MNEs

Multinational Corporation

A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or one with operations in more than a country.

A MNE is often called multinational corporation (MNC) or transnational company (TNC).

DefinitionsDefinitions

Multinational Companies (MNC’s)

As defined by I. L. O. or the International Labor Organization, a M. N. C. is one, which has its operational headquarters based in one country with several other operating branches in different other countries. The country where the head quarter is located is called the home country whereas, the other countries with operational branches are called the host countries.

Transnational Companies (TNC’s)

As defined by United Nations Commission on Transnational Corporations as ‘enterprises which own or control production or service facilities outside the country in which they are based.

• Transnational corporations are a type of Multinational corporations.

• MNC have an international identity as belonging to a particular home country where they are headquartered. On the other hand, transnational corporations are more or less borderless in this regard as they do not consider a particular country as their base.

•MNC have investment in other countries, but do not have coordinated product offerings in each country. It is more focused on adapting their products and service to each individual local market. A TNC, on the other hand, have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market.

Difference Between MNC’s & TNC’s

How Is A Company Classified As An MNC?

Subsidiaries in foreign countries;

Operations in a number of countries;

High proportion of assets in or/ and revenues from global operations;

Stakeholders are from different countries.

EXAMPLES OF MNCs:

Ford

IBM

British Petroleum

Mc Donald’s

Phillips

List attached

The largest MNCs:

Wal-Mart Stores

Exxon Mobil

Royal Dutch Shell

These companies have turnovers in excess of the GNPs of somecountries.

MNCs can be divided into three broad groups according to the

configuration of their production facilities:

1.Horizontally integrated multinational corporations ;

manage production establishments located in different countries to

produce the same or similar products.

(example: McDonald's)

2.Vertically integrated multinational corporations:

It manages production establishment in certain country/countries to

produce products that serve as input to its production establishments in other

country/countries.

(example: Adidas)

3.Diversified multinational corporations:

It manages production establishments located in different countries that

are neither horizontally nor vertically integrated.

(example: Microsoft or Siemens A.G.)

1. The investment level, employment level, and income level of the host

country increases due to the operation of MNC's & TNC's.

2. The industries of host country get latest technology from foreign

countries through MNC's & TNC's.

3. The host country's business also gets management expertise from

MNC's & TNC's.

4. The domestic traders and market intermediaries of the host country

gets increased business from the operation of MNC's & TNC's.

Advantages of MNCs and TNCs to Host Country

5. MNC's & TNC's break local monopolies, create competition among

domestic companies and thus enhance their competitiveness.

6. Domestic industries can make use of R and D outcomes of MNC's &

TNC's.

7. The host country can reduce imports and increase exports due to

goods produced by MNC's & TNC's in the host country. This helps to

improve balance of payment.

8. Level of industrial and economic development increases due to

the growth of MNC's & TNC's in the host country.

1. Create opportunities for marketing the products produced in the home

country throughout the world.

2. Create employment opportunities to the people of home country both at

home and abroad.

3. Boost to the industrial activities of home country.

4. Maintain favorable balance of payment of the home country in the long run.

5. Home country can also get the benefit of foreign culture brought by MNC's

& TNC‘s

6. Acquisition of raw materials from abroad.

7.Technology and management expertise acquired from competing in global

markets

Advantages of MNC's & TNC's for the Home countryAdvantages of MNC's & TNC's for the Home country

1. MNC's & TNC's may transfer technology which has become outdated in the home country.

2. As MNC's & TNC's do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries.

3. MNC's & TNC's may kill the domestic industry by monopolizing the host country's market.

4. In order to make profit, MNC's & TNC's may use natural resources of the home country indiscriminately and cause depletion of the resources.

5. A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty.

Disadvantages of MNC's & TNC's for the host country

POSITIVE ROLE OF MNCs

The first important contribution of MNCs is its role in filling the resource gap

between targeted or desired investment and domestically mobilized savings

An inflow of foreign capital can reduce or even remove the deficit in the

balance of payments if the MNCs can generate a net positive flow of export

earnings..

