Multinational Co-operation

Introduction
In the last unit you studied about different types of risks associated with
business. The unit also discussed about the risk management process.

In the present unit you will study about the concept and role of MNC’s or
Transnational Corporation. The unit also discusses about the transnational
corporation. It has been said that the Multinational Corporation (MNC) is the
most powerful institution in the world today. Indeed, the process of
globalisation, which is radically transforming our world, is driven largely by the
rapid growth and spread of corporations. Since the end of the Cold War in
1991, nearly all nations in the world have reduced the role of the state in the
economy and lowered barriers to the international movement of goods,
services, capital, ideas and technology. As the walls imposed by
nations/states have crumbled, multinational corporations have thrived,
spreading across the globe in search of new markets and factors of
production.
Objectives:
After studying this unit, you will be able to:
• explain the concept of MNC’s
• list the characteristics of MNCs
• describe the role of MNCs
• define Transnational Corporations
• discuss the Drivers of growth and development of MNCs and
Transactional corporations

Concept of Multinational Companies

Multinational Companies are the associations or enterprises that supervise
manufacture or offer services in more than one country. The term
'multinational' consists of two different words, 'multi' and 'national'. The prefix
'multi' here means many while the word 'national' refers to nations or
countries. Therefore, a multinational company may be defined as a company
that operates in several countries. Such a company has factories, branches
or offices in more than one country. According to the United Nations
Commission on Transnational Corporations, a transnational corporation is a
corporation which operates, in addition to the country in which it is
incorporated, in one or more other countries.
A multinational corporation is also known as a 'transnational corporation',
'global giant', 'world enterprise' or 'international enterprise'. The operations of
a multinational corporation (MNC) extends beyond the country in which it is
incorporated. Its headquarters are located in one country (home country) and
in addition it carries on business in other countries (host country).
For example, Coca Cola Corporation has its headquarters in the U.S.A. and
it has branches/ subsidiaries in several countries. A multinational corporation
controls production and marketing facilities in more than one country. Firms
that participate in international business, however large they may be, solely
by exporting or by licensing technology are not multinational corporations.
Definition of Multinational Corporation
MNCs are defined as an enterprise that is headquartered in one country but
has operations in one or more countries. Sometimes it is difficult to know if a
firm is an MNC because multinationals often downplay the fact that they are
foreign held.
For example, most of the people in India are unaware that Bata is a Canadian
company, Bayer is a German company, Nestle is a Swiss company and
Cadbury a British company.
Various definitions have been given to describe to MNCs. Sak Onkwist and
John J. Shah have described MNCs in following manner:
Definition by size
MNC refer to a company which is big in size, but this size has many
dimensions. One company may be big in terms of turnover while another may
be in terms of profit and still another in terms of market value. But corporate
size in terms of ‘sales’ is primarily used to describe a company as a
Multinational Corporation.
The World Investment Report 1997 indicates that there were about 45,000
MNCs with some 2,80,000 affiliates, whereas according to the World
Investment Report 2002, there were about 65,000 of them with about 8.5 lacs
foreign affiliates. But corporate size alone cannot be used as a criterion to be
classified as MNC. For example: General Motors (GM) does not become
multinational because it was large but, it became large by size as a result of
going international.
Definition by structure
This definition measures MNCs by how many countries it is operating in and
by the citizenship of its corporate owners and top managers. For example,
Coca Cola operates in approximately. 200 nations and has widespread share
holdings. The boardroom and the top management of top companies are
becoming global.
Definitions by performance
Definitions by performance depend on such characteristics as earnings, sales
and assets. These performance characteristics indicate the extent of the
commitment of corporate resources to foreign operations and the amount of
reward achieved from that commitment. A major chunk of Coca
Cola’s revenue comes from overseas operations. For example: In India,
Ranbaxy is considered as a true MNC as half to its turnover comes from the
overseas market and this proportion is expected to significantly increase in
the coming years.
Human resource or overseas employees are customarily considered as part
of the performance requirement rather than as part of the structural
requirement. Company’s willingness to use overseas personnel is a
significant criterion for multinationals.
Definition by behaviour
According to this definition, it is the behavioural characteristics of the top
management which decides whether a firm is a multinational or not. Thus a
company becomes more multinational if its management is more
international. If a management has a geocentric thinking then this firm is
treated as a true MNC. In a geocentric approach the firm considers the whole
world rather than the particular country as its target market.
Characteristics of Multinational Corporations
The salient features of multinational corporations are as follows:
1. Large size: The assets and sales turnover of MNC’s are quite large. The
