
Arguments in support of MNCs are usually made by liberal political economists and
by the business community. Since MNCs tend to be successful companies that possess
a variety of competitive advantages, much of the positive case for them rests on the
things they bring into host countries. MNCs transfer technology, products, finance
capital, and sophisticated management techniques to countries lack these. This
infusion of resources into host nations would tend to create jobs and raise the skill
level of the workforce.
MNCss invest overseas because they think they can utilize the other nations assests
and its workers beter than that nations investors and managers can rendering the
assests and workers more producitive than before.
In addition to the direct positive effects of MNCs, there may also be spillover effects
on to other companies and sectors in the economy of the host nation
MNCs are also credited with helping to improve a nations balance of payments. On
the capital side of the account, there is a flow of capital into the economy when the
MNC builds a new subsidiary or acquires an existing one.
HOME COUNTRY EFFECTS
Proponents of MNCs, argue that these companies make economically rational
decisions. They transfer production overseas or open new factories in foreign
countires as a defensive measure in response to competitive pressures. Moreover,
proponents argue that foreign direct investment can actually stimulate economic
activity in the home country.

BENEFITS OF MNC
Proponents of MNCs make a series of political and cultural claims about the benefits
of MNCs. At the systemic level, MNCs are viewed as forces integrating the worlds
economies, thereby reducing nationalism and international tensions. By increasing
trade between nations, by connecting workers from different countires into one MNC
network and by spreading similar consumer products to all of the world they
undermine national differences and help create a world citizen with modern tastes and
habits.
Also MNCs compel governments to collaborate politically so they can regulate and
control these new international forces.
THE NEGATIVE VIEW
The case against MNCs has been spearheaded by radical-structuralists. At the most
general level, they argue that MNCs integrate poor nations into an unequally
structured world system, with poor countries languishing on the periphery, heavily
dependent for their development on the decisions and actions of capitalists ensconced
in MNC headquarters in rich core nations. The policy implications of the most radical
of the dependency school arguments is for poor countries to cut their dependence by
closing their doors to MNCs.
We examine at a lower level of analysis, some of the possible specific negative effects
of MNC investment on, first, the host, and then the home countries.
HOST COUNTRY EFFECT
In several caces, MNCs may borrow the Money for foreign investment in the local
host market rather than transfer it from its home base. MNCs may squeeze out young,
potentially viable local firms from the local market and retard the independent
development of indigenous businessess.
Doubts have also been raised about the benefits of the transferred technology,
especially for poorer developing countires. First the vast bulk of the research and
development capability of MNCs remains at home in the parent company. Very little
is carried out in developing countires. Therefore, MNCs, it is argued, do not help
develop an independent capacity to generate new technology in the host countries.

Since locals receive little training and experience developing new products and
processess, when the MNCs leave, little that was of lasting benefit remains. This
would be particularly true for MNCs producing for export in low labor-cost locations,
fort hey are likely to be short-term residents in these countires.
Second, there is the question of the appropriateness or suitability of the transferred
technology fort he host nation. MNCs that set up subsidiaries in host countries
primarily to service the local market, as is often the case with FDI in developed
nations, are likely to develop contractual linkages with local firms. Those primarily
interested in outsourcing-that is, producing in overseas locations for export, usually
back to the home market then not to develop extensive lingages with local firms.
Critics charge that MNCs tend to exploit workers in developing countries by paying
them low wages and by providing them with inadequate benefits and unsafe working
conditions. Some MNCs have also been accused of transferring enviromentally unsafe
production processes to poorer countries to escape strict U.S. or European
environmental regulations.
Finally, we need to consider briefly the effects of MNCs on the political conditions in
host countries. What is certainly the case is that MNCs are not in the business of
promoting democracy or any other human rights. MNCs have operated quite happily
in countires ruled by left-wing and right-wing authoritarian regimes.
Sometimes, when their interest were threatened, some MNCs have pressed their home
governments to intervene in the internal political affiars of other nations. It is only fair
to point out that MNCs are also subject to political pressures.
HOME COUNTRY EFFECTS
Foreign direct investment means a loss of jobs in the home country and the gradual
deindustrialization of the nations economy.
Governments of both home and host countires are also interested in the tax revenues
MNCs generate. An MNC operating in several countries typically should pay taces to
each government on the profits it earns doing business in that country.
Given that many countires have different tax rates, one can see why MNCs might be
tempted to manipulate transfer prices so as to minimize their total tax burden.

CONCLUSION
Firstly we gave basic informations about the MNCs then we explained both negative
and positive effects of MNCs on the home and host countries in the light of basic
proponents of the MNCs such as liberal and radical structuralist view.

A Critique of Multinational Corporations:

In recent years foreign direct investment through multinational corporations has vastly
increased in India and other developing countries. This vast increase in investment by
multinational corporations in recent years is prompted by factors (1) the liberalisation
of industrial policy giving greater role to the private sector, (2) opening up of the
economy and liberalisation of foreign trade and capital inflows. In this economic
environment multinational corporations which are in search for global profits are
induced to make investment in developing countries.
As explained above, foreign direct investment by multinational firms bring many
benefits to the recipient countries but there are many potential dangers and
disadvantages from the viewpoint of economic growth and employment generation.
Therefore, role of multinational corporations in India and other developing countries
have been criticised on several grounds. We discuss below some of the criticisms
levelled against multinational corporations.
Capturing Markets:
1. First, it is alleged that multinational corporations invest their capital and locate their
manufacturing units on their own or in collaboration with local firms in order to sell
their products and capture the domestic markets of the countries where they invest
and operate. With their vast resources and competitive strength, they can weed out
their competitive firms.
For example, in India if corporate multinational firms are allowed to sell or produce
the products presently produced by small and medium enterprises, the latter would not
be able to compete and therefore would be thrown out of business. This will lead to
reduction in employment opportunities in the country.

