UNIT-5

GLOBALIZATION
MEANING:
The worldwide movement toward economic, financial, trade, and communications
integration. Globalization implies the opening of local and nationalistic perspectives to a
broader outlook of an interconnected and interdependent world with free transfer of capital,
goods, and services across national frontiers. However, it does not include unhindered
movement of labour and, as suggested by some economists, may hurt smaller or fragile
economies if applied indiscriminately.

DEFINITION OF GLOBALIZATION:
Held and his co-writers' definition of globalization in that same book as "transformation in the
spatial organization of social relations and transactions—assessed in terms of their extensity,
intensity, velocity and impact—generating transcontinental or inter-regional flows"

DIMENISIONS OF GLOBALIZATION:

Economic

Economic globalization is the intensification and stretching of economic interrelations around

the globe. It encompasses such things as the emergence of a new global economic order, the
internationalization of trade and finance, the changing power of transnational corporations,
and the enhanced role of international economic institutions.

Political:
Political globalization is the intensification and expansion of political interrelations around
the globe. Aspects of political globalization include the modern-nation state system and its
changing place in today’s world, the role of global governance, and the direction of our
global political systems.

Military:

Military globalization, as sub domain of political globalization, is defined as the

intensification and stretching of military power across the globe through various means of
military power (nuclear military weapons, radiation weapons simply weapons of mass
destruction). This form of globalization occurs across offensive and defensive uses of power
and survival in international field. Beyond states, global organizations such as the United
Nations also extend military means globally through support given by both Global North and
South countries.

Cultural:
Cultural globalization is the intensification and expansion of cultural flows across the globe.
Culture is a very broad concept and has many facets, but in the discussion on globalization,
Steger means it to refer to “the symbolic construction, articulation, and dissemination of
meaning.” Topics under this heading include discussion about the development of a global
culture, or lack thereof, the role of the media in shaping our identities and desires, and the
globalization of languages.

Ecological:
Topics of ecological globalization include population growth, access to food, worldwide
reduction in biodiversity, the gap between rich and poor as well as between the global North
and global South, human-induced climate change, and global environmental degradation.

FEATURES OF GLOBALIZATION:
1. Liberalisation:

It stands for the freedom of the entrepreneurs to establish any industry or trade or business
venture, within their own countries or abroad.

2. Free trade:

It stands for free flow of trade relations among all the nations. Each state grants MFN (most
favoured nation) status to other states and keeps its business and trade away from excessive
and hard regulatory and protective regimes.

3. Globalisation of Economic Activity:

Economic activities are be governed both by the domestic market and also the world market.
It stands for the process of integrating the domestic economies with world economy.

4. Liberalisation of Import-Export System:

It stands for liberating the import-export activity and securing a free flow of goods and
services across borders.

5. Privatisation:

Keeping the state away from ownership of means of production and distribution and letting
the free flow of industrial, trade and economic activity across borders.

6. Increased Collaborations:

Encouraging the process of collaborations among the entrepreneurs with a view to secure
rapid modernisation, development and technological advancement.

7. Economic Reforms:

Encouraging fiscal and financial reforms with a view to give strength to free world trade, free
enterprise, and market forces.
8. Several dimensions of Globalisation:

Increased and Active Social, Economic and Cultural Linkages among the people.
Globalisation has social, economic, political cultural and technological dimensions. It
involves all round inter-linkages among all the people of the world.

Free flow of knowledge, technology goods services and people across all societies is it key
feature. It attempts at making geographical borders soft permitting all the people to develop
their relations and links.

Globalisation accepts and advocates the value of free world, free trade, freedom of access to
world markets and a free flow of investments across borders. It stands for integration and
democratisation of the world’s culture, economy and infrastructure through global
investments.

ADVANTAGES OF GLOBALIZATION:

Ability to tap into a wider talent pool:

When fully taking advantage of globalization, you are no longer restrained by talent that is
available in your city. Today your remote workforce could work from anywhere in the world
with an internet connection opening you up to the brightest and best candidates the entire
world has to offer.

Cultural diversity:

Businesses are experiencing increasingly diverse workforces as a result of a globalised

economy. This includes teams working across different locations, people travelling and
moving countries for work, having a range of different work ethics and practices and even
religious differences. All of these can be challenges, but overwhelmingly are a positive thing
in the workplace as it brings together different ideas and insights and perspectives.

Coaching and training:

With more diversity comes a need for more coaching and training of employees, particularly
around cultural competency to help workers form different backgrounds connect with and
understand one another. With this level of coaching and training, your business is more likely
to be successful.

Improved information between different countries:

Globalization helps to break down more than just trade barriers, it helps countries
communicate and collaborate and share knowledge.

Larger markets:

Openness to trade brings bigger and better opportunities to the economy including larger
markets and increased opportunities to specialize. This includes global economic growth, job
creation, more competitive companies and lower prices for consumers.
Higher standards:

For less developed countries, globalization can be a blessing as it increases standards of

living such as health and welfare and safety conditions in the workplace. Companies from
more developed nations tend to have to comply with regulatory requirements in their home
countries and transfer these expectations when they operate in other parts of the world.

Hollowing out of work:

Globalization has been blamed for the loss of millions of jobs around the world – in particular
middle-wage, middle skilled jobs like managers, assembly line workers or secretaries.

These jobs are often outsourced to regions that have lower wages, or are being replaced
entirely by rapid advances in technology, making them obsolete. The jobs that remain are the
higher paid and lower paid jobs, meaning the middle has been “hollowed out”.

Earnings changes:

With more and more companies accessing overseas outsourcing opportunities, wages have
decreased for many workers in the original countries. Companies in the developing world are
able to offer their services at a much reduced rate from those who live in countries with
greater living standards. This means that workers in larger countries are affected.