sales turnover of some MNCs exceeds the Gross National Product (GNP)
of several developing countries. The gross domestic product is the market
 value of the final goods and services purchased by the government,
households and other countries etc.in the current year.
For example, the physical assets of International Business Machines
(IBM) exceed 8 billion dollars. Here the assets held by IBM are large by
size.
2. International operations: A multinational corporation has production,
marketing and other facilities in several countries. It operates through a
network of subsidiaries, branches and affiliates in host countries. Thus, it
also owns and controls assets in foreign countries.
For example, ITI has about 800 subsidiaries in more than 70 countries.
The company’s production and marketing activities in various countries
are operated through these subsidiaries.
3. Centralised control: A multinational corporation has its headquarters in
the home country. It exercises control over all branches and subsidiaries.
The local managements of branches and subsidiaries operate within the,
policy framework of the parent\host corporation.
4. Oligopolistic-power: Multinational corporations are generally
oligopolistic in nature. Due to their giant size and structure they occupy a
dominant position in the market. They also take over other firms to acquire
a huge economic power.
For example, Hindustan Lever Limited acquired Tata Oil Mills.
5. Sophisticated technology: Generally, a multinational corporation has at
its command advanced technology so as to provide world class products
and services. It employs capital intensive technology not only in
manufacturing but in marketing and other areas of business too.
6. Professional management: In order to integrate and manage worldwide
operations, a multinational corporation employs professional skills. It
employs professionally trained managers to handle advanced technology,
huge funds and international business operations.
7. International market: On account of its vast resources and superior
marketing skills, a multinational corporation has vast access to
international markets. Therefore, it is easily able to sell its product and
Service in different countries.
Role of Multinational Corporations
Multinational corporations play both positive and negative roles. As a positive
role, multinationals can be a dynamic force or instrument for wider distribution
of capital, technology and employment. As a negative role, multinationals can
be monsters beyond the control of national governments and working against
public interest. The economic role of multinational corporations (MNCs) is
simply to channel physical and financial capital to countries with capital
shortages. As a consequence, wealth is created, which yields new jobs
directly and through “crowding-in” effects. In addition, new tax revenues arise
from MNC generated income, allowing developing countries to improve their
infrastructures and to strengthen their human capital.
The given below are the key benefits and criticism of MNCs:
Benefits to host country
Multinationals can offer the following gains to host countries:
1. Capital investment: Developing countries need a lot of capital for rapid
industrialization and infrastructure development. Multinational
corporations bring in much needed capital for the development of these
countries. These corporations make direct foreign investment thereby
speeding up the process of economic development. Since liberalisation,
India has, for example, attracted foreign investment worth several billion
dollars.
2. Technology development: Developing countries are technologically
backward. They lack sufficient resources to carry on research and
development. Multinationals serve as vehicles for the transfer of
advanced technology to these countries. The factors such as, advanced
technological knowhow, improved skills and consultancy help the
developing countries to improve the quality of products and reduce costs.
Through continuous research and development, MNCs serve as a source
of inventions and innovations.
3. Employment generation: Multinationals create large scale employment
opportunities in host countries. They increase the investment level and
thereby the employment and income levels. Multinationals offer excellent
pay scales and career opportunities to managers, technical and clerical
staffs.
4. Foreign exchange: Multinationals help large countries to increase their
exports and reduce their dependence or imports. As a result, these
corporations enable the host economies to improve balance of payment
position.
5. Managerial revolution: Multinationals help to professionalise
management in large countries. They employ modern management
techniques and trained managers. Several concepts and techniques like.
Corporate planning, management by objectives and job enrichment were
evolved by multinational corporations. As carriers of knowledge and
experience, multinationals build up 'knowledge base' and thereby assist
the development of human resources in host countries.
6. Healthy competition: Multinationals increase competition and thereby
break domestic monopolies. They compel the domestic companies to
improve their efficiency or withdraw from the market.
For example, many Indian companies acquired ISO-9000 quality
certification due to competition from multinational corporations after
Liberalisation.
7. Growth of domestic firms: MNCs stimulate the growth of local
enterprises. In order to support its other operations, a multinational may
assist domestic suppliers and ancillary units.
8. Standard of living: By providing superior products and services, MNCs
help to improve living standards in large countries.
9. World economy: MNCs help to integrate national economies into a world
economy. They encourage international brotherhood and cultural
exchanges through international business.