2. Use of Capital-intensive Techniques:

It has been seen that increasing capital intensity in modern manufacturing sector is
responsible for slow growth of employment opportunities in Indias industrial sector.
These capital-intensive techniques may be imported by large domestic firms but
presently they are being increasingly used by multinational corporations which bring
their technology when they invest in India.
Emphasising this factor, Thirwall rightly writes, In this case the technology may be
inappropriate not because there is not a spectrum of technology or inappropriate
selection is made but because the technology available is circumscribed by the global
profit maximising motives of multinational companies investing in the less-developed
country concerned
3. Encouragement to Inessential Consumption:
The investment by multinational companies leads to overall increase in investment in
India but it is alleged that they encourage conspicuous consumption in the economy.
These companies cater to the wants of the already well-to-do people. For example, in
India very expensive cars (such as City Honda, Hyundais Accent, Mercedes, Opal
Astra, etc.) the air conditioners, costly laptops, washing machines, expensive fridges,
29 and Plasma TVs are being produced/sold by multinational companies.
Such goods are quite inappropriate for a poor country like India. Besides, their
consumption has a demonstration effect on the consumption of others. This tends to
raise the propensity to consume and adversely affects the increase in savings of the
country.
4. Import of Obsolete Technology:
Another criticism of MNCs is based on the ground that they import obsolete machines
and technology. As mentioned above, some of the imported technologies are
inappropriate to the conditions of Indian economy. It is alleged that India has been
made a dumping ground for obsolete technology.
Moreover, the multinational corporations do not undertake Research and
Development (R&D) in India to promote local technologies suited to the Indian

factor-endowment conditions. Instead, they concentrate R&D activity at their head

quarters.
5. Setting up Environment-Polluting Industries:
It has been found that investment by multinational corporations in developing
countries such as India is usually made for capturing domestic markets rather than for
export promotion. Moreover, in order to evade strict environment control measures in
their home countries they set up polluting industrial units in India.
A classic example of this is a highly polluting chemical plant set up in Bhopal
resulting in gas tragedy when thousands of people were either killed or made
handicapped due to severe ailments. With the tightening of environmental measures
in the such countries, there is a tendency among the MNCs to locate the polluting
industries in the poor countries, where environmental legislation is non-existent or is
not properly implemented, as exemplified in the Bhopal gas tragedy.
6. Volatility in Exchange Rate:
Another major consequence of liberalised foreign investment by multinational
corporations is its impact on the foreign exchange rate of the host country. Foreign
capital inflows affect the foreign exchange rate of the Indian rupee.
A large capital inflow through foreign investment brings about increase in the supply
of foreign exchange say of US dollars. With demand for foreign exchange being
given, increase in supply of foreign exchange will lead to the appreciation of
exchange rate of rupee.
This appreciation of the Indian rupee will discourage exports and encourage imports
causing deficit in balance of trade. For example, in India in the fiscal years 2004-05
and 2005-06, there were large capital inflows by FII (giant financial multinationals) in
the Indian economy to take advantage of higher interest rates here and also booming
of the Indian capital market.
On the other hand, when interest rates rise in the parent countries of these
multinationals or rates of return from capital markets go up or when there is loss of
confidence in the host country about its capacity to make payments of its debt as
happened in case of South-East Asia in the late nineties there is large outflow of

capital by multinational companies resulting in the crisis and huge depreciation of

their exchange rate. Thus, capital inflows and outflows by multinationals have been
responsible for large volatility of exchange rate.
Then there is the question of repatriation of profits by the multinationals. Though a
part of profit is reinvested by the multinational companies in the host country, a large
amount of profits are remitted to their own parent countries.
This has a potential disadvantage for the developing countries, especially when they
are facing foreign exchange problem. Commenting on this Thirwall writes FDI has
the potential disadvantage even when compared with loan finance, that there may be
outflow of profits that lasts much longer.
Transfer Pricing and Evasion of Local Taxes:
Multinational corporations are usually vertically integrated. The production of a
commodity by multinational firm comprises various phases in its production the
components used in the production of a final commodity may be produced in its
parent country or in its affiliates in other countries.
Transfer pricing refers to the prices a vertically integrated multinational firm charges
for its components or parts used for the production of the final commodity, say in
India. These prices of components or parts are not real prices as determined by
demand for and supply of them.
They are arbitrarily fixed by the companies so that they have to pay less taxes in
India. They artificially inflate the transfer prices for intermediate products (i.e.,
components) produced in their parent country or their overseas affiliates so as to show
lower profits earned in India. As a result, they succeed in evading corporate income
tax.
Conclusion:
We have seen above foreign investment by multinational companies have both
advantages and disadvantages. Therefore, they need regulation and should be
permitted in selected sectors and also subject to a cap on their investment in particular
fields. If objective of economic growth with stability and social justice is to be
achieved, there should not be complete open door policy for them.

It is true that multinational corporations take risk in making investment in India, they
bring capital and foreign exchange which are non-debt creating, they generally
promote technology and can help in raising exports. But they must be regulated so
that they serve these goals.
They should be allowed to invest in infrastructure, high-technology areas, and in
industries whose products they can export and if they help in generating net
employment opportunities. We agree with Colman and Nixon who write:
Transnational corporations cannot be directly blamed for lack of development (or the
direction development is taking) within less developed countries. Their prime
objective is global profit maximisation and their actions are aimed at achieving that
objective, not developing the host less developed country. If the technology and
products that they introduce are inappropriate, if their actions exacerbate regional and
social inequalities, if they weaken the balance of payments position, in the last resort
it is up to the government of less developed country to pursue policies which will
eliminate the causes of these problems.