The third important role of MNCs is filling the gap between targeted

governmental tax revenues and locally raised taxes.

Fourthly, Multinationals not only provide financial resources

but they also supply a “package” of needed resources

including management experience, entrepreneurial abilities,

and technological skills.

Moreover, MNCs bring with them the most sophisticated

technological knowledge about production processes while

transferring modern machinery and equipment to capital poor

LDCs.

POSITIVE ROLE OF MNCs(contd)

.Other Beneficial Roles: The MNCs also bring several other benefits to the host country.

(a) The domestic labour may benefit in the form of higher real wages.

(b) The consumers benefits by way of lower prices and better quality products.

(c) Investments by MNCs will also induce more domestic investment. For example, ancillary units can be set up to ‘feed’ the main industries of the MNCs

(d) MNCs expenditures on research and development(R&D), although limited is bound to benefit the host country.

NEGATIVE ROLE OF MNCs

1. Although MNCs  provide capital, they may lower domestic

savings and investment rates by stifling competition through

exclusive production agreements with the host governments.

MNCs often fail to reinvest much of their profits and also they

may inhibit the expansion of indigenous firms.  

2. Although the initial impact of MNC investment is to improve the

foreign exchange position of the recipient nation, its long-run

impact may reduce foreign exchange earnings on both current and

capital accounts

3. While MNCs do contribute to public revenue in the form of corporate taxes, their

contribution is considerably less than it should be as a result of liberal tax concessions,

excessive investment allowances, subsidies and tariff protection provided by the host

government.

4. The development of local skills may be inhibited by the MNCs by stifling the growth

of indigenous entrepreneurship as a result of the MNCs dominance of local markets.

5. In many situations MNC activities reinforce dualistic economic structures and widens

income inequalities. They tend to promote the interests of some few modern-sector

workers only. They also divert resources away from the production of consumer goods

by producing luxurious goods demanded by the local elites.

NEGATIVE ROLE OF MNCs(contd)6

6. MNCs typically produce inappropriate products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country.

7. The behaviour pattern of MNCs reveals that they do not engage in R & D activities in underdeveloped countries. However, these LDCs have to bear the bulk of their costs.

6. MNCs often use their economic power to influence government policies in

directions unfavorable to development. The host government has to provide

them special economic and political concessions in the form of excessive

protection, lower tax, subsidized inputs, cheap provision of factory sites.

As a result, the private profits of MNCs may exceed social benefits.

7. Multinationals may damage the host countries by suppressing domestic

entrepreneurship through their superior knowledge, worldwide contacts,

and advertising skills. They drive out local competitors and inhibit the

emergence of small-scale enterprises.

There are a number of reasons why the multinational

companies are coming down to India. India has got a huge

market. It has also got one of the fastest growing economies in

the world. Besides, the policy of the government towards FDI

has also played a major role in attracting the multinational

companies in India.

MNC’s & TNC’s in India Why?

What India offers???

One billion plus population.

India is ranked as the 10th largest economy, 4th largest in terms of Purchasing

Power Parity.

250-300 million middle class.

Gross Domestic Product (GDP) is growing at over 7-9 %, making it one of the

fastest growing economies in the world.

Opportunities for U.S. exporters with the right products or services.

Easier access to capital.

Trends Of MNCs In INDIA:

First MNC in India was the EAST INDIA Company. in 1600.

American companies account for around 37% of the turnover of the top 20 firms operating in India.

Oil companies and Infrastructure builders from the Middle East are also flocking in India to catch the boom.

Contd…….

Increasing flocking of Europian Union companies to India.

Finish mobile handset manufacturing giant Nokia is the largest Multinational Corporation In India.

Italian automobile giants like Fiat, Ford Motors, Piaggio etc expanded their operations in India with R&D wing attached.

South Korean Electronics giants Samsung and LG Electronics and small and mid-segment car giant Hyundai Motors are doing excellent business and using India as a hub for global delivery.