Social injustice:

Many multinational corporations have been accused of exploitation when working in poorer,
developing countries and delivering unfair work conditions such as slave labour, poor
standards of living and unsafe working practices. They are also often accused of damaging
the environment and depleting it of natural resources and causing problems with ecological
systems.

Many opponents of globalization say that it has worsened inequality internationally with the
richest 20 per cent of the world population consuming 86 per cent of the world’s resources
and the poorest 80 per cent of the world’s population consume just 14 per cent of the world’s
resources.

Multinationals with political influence:

Some multinational corporations no longer just limit themselves to corporate activities and
become part of politics and actively attempt to influence political decisions in some parts of
the world.

Potential for IP theft:

When products are built overseas in factories on behalf of a company based in another
country, there is potential that intellectual property and designs could be copied and stolen
and replicated and sold for cheaper elsewhere.

Internal communication challenges:

When you work across time zones, cultures and countries and have a workforce that is not
always even online at the same time, let alone in the same room at the same time, reaching
everyone and communicating effectively can be a challenge unless managed strategically. For
example, investing in Desk Alerts to send pop-up notifications straight to employees’ desktop
screens, no matter where they are located in the world, scheduled to reach them at the
appropriate time in their time zone, written in their language.

Globalization refers to several different concepts all rolled into one package. It may refer to
the ease in which businesses conduct operations in different countries other than their own.
Some look at this subject as a way to create a world without national borders. There are
concepts of communication, information access, and technology development to consider
when looking at this subject matter too.

Even though the geographic size of our planet remains consistent, how we interact with each
other is changing by the minute. Despite more than 200 countries independently working for
their best interests, we all come together in ways to make the world a better place. If you have
access to a computer or mobile device with data or an ISP, then you can communicate with
anyone else in the world with the same setup.

We are closer than ever before. That closeness also means that groups of people are further
apart than ever before. Neighbourhoods’ form around common interests or political
perspectives more than our common humanity. Travel restrictions dictate where some people
can go, and others cannot.

As the advantages and disadvantages of globalization show, even though progress occurs, we
are also taking steps backward.

Disadvantages of Globalization:

Globalization may encourage more off shoring instead of less:

With fewer restrictions in place at the national level, some businesses may use off shoring to
their advantage. Even if they kept jobs local, the threat of sending jobs to a different, cheaper
region overseas could be used to justify lower wages at home. The end result of an effort to
remove borders would be an increase in wages in the developing world, but a decrease in
developed countries. Many households could see their standard of living go down if
consumable price decreases don’t occur simultaneously.

Globalization benefits the wealthy more than the poor:

Value-added taxes above 25% exist in some nations. Tariffs above 70% exist for some
products. Unless borders are completely removed, the advantages of globalization are
challenging to achieve. The people who have the power to dictate policy would reap the most
significant rewards. Those with money to invest would see their bank accounts continue to
rise. At the same time, households living pay check-to-pay check would struggle to access
what they require, suppressing their ability to pursue a better job.

Globalization would encourage disease transfer:

The outcome of the Columbian Exchange was profound at the time. Over 90% of some
population centers died because of their exposure to smallpox, chickenpox, and other diseases
that the Europeans were somewhat immune to at the time. The Europeans brought back
syphilis and other diseases as well. If global travel restricts eased, then issues with malaria
and tropical disease could spread to portions of the world where exposures are minimal.
Tuberculosis, certain influenza strains, and other communicable disease could produce
outbreaks at epidemic levels.

Globalization could reduce social safety net programs:

Most nations today offer those in extreme poverty access to safety net programs for basic
supplies. Even in the United States, programs like WIC and SNAP offer food and care access
to those who cannot afford it on their own for whatever reason. When we reduce or eliminate
borders, there would be a likely shift in social programs to benefit those earning less than $2
per day while ignoring the needs of those at home. Households living in poverty in the U.S.
or United Kingdom fit into a different definition when compared to global poverty.

Globalization would create a new system of politics:

We’ve already received a sneak peek of what a global society would be like from a political
perspective. The individuals and organizations who spend the most to lobby politicians would
receive the best chance of having their needs met first. We’ve seen billions spent in U.S.
elections lately to influence legislation and policy to become favourable toward specific
outcomes. This issue would translate to a global economy, where only the richest and most
influential would influence laws which would impact everyone.

Globalization would not prevent resource consumption:

The goal of globalization is to equalize patterns of consumption for populations around the
world. Even though there would be movement toward doing so, there is no getting around the
fact that the wealthiest nations will still consume the most resources. The 20 richest countries
in the world today consume almost 90% of the planet’s resources each year. The United
States constitutes 5% of the global population right now, but it consumes 24% of the world’s
energy as a country.

When you look at the per capita consumption rates of energy globally, one American
consumes as much energy as 31 people in India. If you go to a developing nation, it takes 370
Ethiopians to use the same amount of energy that a single U.S. citizen uses to meet their
needs.

Globalization would make it easier for people to cheat:

The statistics of consumption (especially food) show us already that those who are in power
take the majority of resources away from the general population. Americans eat almost 200
billion more calories per day as a nation than they require, which means 80 million people are
hungry needlessly because of these consumption habits. About 200,000 tons of edible food is
disposed of daily in the United States. By the age of 75, the average person in the U.S. creates
52 tons of garbage.
Globalization would likely centralize distribution of necessary resources. With only a few
controlling access to the many, the chance to negatively impact populations on a large scale
become greater when borders are reduced.

Globalization doesn’t fix a lack of skills:

The future of employment involves programming, robotics, and artificial intelligence.

Workers who adapt to automation with their skillset are the most likely to find employment
in the coming generations. Jobs which require repetitive functions will be the first to go
away, which are the employment opportunities often found in the developing world. With no
meaningful skills to a globalized economy, there could be a higher unemployment rate if
border restrictions reduce because only those in the developed world would be trained for the
new economy.

Unless new vocational development opportunities implement with the globalization

structures, the boundaries between the developed and developing world will likely continue
to exist.