Benefits to home country

Multinationals offer the following advantages to the country of their origin:
1. The home country can obtain raw materials and labour at comparatively
lower cost.
2. It can export components and finished products and thereby market is
widened.
3. It can earn huge revenue by way of dividends, royalty, licensing fees, etc.
4. It can increase domestic employment due to higher scale of operations.
5. It can acquire technical and managerial expertise of foreign nations.
Criticism of multinationals
The disadvantages of multinationals are given below:
1. Disregard of national goals: MNCs invest in most profitable sectors, for
e.g., consumer goods disregarding the goals and. priorities of large
countries. They do very little for underdeveloped strategic sectors and
backward regions. Due to their capital intensive technology and
profitmindedness, they create relatively few jobs and fail to solve the
chronic problems, for e.g., unemployment and poverty of large nations.
2. Obsolete technology: MNCs often transfer outdated technology to their
collaborators in large countries. In many cases technology transferred
was unsuitable causing waste of scarce capital. Repetitive imports of
similar technology led to excessive royalty payments without adding to
technical knowledge in host countries. Sometimes, machinery available
locally was imported or it remained idle for want of repairs and
maintenance facilities. MNCs have failed to develop local skills and
talents.
3. Excessive remittance: MNCs squeeze out maximum payment from their
subsidiaries / affiliates and collaborators in the form of royalty, technical
fee, dividend, etc. By increasing profits, MNCs put serve pressures on the
foreign exchange reserves and balance of payments of host countries.
4. Creation of monopoly: MNCs join hands with big business houses and
give rise to monopoly and concentration of economic power in large
countries. They kill indigenous enterprises through strategic advantages
like patents, superior technology, etc.
For example, Parle Soft Drinks and Kwality Ice Cream Co., had to sell
themselves to foreign MNCs in India.
5. Restrictive clauses: Due to their strong bargaining power, MNCs
introduce restrictive clause in collaboration agreements, for e.g.,
technology cannot be passed to third parties, pricing of products will be
by the MNC, exports from host country will be restricted and managerial
posts will be filled by parent company. MNCs do not transfer R&D, training
and other facilities to host countries.
6. Threat to national sovereignty: MNCs pose a danger to the
independence of host countries. These corporations tend to interfere in
 the political affairs of host nations. Some MNCs like ITI are accused of
overthrowing Governments in countries such as Chile.
7. Alien culture: MNCs tend to weaken the cultural heritage of local people
and extend their own culture to sell their products. For instance, MNCs
have encouraged the consumption of synthetic food, soft drinks, etc. in
India.
8. Depletion of natural resources: MNCs cause rapid reduction of some
of the non-renewable natural resources in large countries.
Thus, multinationals play both positive and negative roles. In recent years,
India has adopted an open-arm welcome policy towards MNCs. But
experience reveals that the hopes with which MNCs were permitted in India
have not been fulfilled. Most of the MNCs have entered in low tech areas like
soft drinks, toilet goods, electronics, etc. Several Indian companies were
forced either to sell out or to serve as affiliates of MNCs. Therefore, it is
necessary to safeguard the country’s interests.

