Mcom Part I

Economics Global Trade And Finance

Multinational companies
Definition of MNC:
A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation that is registered in more than one country or that has operations in more than one country. It is a large corporation which both produces and sells goods or services in various countries. It can also be referred to as an international corporation. They play an important role in globalization. The first multinational company was the British East India Company, founded in 1600. The second multinational corporation was the Dutch East India Company, founded March 20, 1602.

Horizontally integrated multinational corporations manage production establishments located in different countries to produce similar products. (Example: McDonald's)

Vertically integrated multinational corporations manage production establishment in certain country/countries to produce products that serve as input to its production establishments in other country/countries. (Example: Adidas)

Diversified multinational corporations do not manage production establishments located in different countries that are horizontally, vertically or straight (Example: Microsoft or Siemens A.G.)

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Economics Global Trade And Finance

Multinational companies in India

Tata Consultancy Services: Commonly known as T. C. S., this multinational company is a famous name in the field of I. T. (Information Technology) services, Business Process Outsourcing (B. P. O.) as well as business solutions. This company is a subsidiary of the Tata Group. The first center for software researching was established in the country in 1981 in the city of Pune. Tata Consultancy earned a growth of 8.9 % during the latest quarter of this financial year, which ended on 30th September, 2011. This renowned company is presently looking forward to the 10 big deals that they have received besides the Credit Union Australia's contract as well as Government of Karnataka's INR. 94 crore deal for a total period of 6 years. In this current business year, they are about to employ 60, 000 people to meet their business requirement.

Reebok International Limited: This global brand is a famous name in the field of sports as well as lifestyle products. Reebok International Limited, a subsidiary of Adidas AG, is based in U. S. A. (United States of America) started its operation in 1890s. During the last financial year, Adidas's currency neutralized group sales increased by 9 %. Apart from their alliance with CrossFit that is among the largest contemporary fitness movements, in the current year, Reebok's announcement of its partnership with artist, designer and producer Swizz Beatz reflects its long term future growth

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Economics Global Trade And Finance

Global, International, Multinational & Transnational Firms:

As the companies grow and develop, there category changes and they become international, global, multinational or transnational firms. As time passes, their product category also changes.

Global Firms consider the world as a single integrated unit with centralized scale intensive manufacturing. Through world wide diffusion and adaptation, these companies exploit the parent companys knowledge and capabilities (Dunning 1993).

International Firms take the overseas units as offshoots of domestic strategy. Here the core competencies are centralized and others are decentralized. It builds cost advantage through global scale operations (Dunning 1993).

Multinational Firms consider the world as a portfolio of national opportunities. They are self sufficient and decentralized. Through strong resourceful national operations it creates a response to national differences.

Transnational Firms comprise of all the above three firms. They are dispersed, interdependent and specialized. They have flexibility, global efficiency and great learning capability.

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Economics Global Trade And Finance

Innovations in MNCs
Innovations are a growing trend in todays world and MNCs are successful till they maintain their innovativeness and creativity. Innovation does not necessarily come from the home country but it can also be sourced in the local country. The MNCs hire the employees of the local country so it can be possible that innovations are from the local country.

Government and the MNCs

There are differences among the MNCs about the Government policies and regulations. Governments encouragement or inhibition for the oil and gas industry depends on the type of country and the requirement of such an MNC in the country. There are also significant differences across various locations for the involvement of Government in the MNC activities. This depends on the need of the country to grow and develop and also on the economy of the country. This can also be explained with the help of Dunnings O-I-L framework. The Government involvement depends on the asset availability of the country which is location specific.

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Economics Global Trade And Finance

Reasons for a Company to Become a Multinational Corporation:

There are several good reasons for a company to invest abroad. Learn about these and the alternative approaches to international business.