Globalization changes how humans would identify themselves:

Humans are global citizens in some ways already. We all share the same planet, after all, so
we are united with that common ground. If we lose borders, however, we also lose a piece of
our culture, ethnicity, or family heritage. People identify themselves based on their history, so
being Irish in a global world would have less impact than it does today. We already seen how
this works when Texas came into the U.S. after being an independent nation. Some Texans
label themselves as such first, but many see themselves as an American before being a Texan.

Globalization would negatively impact the environment:

We’ve already seen what free trade does to the environment. Greenhouse gas emissions rose
in 2018 despite efforts to curtail them. Micro-plastics invaded our oceans, creating negative
impacts on marine life. The waters of our planet are slowly acidifying, creating economic and
health impacts every day. Over 200,000 Americans die each year because of pollution
exposure. If caps are taken off of what is not permitted through globalization, then this issue
will continue growing worse.

Essential conditions of globalization:

 In order to smoothen the process of globalisation, the following are necessary:
 Removal of quotas and tariffs.
 Liberalisation of Government rules and regulations.
 Freedom to business and industry.
 Removal of bureaucratic formalities and procedures.
 Adequate infrastructure.
 Competition on the basis of quality, price, delivery and customer service.
 Autonomy to public sector undertakings.
 Incentives for research and development.
 Administrative and Government support to industry.
 Development of money markets and capital markets.
Types of globalization:
Financial globalization:
Interconnection of the world’s financial systems e.g. stock markets More of a connection
between large cities than of nations.
Example: What happens in Asian markets affects the North American markets.
Economic Globalization:
A worldwide economic system that permits easy movement of goods, production, capital, and
resources (free trade facilitates this)
Example: NAFTA, EU, Multinational corporations
Technological Globalization:
Connection between nations through technology such as television, radio, telephones,
internet, etc.
Was traditionally available only to the rich but is now far more available to the poor. Much
less infrastructure is needed now.
Political Globalization:
Countries are attempting to adopt similar political policies and styles of government in order
to facilitate other forms of globalization
E.g. move to secular governments, free trade agreements, etc
Cultural Globalization:
Merging or “watering down” of the worlds cultures e.g. food, entertainment, language, etc.
Heavily criticized as destructive of local culture
E.g. The Simpsons is shown in over 200 countries in the world.
Ecological Globalization:
Seeing the Earth as a single ecosystem rather than a collection of separate ecological systems
because so many problems are global in nature
E.g. International treaties to deal with environmental issues like biodiversity, climate change
or the ozone layer, wildlife reserves that span several countries
Sociological Globalization
A growing belief that we are all global citizens and should all be held to the same standards –
and have the same rights
E.g. the growing international ideas that capital punishment is immoral and that woman
should have all the same rights as men.
Foreign Direct Investment:
Foreign direct investment (FDI) has increased tenfold over the last 20 years. This kind of
investment brings private overseas funds into a country for investments in manufacturing or
services (for example, General Motors building an auto factory in the Philippines).

FDI can bring impressive growth, as in China's coastal provinces, but also instability and
economic distress, as during the 1997-98 Asian financial crisis. Governments of many poor
countries see foreign capital as a means of economic growth, and they have taken steps to
attract it.

These steps often include minimizing business regulation and weakening codes for labour,
health, and the environment. Such governments may also try to improve the investment
climate by using violence to silence opposition parties and movements.

Rich countries, for their part, have sought legal protection for investors, and have used the
World Bank and the IMF to impose new arrangements in this field. Bilateral and multilateral
agreements, such as the North American Free Trade Area, protect investments at the expense
of environmental and health regulations. The proposed Multilateral Investment Agreement
(MIA), under negotiation at the WTO, would replicate this imbalance at the global level.

Advantages of Foreign Direct Investment

1. Economic Development Stimulation:

Foreign direct investment can stimulate the target country’s economic development, creating
a more conducive environment for you as the investor and benefits for the local industry.

2. Easy International Trade:

Commonly, a country has its own import tariff, and this is one of the reasons why trading
with it is quite difficult. Also, there are industries that usually require their presence in the
international markets to ensure their sales and goals will be completely met. With FDI, all
these will be made easier.

3. Employment and Economic Boost:

Foreign direct investment creates new jobs, as investors build new companies in the target
country, create new opportunities. This leads to an increase in income and more buying
power to the people, which in turn leads to an economic boost.

4. Development of Human Capital Resources:

One big advantage brought about by FDI is the development of human capital resources,
which is also often understated as it is not immediately apparent. Human capital is the
competence and knowledge of those able to perform labor, more known to us as the
workforce. The attributes gained by training and sharing experience would increase the
education and overall human capital of a country. Its resource is not a tangible asset that is
owned by companies, but instead something that is on loan. With this in mind, a country with
FDI can benefit greatly by developing its human resources while maintaining ownership.

5. Tax Incentives.
Parent enterprises would also provide foreign direct investment to get additional expertise,
technology and products. As the foreign investor, you can receive tax incentives that will be
highly useful in your selected field of business.

6. Resource Transfer.
Foreign direct investment will allow resource transfer and other exchanges of knowledge,
where various countries are given access to new technologies and skills.

7. Reduced Disparity Between Revenues and Costs.

Foreign direct investment can reduce the disparity between revenues and costs. With such,
countries will be able to make sure that production costs will be the same and can be sold
easily.

8. Increased Productivity.
The facilities and equipment provided by foreign investors can increase a workforce’s
productivity in the target country.

9. Increment in Income.
Another big advantage of foreign direct investment is the increase of the target country’s
income. With more jobs and higher wages, the national income normally increases. As a
result, economic growth is spurred. Take note that larger corporations would usually offer
higher salary levels than what you would normally find in the target country, which can lead
to increment in income.

Disadvantages of Foreign Direct Investment

1. Hindrance to Domestic Investment.

As it focuses its resources elsewhere other than the investor’s home country, foreign direct
investment can sometimes hinder domestic investment.