Transnational Corporations (TNC)

Transnational Corporations (TNC) are great companies that operate in more
than one country at a time. For example, Holden and Nike. Trans.
corporations have turn into some of the most influential economic entities in
the world today. These corporations account for seventy percent of world
trade.
In simple terms we can say that a foreign transnational corporation refers to
a large sized company incorporated in a foreign country but having production
and marketing facilities in India.
For example, Electrolux Corporation is a foreign transnational corporation. It
has entered India recently by acquiring Kelvinator of India and TVS Washing
Machines.
The amount and size of TNCs have significantly augmented since the late
1970s and encompass caused a shift towards a globalize economy. The
economic activities of TNCs have therefore been the subject of a series of
economic researches. It tried to estimate and assess the impacts of TNC
actions on the expansion process in the Third World countries.
By the majority measures, TNCs play a superior role in the world economy
today than they did in the past in terms to key trade and industry indicators
such as Gross Domestic Product, exports and domestic capital formation in
the global wealth as a whole and in the host countries both developed and
developing. Various intercontinental organizations and foreign advisors
suggest developing countries to rely mainly on foreign direct investment (FDI)
as a source of external finance. They argue that, for several reasons, FDI
stimulates economic growth more than other types of capital inflows.
Foreign transnational corporations operate in India through their
subsidiaries/branches and affiliates. Many of these have collaboration
agreements with Indian companies. Under these' agreements, foreign
transnational corporations provide capital, technology and brand names.
Foreign transnational corporations have a considerable influence over the
Indian industry as can be seen from the following:
Foreign Transnational Corporations in India
Foreign Transnational Indian affiliates
ABB ABB India
Cadbury Cadbury India
Coca-Cola Corporation Coca Cola India
Colgate Palmolive Colgate India
Indian transnational corporations
An Indian transnational corporation is a company incorporated in India and
having subsidiary/affiliate in a foreign country. Some big business houses, for
e.g., Birla’s, Tata’s have subsidiaries and joint ventures abroad. UB Group,
Arvind Mills, Ispat Group, Amtrix Corporation, Dalmia’s, lTC, etc. have in
recent years set up joint ventures in foreign countries. Even public sector
enterprises, for e.g., HMT, BHEL, Engineers India, IRCON have started
projects abroad.
Indian transnational corporations operate abroad mainly in textiles,
engineering, chemicals, pharmaceuticals, paper and glass. Recently they
have entered new areas like banking, hotels, tea blending and packaging,
construction, real estate, publishing, travel and tours, etc.
The main characteristics of Indian transnational corporations are given below:
1. Smaller size: Indian transnational corporations are small in terms of
assets and sales turnover as compared to foreign transnational
corporations. This is because the former are new entrants to international
business and they possess few distinctive advantages.
2. Narrow spread: Most of the Indian transnational corporations are located
in a few developing countries like Indonesia, Thailand, Senegal, Nigeria,
Ethiopia, Kenya, Sri-Lanka, UAE, etc.
3. Adopted technology: The technology of Indian transnational
corporations is largely an adaptation of the technology which they used to
import earlier.
4. Skewed ownership: A few big business houses own most of the Indian
transnational corporations. A broad based participation of Indian firms in
international business is lacking. For instance, Birla’s alone control
onefourth shares of Indian joint ventures abroad.
5. Minority ownership: Majority of the Indian transnational corporations
operate in the form of joint ventures with foreign firms. Until 1978, Indian
Government did not permit major shareholding abroad.
6. Wide range of industries: Indian transnational corporations are involved
in a wide range of industries, for e.g., trading, marketing, consultancy,
hotel, computer software, shipping, construction, iron and steel, textiles,
paper, etc.
7. High mortality rate: A large number of Indian transnational corporations
have failed due to unclear objectives, incomplete project proposals, poor
understanding of foreign markets, small size, excessive gestation period
and legal restrictions.
8. Multiple objectives: Exploitation of foreign markets has been the main
motive of Indian transnational corporations. But many of them are also
inspired by the goals of export promotion, technology/ finance and
benefits of large scale operations.