In the 1980's, the economist John Dunning developed a theory that explains why companies would invest abroad and become multinational corporations (MNCs). This theory was named the eclectic theory. However, today it is more widely known as the OLI model, due to the three factors that are thought to spike foreign investments:

1. Organizational Advantages 2. Locational Advantages 3. Internalization Advantages

Coca-Cola is an example of a company with a significant organizational advantage. Its trademark is well-known and enough to sell soft-drinks in numerous countries across the world. According to James W. Harrington, a professor in geographical economics at the University of Washington, organizational advantages also cover company specific factors such as product quality, delivered price, marketing sophistication, distribution networks, low-cost inputs and superior production technology.

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Economics Global Trade And Finance

Natural resources in Greenland are becoming easier to access. Mining companies locating there, such as Nuukfjord Gold, have a locational advantage. Low wages, local tariffs and other trade barriers are also factors that would make it sensible to locate in a foreign country.

Internalization, i.e. owning foreign operations, is sensible when a company seeks to retain all expected profits or wishes to control the quality, marketing and local growth strategies. Being represented and taking responsibility abroad may also make it easier to sway local decision makers. Finally, according to the economists Jeff Madura and Roland Fox, having a presence in several countries can increase the knowledge of and access to new financing and investment opportunities.

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Economics Global Trade And Finance

What are the characteristics of MNCs?

MNCs have managerial headquarters in home countries, while they carry out operations in a number of other (host) countries.

A large part of capital assets of the parent company is owned by the citisens of the company's home country.

The absolute majority of the members of the Board of Directors are citisens of the home country.

Decisions on new investment and the local objectives are taken by the parent company.

MNCs are predominantly large-sized and exercise a great degree of economic dominance.

MNCs control production activity with large foreign direct investment in more than one developed and developing countries.

MNCs are oligopolistic in character. It is sustained by modern technologies, management skill, product differentiation and enormous advertising.

MNCs are not just participants in export trade without foreign investments.

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What are the features of MNCs?

1. Multiple operations: - MNC caring multiple operations such as manufacturing, marketing, finance, advertisement, marketing and research etc.

2. Better standard of living:- MNC contribute in batter standard of living in two ways

(i) By providing employment

(ii) By providing quality of product at low cost.

3. Transfer of resources: - MNC helps to transfer the resources such as modern technology, skilled and professional persons, raw material etc from advance country to those country in which they operate their activities.

4. Economic Impacts: - Advocates highlight that multinationals have a positive impact on economic development since they are large investors that create jobs and wealth. However, critics argue MNCs exert undue political influence and receive subsidized funding, tax holidays and other economic benefits to the detriment of the wider.

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Economics Global Trade And Finance

Global, International, Multinational & Transnational Firms

As the companies grow and develop, there category changes and they become international, global, multinational or transnational firms. As time passes, their product category also changes.

Global Firms consider the world as a single integrated unit with centralized scale intensive manufacturing. Through world wide diffusion and adaptation, these companies exploit the parent companys knowledge and capabilities (Dunning 1993).

International Firms take the overseas units as offshoots of domestic strategy. Here the core competencies are centralized and others are decentralized. It builds cost advantage through global scale operations (Dunning 1993).

Multinational Firms consider the world as a portfolio of national opportunities. They are self sufficient and decentralized. Through strong resourceful national operations it creates a response to national differences.

Transnational Firms comprise of all the above three firms. They are dispersed, interdependent and specialized. They have flexibility, global efficiency and great learning capability

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Economics Global Trade And Finance

What is the role of MNC in India?

Multinational companies are the organizations or enterprises that manage production or offer services in more than one country. And India has been the home to a number of multinational companies. In fact, since the financial liberalization in the country in 1991, the number of multinational companies in India has increased noticeably. Though majority of the multinational companies in India are from the U.S., however one can also find companies from other countries as well. The later one is in fact one of the earliest entrants in the list of multinational companies in India, which is currently growing at a very enviable rate. There are also a number of oil companies and infrastructure builders from Middle East. Electronics giants like Samsung and LG Electronics from South Korea have already made a substantial impact on the Indian electronics market. Hyundai Motors has also done well in mid-segment car market in India.

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Economics Global Trade And Finance

Why are Multinational Companies in India?