2. Risk from Political Changes.

Because political issues in other countries can instantly change, foreign direct investment is
very risky. Plus, most of the risk factors that you are going to experience are extremely high.

3. Negative Influence on Exchange Rates.

Foreign direct investments can occasionally affect exchange rates to the advantage of one
country and the detriment of another.

4. Higher Costs.
If you invest in some foreign countries, you might notice that it is more expensive than when
you export goods. So, it is very imperative to prepare sufficient money to set up your
operations.
5. Economic Non-Viability.
Considering that foreign direct investments may be capital-intensive from the point of view
of the investor, it can sometimes be very risky or economically non-viable.

6. Expropriation.
Remember that political changes can also lead to expropriation, which is a scenario where the
government will have control over your property and assets.

7. Negative Impact on the Country’s Investment.

The rules that govern foreign exchange rates and direct investments might negatively have an
impact on the investing country. Investment may be banned in some foreign markets, which
means that it is impossible to pursue an inviting opportunity.

8. Modern-Day Economic Colonialism.

Many third-world countries, or at least those with history of colonialism, worry that foreign
direct investment would result in some kind of modern day economic colonialism, which
exposes host countries and leave them vulnerable to foreign companies’ exploitations.

Features Of Foreign Direct Investment

It is commonly made in open economies that offer a skilled workforce and good growth
prospects for the investors in comparison to tightly regulated economies.
It involves a long term commitment as there is no intention to seek quick capital gains.
As per organization for economic cooperation & development (OECD), investment of 10%
or above from overseas is considered as FDI.
Foreign direct investment not only requires capital investment but also requires management
as well as technology.
It increases the productive capacity of the target company as it involves creation of physical
assets. This helps in generating employment opportunities and fast economic growth in the
host country.
It establishes an effective control in the company in which the investment is made.
Investing company has a major influence on the decision making process of the company in
which the investment is made.

Types and Examples of Foreign Direct Investment

There are two main types of FDI:

 Horizontal
 Vertical

Horizontal: a business expands its domestic operations to a foreign country. In

this case, the business conducts the same activities but in a foreign country. For
example, McDonald’s opening restaurants in Japan would be considered horizontal
FDI.

Vertical: a business expands into a foreign country by moving to a different level

of the supply chain. In other words, a firm conducts different activities abroad but
these activities are still related to the main business. Using the same example,
McDonald’s could purchase a large-scale farm in Canada to produce meat for their
restaurants.

However, two other forms of FDI have also been observed: conglomerate and
platform FDI.

Conglomerate: a business acquires an unrelated business in a foreign country.

This is uncommon as it requires overcoming two barriers to entry: entering a
foreign country and entering a new industry or market. An example of this would
be if Virgin Group, which is based in the United Kingdom, acquired a clothing line
in France.

Platform: a business expands into a foreign country but the output from the
foreign operations is exported to a third country. This is also referred to as export-
platform FDI. Platform FDI commonly happens in low-cost locations inside free-
trade areas. For example, if Ford purchased manufacturing plants in Ireland with
the primary purpose of exporting cars to other countries in the EU.
OBJECTIVES OF FOREIGN DIRECT INVESTMENT'S AND PI

1. Sustaining a high level of investment :

Since the underdeveloped countries want to industrialized themselves within a short
period of time, it becomes necessary to raise the level of investment substantially. This
requires, in turn, a high level of savings.
However, because of general poverty of masses, the savings are often very low. Hence
emerges a resource gap between investment and savings. This gap has to be filled
through foreign capital.

2. Technological gap :
The under developed countries have very low level of technology as compared to the
advanced countries. However they possess strong urge for industrialization to develop
their economies and to wriggle out of the low level equilibrium trap in which they are
caught.
This raises the necessity for importing technology from advanced countries. Such
technology usually comes with foreign capital when it assumes the form of private
foreign investment or foreign collaboration. In the Indian case technical assistance
received from abroad has helped in filling the technological gap through the following
three ways:
(a) Provision for expert services
(b) Training of Indian personnel
(c) Education research and training institution in the country

3. Exploitation of natural resources :

A number of underdeveloped countries possess huge mineral resources, which await
exploitation. These countries themselves do not possess the required technical skill and
expertise to accomplish this task. As a consequence, they have to depend upon foreign
capital to undertake the exploitation of their mineral wealth.

4. Undertaking the initial risk :

Many under developed countries suffer from acute private entrepreneurs. This creates
obstacles in the programs of industrialization. An argument advanced in favour of the
foreign capital is that it undertakes the risk of investment in host countries and thus
provides the much-needed impetus to the process of industrialization.
Once the programme of industrialization gets started with the initiative of foreign capital,
domestic industrial activity starts picking up as more and more of the host country enter
 the industrial field.

5. Development of basic economic infrastructure :

It has been observed that the domestic capital of the under developed countries is often
too inadequate to build up the economic infra structure of its own. Thus these countries
require the assistance of foreign capital to undertake this task.
In the latter half of the 20th century, especially during the last 3-4 decades, international
financial institutions and many governments of advanced countries have made substantial
capital available to the under developed countries to develop their system of transport
and communications, generation and distribution of electricity, development of irrigation
facilities, etc.

6. Improvement in balance of payments position :

In the initial phase of the economic development, the under developed countries need
much larger imports (in the form of machinery, capital goods, industrial raw materials,
spares and components), then they can possibly export. As a result, the balance of
payments generally turns adverse. This creates a gap between the earnings and foreign
exchange. Foreign capital presents short run solution to the problem.
This shows that the economic development of an underdeveloped country should
obviously receive a boost as a result of foreign capital.
Accordingly, if foreign capital is obtained on easy terms and without any ‘strings’, it
should be welcomed. However, as noted by John P. Lewis, “despite denials, the fact is
that all foreign aid carries strings and every foreign aid relationship involves bargaining,
however genteel, between aiding and receiving parties.”