Downside transactional corporations in the host country

TNCs seek to increase their competitiveness in an intercontinental context.
Not all FDI is, therefore, always and involuntarily in the best interest of host
countries. Some can have an unfavourable effect on development. TNCs
seek to increase their own competitiveness, not to develop host economies.
Their needs and strategies may differ from the needs and objectives of host
countries. The presence of TNCs in a host country may conflict with building
strong national firms. Or, a host country may seek new technologies while a
foreign associate may wish to use mature technologies. A TNC may find it
competent to close an affiliate in the face of significance liberalization or
shifting comparative advantage while a host country wants to preserve
employment. TNCs may seek stronger protection for intellectual property
rights, while a host country may favour weak intellectual property rights to
permit greater dissemination of technology.
There are numerous situations in which strategies and needs can be different
between TNCs and host countries and, one may add, be they developed or
developing. Still, there is a substantial overlap between the objectives of host
countries and TNCs.
Indeed, to a large level an investment responsive policy framework is also a
development-friendly policy framework. Since the overlap is incomplete, it is
to the advantage of governments not only to try to attract FDI, but also to try
to maximize its net contribution to development. However, they are better
equipped than national firms to escape the constraints of policies that they
find unsuitable.
A TNC can simultaneously have import-substituting and export-oriented
facilities in unusual host countries. Under certain conditions, they may
contribute more than national firms because of their better access to a whole
range of resources. For instance, when an economy opens up to trade, TNCs
can reorganize their affiliates to reach worldwide levels of technology and
productivity.