IMPORTANT FACTORS OF FDI:

1) Helps in Balancing International Payments:

FDI is the major source of foreign exchange inflow in the country. It offers a supreme benefit
to country’s external borrowings as the government needs to repay the international debt with
the interest over a particular period of time. The inflow of foreign currency in the economy
allows the government to generate adequate resources which help to stabilize the BOP
(Balance of Payment).

2) FDI boosts development in various fields:

For the development of an economy, it is important to have new technology, proper

management and new skills. FDI allows bridging of the technology gap between foreign and
domestic firms to boost the scale of production which is beneficial for the betterment of
Indian economy. Thus, FDI is also considered an asset to the economy.

3) FDI & Employment:

FDI allows foreign enterprises to establish their business in India. The establishment of these
enterprises in the country generates employment opportunities for the people of India. Thus,
the government facilitates foreign companies to set up their business entities in the country to
empower Indian youth with new and improved skills.

4) FDI encourages export from host country:

Foreign companies carry a broad international marketing network and marketing information
which helps in promoting domestic products across the globe. Hence, FDI promotes the
export-oriented activities that improve export performance of the country.

Apart from these advantages, FDI helps in creating a competitive environment in the country
which leads to higher efficiency and superior products and services.

Types of FDI:

There are two types of FDI:

i. Greenfield Investment:

It is the direct investment in new facilities or the expansion of existing facilities. It is the
principal mode of investing in developing countries like India.

ii. Mergers and Acquisition:

It occurs when a transfer of existing assets from local firms takes place.

Importance of FDI in India:

The Indian economy stood at the 11th position in the world with regards to the nominal gross
domestic product (GDP) for the fiscal year 2011-12 witnessed a year low growth of the
Indian economy (grew at a rate of 6.5%) and reasons traced could be the weak monetary
policy, inflation issues, and cut in investments.

India is one of the most attractive destinations for foreign investment. Since liberalization,
when foreign direct investments (FDI) were allowed to enter India, our economy has grown
by manifolds. Foreign investments play a very significant role in the Indian economy.

The importance could be attributed to the following reasons:

i. Increased Investment in the country Improvement in Technology and Infrastructure

Increased productivity

ii. Enhanced Flow of Equity Capital Improved Corporate Governance Increased Employment
Opportunities.

Foreign Direct Investment Statistics

Four agencies keep track of FDI statistics.

The U.N. Conference on Trade and Development publishes the Global Investment Trends
Monitor. It summarizes FDI trends around the world.
The Organization for Economic Cooperation and Development publishes quarterly
FDI statistics for its member countries. It reports on both inflows and outflows. The only
statistics it doesn't capture are those between the emerging markets themselves.
The IMF published its first Worldwide Survey of Foreign Direct Investment Positions in
2010. This annual worldwide survey is available as an online database. It covers investment
positions for 72 countries. The IMF received help from the European Central Bank, Eurostat,
the Organization for Economic Cooperation and Development, and the United Nations
Conference on Trade and Development.
The Bureau of Economic Analysis reports on the FDI activities of foreign affiliates of U.S.
companies. It provides the financial and operating data of these affiliates. It says which U.S.
companies were acquired or created by foreign ones. It also describes how much U.S.
companies have invested overseas.
MULTINATIONAL COMPANY(MNCS)

Meaning of Multinational Companies (MNCs):

A multinational company is one which is incorporated in one country (called the home
country); but whose operations extend beyond the home country and which carries on
business in other countries (called the host countries) in addition to the home country.

It must be emphasized that the headquarters of a multinational company are located in the
home country.

Definition:

Neil H. Jacoby defines a multinational company as follows:

“A multinational corporation owns and manages business in two or more countries.”

Advantages of Multinational Corporations

1. Multinational corporations are often responsible for today’s best practices.

Most multinational corporate rely on merchants and distributors for their goods and services.
Some even use these third-party entities to create additional sales opportunities. Because of
their global presence and overall sizes, these organizations use leverage with their associates
to produce a required action for each customer.

If the vendor fails to do so, then the multinational corporation can move to a different
supplier immediately. This practice directly eliminates some distribution businesses overseas
with a single decision, which is why this structure creates competences of scale that keep
prices down while still ensuring reasonably excellent product quality.
2. Innovation happens because of the investments made by multinational corporations.
Most multinational corporations spend about 5%-10% of their yearly budget on innovative
research and development projects. Most of the firms that invest richly into R&D are the
organizations who are on the Fortune Global 500 list consistently.

Only two companies, Stanley Black and Decker and Apple, qualify as high-leverage
innovators because of their investments today. The world’s largest spenders increased their
investments by 11.4% in 2018 to total almost $800 billion. Without these investments, the
world would be a very different place.

3. The world has more cultural awareness because of multinational corporations.

When an organization decides to expand to a foreign market, then they are presented with
brand-new sociological certainties. Multinational companies are amazingly diverse, giving
them additional power because of this diversity. The current marketplace requires agencies to
know what the pain points of the local market are before it becomes possible to create
products or services for them.

When each person expands their reasoning to include new viewpoints, the planet becomes a
healthier place because of that action. These organizations provide a resolute influence on
cross-culture information when this advantage becomes a prime preference for them.

4. Multinational companies focus on consistency for the consumer.

Multinational companies work from centralized structures. That means there is a fundamental
expectation that every asset will look and function as every other item does. Even though a
company in China serves different products than one in Canada, the core ethics and values of
the corporation are still displayed for all to see.

You’ll see similar designs, ordering procedures, and best practices implemented at all
managed locations for a multinational company. Customers believe in these institutions
because they realize what the value proposition is before they ever spend any money with
that brand. This advantage works the same way for every business which excels because of
their status in different markets.

5. Diversification becomes possible because of multinational corporations.

Most populations, developing nations, and marketplaces depend on a set of core products for
their survival. Most of the items tend to link up with agriculture-based industries, such as
farming. Multinational companies offer these economies more variety in product and price
choice, which creates another layer of diversity for the local consumer. This advantage
reduces their reliance on materials that often have volatile pricing structures due to their
supply and demand levels frequently changing – sometimes daily.

6. Local infrastructures improve with the presence of multinational corporations.

The Coca-Cola Company developed a 2020 Vision Program to encourage more local
infrastructure development in the Asia-Pacific region as a way to develop more middle class
households. Over $30 billion is being spent on this effort to raise the standard of living in
countries where some workers still make less than $2 per day. Other multinational companies
have similar development projects in the works.

Multinational corporations must make infrastructure improvements to encourage local

populations to develop skill-based workers that can take on their needed tasks. Communities
must be able to access the local market and reach their employment opportunity. That’s why
you will see businesses helping to fund local road projects, build bridges, and reduce other
transportation barriers around the world.

7. Multinational companies offer employment opportunities at the local level.

Although multinational companies route command decisions through a centralized office at
their domestic headquarters, all of them need to have boots on the ground in each local
market. Because over 70% of the jobs people hold in the world today are tied to the
agricultural industry, these companies can transform an economy quickly by providing new
tools, educational resources, and financing that can shift the standard of living for the entire
economy.

It’s the “rising tide lifts all boats” analogy, but then put into practice in real life. This
advantage is helping some developing countries to triple their GDP over the past 10 years.
With more multinational companies entering new markets all over the world, it will not take
long for there to be more developed than developing nations.

8. The import-export market is present because of multinational corporations.

The issue of economic development in undeveloped nations occurs because there is an
overall lack of resource access to these countries. What is available to the average customer
in the U.S. is quite distinct when compared to what is accessible in a country like Sudan.
There are even differences between markets like Canada and South Africa to manage.

When multinational corporations build a presence in the developing world, their capital
inflows help each country to develop better access to the import-export market. This
advantage gives each marketplace better access to valuable goods, creates more opportunities
for trade, and it ultimately raises the standard of living for the entire economy.

9. Multinational companies reduce the need for foreign aid.

African countries often rely on foreign aid as a way to balance their domestic budget each
year. Some nations in the past decade have receive 50% to almost 80% of their GDP from
contributions made by the developed world. Because government processes are typically
inefficient when compared to the private sector, the presence of multinational companies in
each marketplace makes it easier to build profits and improve conditions even if the overall
value of each transaction is not high on a global scale.

The presence of multinational corporations could boost the levels of trade on the African
continent by up to 50% in the next decade, which would put this region into the same
category as Southeast Asia for trade opportunities in the global market.

10. Capital inflows occur because of the presence of multinational corporations.

Most multinational companies have their headquarters in the developed world, which means
Europe, the U.S., or Japan for most organizations. These companies rely on the resources of
those mature marketplaces to maintain the diversity of their revenue streams because it is
cheaper to develop production assets outside of their domestic market.

These agencies must move into the developing world to earn profits through the investments
that they make there to maintain the value of their overall portfolio. Multinational companies
are a leading source of capital inflows to the developing world because they build
manufacturing centers, investing in workforce training, and support institutions of learning to
advance their productive capacity in foreign markets.

Disadvantages of Multinational Corporations

1. Multinational corporations can use their structure to form monopolistic markets.

Most countries treat the assets of a multinational corporation as an independent structure, like
a transnational company, instead of looking at the hierarchy of the business for what it tends
to be. This disadvantage allows each firm to have more flexibility in how they handle the
local marketplace with their presence. Global monopolies do not currently exist, by firms like
Alphabet, Illumine, and Broad ridge all manage a 50% share or more of their industry.

When these structures are present and treated in this way, then the benefits of scale allow the
multinational corporation to price everyone out of the market. There might still be local
competition, but the average consumer will work with the cheapest offer whenever if
provides a similar amount of value for them.

2. Because of their size, multinational corporations put SMEs out of business.

Did you know that 9 out of 10 companies will eventually fail? The most critical time for any
small business is during the first five years of operation. About one-third typically fail in their
first 12 months of existence. One of the contributing factors to this problem is the size and
scale of multinational corporations. Bigger companies can produce a larger bulk order, which
means they can see a per-unit price savings when compared to SMBs and SMEs.

“Multinational corporations do control,” said California Governor Jerry Brown. “They

control the politicians. They control the media. They control the pattern of consumption,
entertainment, and thinking. They’re destroying the planet and laying the foundation for
violent outbursts and racial division.”

3. Multinational corporations often take advantage of the international standard of

living.
Many states in the U.S. are approaching or exceeding $12 per hour for their minimum wage.
Several of the 2020 Presidential candidates for the Democratic party are pushing for a $15
per hour minimum wage. The goal of this legislation is to provide a “living salary’ for
workers who are putting in full-time hours to support their families, but it is also an effort that
encourages more off shoring.

Did you know that the minimum wage in China is the equivalent of less than $1 per hour?
Some African countries have a minimum wage that pays workers less than a nickel per hour
for the work that they do. If a multinational company can transfer hundreds of jobs and save
$10 per hour in wages without a harmful drop in quality, then that cost savings can go
straight into their budget and the pockets of their C-Suite.

4. Political corruption typically rises with the influence of a multinational corporation.

“The multinational corporations are now developing budgets that are often bigger than
medium-sizes countries,” said Paddy Ashdown, a British diplomat and politician who served
as the leader of the Liberal Democrats for over a decade. “These live in a global space which
is largely unregulated, not subject to the rule of law, and in which people may act free of
constraint.”
Legal lobbying is a multi-billion dollar industry, even if you were to only take the spending
that happens in the United States. According to data published by Open Secrets, the U.S.
Chamber of Commerce spent $94.8 million on lobbying efforts in 2018. The National
Association of Realtors spent $72.8 million, while the Pharmaceutical Research and
Manufacturers of America spent $27.9 million. When you add in the under-the-table deals
that happen internationally, corruption occurs because companies have the power of the
purse.