Drivers of Growth and Development of Multinational

Corporations and Transactional Corporations
Undoubtedly, firms across national boundaries accept the risk of operating in
an unknown environment in the hope of earning more profit and increasing
their shareholders wealth. Besides this, there are many other reasons such
as survival, new sources of supplies, cheap human resource and even to
keep busy the nearest rival in its home country. Some of the key reasons of
crossing national boundaries are as follows:
1. Survival: Most countries are not as fortunate as India, Russia, China or
the US in terms of size, resources and opportunities. Most European
nations are small in size or most Middle East and South East countries
are rich in only one or few resources. In these countries organizations are
bound to do business in and with other countries to survive. Even
organisations of big countries are bound to look out for new markets for
their products and cheap resources to remain competitive and to survive.
2. Growth of overseas market (sales): This has been the biggest reason
for more and more companies expanding overseas. In the last 20 years
many economies have opened their doors for the world. This resulted in
a big opportunity in terms of Market. Most of the European nations, USA,
Canada, Japan, etc., have a stagnant population growth and very low
GDP growth.
All these factors led to companies searching for a new market. Emerging
economies like India, China, and South East Asia form a significant
market — perhaps more than 35% of the world market. This has given
them opportunities and MNCs have started expanding their wings in these
parts of the world.
India and China are amongst the top five countries of the world in terms of
Purchasing Power ability. All this attracted many organizations to tap new
markets in emerging economies. Besides these agreements/groups like
GATT, GATS, ASEAN, EU, SAPTA, NAFTA, etc., have also created huge
opportunities of business for organizations and to tap these, they are
going abroad.
3. Diversification: No organization wishes to keep all its eggs in one basket.
Every organization wants to diversify its risk and internationalisation is a
good manner to do that, along with sticking to its core competency or old
business. Different countries have different trade cycles for the same
product. When there is a recession in one economy, there could be a
boom in the other and an organization can cover losses in one country by
profits. For example: The Ispat group has steel plants almost all over the
world. It is number two in most of the countries but it is number one in
terms of sales in India. Levers which is behind P&G in USA, is much
ahead of P&G in India. Thus MNCs diversify risk through
internationalisation.
4. Resources: In today’s cut-throat competition, cost cutting is the key to
success. Prices are controlled by consumers and the only thing which can
be manipulated to increase profit is cost. Organizations go abroad in
search of economical sources of supply. A truly global firm always locates
its processing in the best available location in the world and outsource HR
and other physical resources from the best suited place available. In fact,
this is the reason that more and more companies are establishing their
call centres in India. For example: Even Wal-Mart, the biggest retailer of
the world, does not have any retail shop in India but it does have a
purchase office in India. Nike gets its shoes manufactured in South East
Asia. Besides Nike even Nokia, IBM, Toyota, Sony, Philips, Samsung,
Mitsihuta, Boeing, Airbus, Adidas, GM, Ford, etc., have their
manufacturing capacities, research centres, and ancillary units at places
best -suited for their purposes. Thus, companies cross borders to have
access to economical resources.
5. To protect market share: Firms also become MNEs (Multi National
Enterprises) in response to increased foreign competition and a desire to
protect their home market share. Using a “follow the competitor” strategy,
a growing number of MNEs have now set up operations in the home
countries of their own major competitors. This approach serves as a dual
purpose: (1) it takes away business from their competitors by offering
customers other varied choices and (2) it lets competitors know that, if
they attack the MNEs home markets, they will face a similar response.
6. Tariff and non-tariff barrier: Organizations establish their operation
overseas to deal with tariff and non-tariff barriers. Many time countries
impose tariff and non-tariff restrictions on import in such cases.
Organizations establish their production unit in the host country so that it
can be treated as a local company. In the late 1970, when the US imposed
some non-tariff restrictions on the automobile import of Japan, Japanese
firms began establishing their units in the US so that in terms of taxes they
could be treated at par with US firms, Soon, America became the
playground of Japanese firms.
7. Technology expertise: One reason for becoming an MNE is to take
advantage of technological expertise by manufacturing goods directly (by
FDI) rather than allowing others to do it under a license. Many MNCs feel
 it unwise to give another firm access to proprietary information such as
patent, trademarks or technological expertise.
8. Access to economical human resources: Many times companies cross
borders to have access to economical human resource. Organizations
which used to earlier import Human Resource from our country are now
establishing their operations in India itself, only to take advantage of
economical human resource. Various companies are crossing borders
because the cost of human resource is rising.

Summary
The role of MNCs is underappreciated – they have provided emergent
countries with a large amount needed investment, jobs, and environmentally
forthcoming technologies. During free market initiatives, MNCs generate
wealth, which provides the revenue flow necessary for welfare improvements.
If the desideratum of emergent countries is to escape brutal conditions of
poverty, they need to privatize, deregulate, protect confidential property
rights, and ascertain a rule of law; the MNCs will then provide the capital.
The basic financially viable growth and enlargement indicators and drivers
were analyzed and the role TNCs can play with admiration to each of such
indicators were investigated. The conclusion shows that FDI from TNCs either
in form of Greenfield investments or M&As can unquestionably play a decisive
role in the economic expansion of host mounting countries.
However some unenthusiastic impacts can also be made, but it’s worth
mentioning that there is accord in the findings of most researchers conducted
that the advantages of TNCs activities with congregation economies in
particular host developing economies far ought consider the disadvantages.
Commencing the other direction the government’s policy settings and the
infrastructures in particular trade, edification and employment can also play a
very significant role in the way countries can get assistance from the TNCs
activities, therefore in some cases staid revisions in the policy framework and
drastic improvements should be conducted and implemented in order to make
the FDI as competent as possible and adopt a welcoming deportment towards
attracting more FDI that can be expressed as an FDI-friendly policy
framework.