5. Multinational corporations can cause harm to the environment.

Most developing countries do not have the same level of regulation and oversight that the
developed world maintains to protect the environment. When these firms decide to do
business in the international market, they are subject to local laws – not the ones that govern
their domestic headquarters – when working to obtain raw materials.

Smaller, less developed governments often trade an increase in revenues for access to their
natural resources. The lower standards create better pricing structures for each customer, but
it also creates environmental damage that could have future generations paying the price for
today’s decisions. Some nations even trade in recycled materials and trash, which can place
even more stress on local resources.

6. Profits often go back to the multinational company instead of staying in the local
market.
Multinational corporations might provide job opportunities in each local market, but they also
funnel out many of the profits back to their centralized office. Some might see this as a return
on their infrastructure and educational investments, but it can also be a decision that further
weakens an already underperforming government or economy. When you compare how
much goes into foreign markets with what comes out of them, the difference is usually
minimal and can sometimes be a negative return.

7. Nothing stops a multinational company from importing their skilled labor.

There are even times when a multinational corporation will not hire local workers, opting
instead to import positions from the centralized office to get things up and running. This
process will still provide contributions to the local economy and provide a handful of jobs
that fall outside of this disadvantage, but it tends to benefit the company and the workers
more than the local community.

The best jobs, especially the ones which become available in a developing country, are
therefore given to someone who may not even live in the local community. That means their
wages will not have the same economic impact that they would have if a local employee was
in that position.

8. Multinational corporations remove raw materials from the local economy.

Although infrastructure benefits do occur when a multinational corporation moves into a
developing country, the construction efforts are usually meant to benefit the business and not
the local market. Roads and bridges are built to access raw materials, distribute goods, and
manage processes more than they are to improve the livelihood of those living in the region.
Once all of the goods are removed, then the agency might decide to abandon the project,
leaving the government with no way to manage the situation.
 “Multinational corporations and a market economy have transformed human beings into
instruments of making money,” said Satish Kumar. “Human beings should be the end, and
money should be the means to the end.”

9. Individual influences are virtually impossible to create with multinational

corporations.
Because multinational corporations can sometimes be larger than a nation in terms of size and
monetary value, these companies have a lot of influence on global trade. Their presence
places the average person out of reach from any decision that could impact their local
economy. Even homesteading or “going off-the-grid” requires help from these agencies to
create a successful experience.

“The largest 100 corporations hold 25% of the worldwide productive assets, which in turn
control 75% of international trade and 98% of all foreign direct investment,” said Peter
Drucker. “The multinational corporation… puts the economic decision beyond the effective
reach of the political process and its decision-makers, national governments.”

10. It creates a dependency on the business that can be unhealthy for an economy.
Because a multinational corporation can control a majority of the decisions that people make
thanks to the size and scope of their structure, their presence can create dependencies that are
unhealthy for the local marketplace. Consumers might think that they have choices when
shopping, but the reality of their situation is that one company is pulling all of the strings of
their transaction. That’s why Zbigniew Brzezinski said that the people, governments, and
economies of each country must serve the needs of this entity.

Unilever sells everything from soap to olive oil and has products selling in over 190
countries. Coca-Cola and PepsiCo sell a combination of beverages and snacks that
encompass hundreds of different brands – sometimes competing with each other for the same
shelf space. Anheuser-Busch InBev controls a lineup of more than 200 different beer brands.
Over 2 billion people use the products from these companies on any given day.

Features of Multinational Corporations (MNCs):

(i) Huge Assets and Turnover:

Because of operations on a global basis, MNCs have huge physical and financial assets. This
also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many
MNCs are bigger than national economies of several countries.

(ii) International Operations Through a Network of Branches:

MNCs have production and marketing operations in several countries; operating through a
network of branches, subsidiaries and affiliates in host countries.

(iii) Unity of Control:

MNCs are characterized by unity of control. MNCs control business activities of their
branches in foreign countries through head office located in the home country. Managements
of branches operate within the policy framework of the parent corporation.
(iv) Mighty Economic Power:

MNCs are powerful economic entities. They keep on adding to their economic power through
constant mergers and acquisitions of companies, in host countries.

(v) Advanced and Sophisticated Technology:

Generally, a MNC has at its command advanced and sophisticated technology. It employs
capital intensive technology in manufacturing and marketing.

(vi) Professional Management:

A MNC employs professionally trained managers to handle huge funds, advanced technology
and international business operations.

(vii)Aggressive Advertising and Marketing:

MNCs spend huge sums of money on advertising and marketing to secure international
business. This is, perhaps, the biggest strategy of success of MNCs. Because of this strategy,
they are able to sell whatever products/services, they produce/generate.

(viii) Better Quality of Products:

A MNC has to compete on the world level. It, therefore, has to pay special attention to the
quality of its products.

Limitations of MNCs :

(i) Danger for Domestic Industries:

MNCs, because of their vast economic power, pose a danger to domestic industries; which
are still in the process of development. Domestic industries cannot face challenges posed by
MNCs. Many domestic industries have to wind up, as a result of threat from MNCs. Thus
MNCs give a setback to the economic growth of host countries.

(ii) Repatriation of Profits:

(Repatriation of profits means sending profits to their country).

MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign
exchange reserves of the host country; which means that a large amount of foreign exchange
goes out of the host country.

(iii) No Benefit to Poor People:

MNCs produce only those things, which are used by the rich. Therefore, poor people of host
countries do not get, generally, any benefit, out of MNCs.

(iv) Danger to Independence:

Initially MNCs help the Government of the host country, in a number of ways; and then
gradually start interfering in the political affairs of the host country. There is, then, an implicit
danger to the independence of the host country, in the long-run.

(v) Disregard of the National Interests of the Host Country:

MNCs invest in most profitable sectors; and disregard the national goals and priorities of the
host country. They do not care for the development of backward regions; and never care to
solve chronic problems of the host country like unemployment and poverty.

(vi) Misuse of Mighty Status:

MNCs are powerful economic entities. They can afford to bear losses for a long while, in the
hope of earning huge profits-once they have ended local competition and achieved monopoly.
This may be the dirties strategy of MNCs to wipe off local competitors from the host country.

(vii) Careless Exploitation of Natural Resources:

MNCs tend to use the natural resources of the host country carelessly. They cause rapid
depletion of some of the non-renewable natural resources of the host country. In this way,
MNCs cause a permanent damage to the economic development of the host country.

(viii) Selfish Promotion of Alien Culture:

MNCs tend to promote alien culture in host country to sell their products. They make people
forget about their own cultural heritage. In India, e.g. MNCs have created a taste for synthetic
food, soft drinks etc. This promotion of foreign culture by MNCs is injurious to the health of
people also.

(ix) Exploitation of People, in a Systematic Manner:

MNCs join hands with big business houses of host country and emerge as powerful
monopolies. This leads to concentration of economic power only in a few hands. Gradually
these monopolies make it their birth right to exploit poor people and enrich themselves at the
cost of the poor working class.

Characteristics of MNCs:

(i) Mode of Transfer:

The MNC has considerable freedom in selecting the financial channel through which funds or
profits or both are moved, e.g., patents and trademarks can be sold outright or transferred in
return through contractual binding on royalty payments.

Similarly, the MNC can move profits and cash from one unit to another by adjusting transfer
prices on intercompany sales and purchases of goods and services. MNCs can use these
various channels, singly or in combination, to transfer funds internationally, depending on the
specific circumstances encountered.
(ii) Value for Money:

By shifting profits from high-tax to low-tax nations, MNCs can reduce their global tax
payments. In addition, they can transfer funds among their various units, which allow them to
circumvents currency controls and other regulations and to tap previously inaccessible
investment and financing opportunities.

(iii) Flexibility:

Some to the internationally generated claims require a fixed payment schedule; other can be
accelerated or delayed. MNCs can extend trade credit to their other subsidiaries through open
account terms, say from 90 to 180 days. This give a major leverage to financial status. In
addition, the timing for payment of fees and royalties may be modified when all parties to the
agreement are related.

Importance of MNC’S :
1.TRANSFER OF CAPITAL AND TECHNOLOGY
The multinational companies transfer investment ,advance technology to developing
countries through establishing branches and subsidiaries. Therefore developing countries like
Nepal get benefited of receiving Advanced technology and capital
investment through such companies.
2. Mass production
With help of advanced technology, the can produce quality goods and products at cheaper
price. Due to Job innovation and specialization help to produce more consumption increase as
production in more unit reduce cost.

3. INCREASE IN EMPLOYMENT OPPORTUNITY:

A multinational company requires a large number of skilled as well as unskilled employees to
operate its activities.
Thus it provides employment opportunity to the people of host country as a result economic
standard of society is improved.

4. INCREASE IN GOVERNMENT REVENUE

A multinational company is a large scale business. It pays a large amount of duties ,income
tax, vat,etc to government. Therefore Government revenue is increased due to operation of
such companies.

5. RESEARCH AND DEVELOPMENT:

In complete world, it is need of Research and Development. To meet international standard of
its products and services, a multinational company conducts several research and
development activities. Constantly such programs are beneficial to society.
It helps to develop better equipments, quality products and advanced technology in
production.

6. GOOD INTERNATIONAL RELATION:

A multinational company recognizes the country in the international market. It creates
harmonious relation between parent company and subsidiary countries. It recognizes
exporting country to all over the world....

CONTROL OF MNC’ S IN INDIA:

1. Controlling Crucial Elements of Corporate Operations:

Most of the MNCs try to prevent operations in developing countries by other local entities
without their cooperation. This can be achieved if the company maintains control of an
element of operations.

For example, food and soft drink manufacturers keep their special ingredients secret.
Automobile companies may produce vital parts such as engines in some other country and
refuse to supply these parts if their operations are seized.

2. Programmed Stages of Planned Disinvestment:

There is an alternative technique to handover ownership and control to local people in future.
This is sometimes a requirement of the host government. There is a calculated move to
involve themselves in stages.

3. Joint Ventures:

Instead of promising shared ownership in future, an alternative technique for reducing the
risk of expropriation is to share ownership with private or official partners in the host country
from the very beginning.

Such shared ownerships, known as joint ventures rely on the reluctance of local partners, if
private, to accept the interference of their own Government as a means of reducing
expropriation.

When the partner is the government itself, the disincentive to expropriation is concerned over
the loss of future investments. Multiple joint ventures in different countries reduce the risk of
expropriation, even if there is no local participation. If the government of one country does
expropriate the business, it faces the risk of being isolated simultaneously by numerous
foreign powers.

New Industrial Policy 1991 and Multinational Corporations:

The New Industrial Policy 1991, removed the restrictions of entry to MNCs through various
concessions. The amendment of FERA in 1993 provided further concession to MNCs in
India.
At present MNCs in India can—
(i) Increase foreign equity up to 51 percent by remittances in foreign exchange in specified
high priority areas. Subsequently MNCs are free to own a majority share in equity in most
products.
(ii) Borrow money or accept deposit without the permission of Reserve Bank of India.
(iii) Transfer shares from one non-resident to another non-resident.
(iv)Disinvest equity at market rates on stock exchanges.
(v) Go for 100 percent foreign equity through the automatic route in Specified sectors.
(vi)Deal in immovable properties in India.
(vii) Carry on in India any activity of trading, commercial or industrial except a very small
negative list.
Thus, MNCs have been placed at par with Indian Companies and would not be subjected to
any special restrictions under FERA.