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. For quite a long time, India had a restrictive policy in terms of foreign direct investment. As a result, there was lesser number of companies that showed interest in investing in Indian market. However, the scenario changed during the financial liberalization of the country, especially after 1991. Government, nowadays, makes continuous efforts to attract foreign investments by relaxing many of its policies. As a result, a number of multinational companies have shown interest in Indian market.

It is too specify that the companies come and settle in India to earn profit. A company enlarges its jurisdiction of work beyond its native place when they get a wide scope to earn a profit and such is the case of the MNCs that have flourished here. More over India has wide market for different and new goods and services due to the ever increasing population and the varying consumer taste. The government FDI policies have somehow benefited them and drawn their attention too. The restrictive policies that stopped the company's inflow are however withdrawn and the country has shown much interest to bring in foreign investment here

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Economics Global Trade And Finance

WTO IN MNC ACTIVITY

WTO and regional trade agreements influence the MNC activities in many ways. The fundamental principles of WTO are non discrimination, free trade, encouraging competition and extra provisions for less developed countries. Through non discriminatory trading system, all the MNCs are provided with their rights and obligations to be used while performing their operations. Each country and MNC receives fair exports and fair treatment in the markets of other countries. It provides responsibilities regarding implementation of agreements, technical cooperation and increased participation in the global trading system. These agreements help in removing trade barriers and duty free access. It also helps in protecting industrial property rights and dispute settlement. The trade agreement system helps in promoting peace, provides more choices of products and qualities (Cherunilam 2005).

Export processing zone refers to one or more specific areas of a country where some of the normal trade barriers are ruled out and bureaucratic necessities are let down in the desire of attracting new business and foreign investments. This zone also refers to the manufacturing centers, which are labor intensive involving the import of raw materials and the export of factory products. This zone is of great importance for the operations of MNCs.

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Economics Global Trade And Finance

SOCIAL & CULTURAL FACTORS

The MNCs are also affected by social and cultural factors of the local country. They have to conduct the business according to the conditions in that country. The products should be manufactured according to the needs and requirements of the people. The cultural and social sentiments of the people should be taken care of. For example, when Mc Donalds started its business in India, it made beef burgers. But this was failed in India, as it was against the cultural, religious and social sentiments of the people of India, because Indians worship cows so they would never prefer a beef burger. But many a times it happens that MNCs also shape the social, cultural, political and even the legal framework of the local country. The people of the local country many a times adapt to the products of the MNCs. For example, Pizza Hut, Dominos, etc. have totally changed the eating habits of the people wherever they have spread their business. The dressing style of the people changes, e.g. Indians started wearing western style clothes. They also convince the Government to make its legal policy flexible to suit their business conditions because the country is being benefited by the MNCs.

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Economics Global Trade And Finance

Why are MNCs attractive to developing countries?

Developing countries are attracted to MNCs mainly because of the FDI that they bring. Aid and financial grants have declined since the 1980s, so developing countries Governments are increasingly focused on FDI (UNCTAD 2007). FDI creates employment opportunities and new economic sectors though technology and skills transfer, and helps with external debt payments (Brittan 1995, 2). Although some scholars are skeptical of FDI s effectiveness to improve growth in developing countries others are certain of it (Wolf 2004). Regardless of the debate, FDI plays an important role in many developing economies. One benefit of MNC investment in developing countries is increased productivity inexpert sectors. Tybout and Erdem analyzed trade liberalizations effects on developing countries productivity from the early 1970s to the mid 1990s and found that productivity increased as supply chain integration intensified, but was uncorrelated to the overall growth rate (Tybout and Erdem 2003). Similarly in Bangladeshs apparel industry, FDI increased employment opportunities and raised gender equality, but had little effect on poverty reduction (Kabeer and Mahmud 2004). Consistent with Woods argument, this sector is low-skilled, not unskilled, and thereby excludes the extreme the poor (1999). Another reason to attract FDI is that MNC operations bring technological and other spillovers (Lall 1992). However, these spillovers are industry-specific and only become significant to economic growth when appropriate local capabilities already exists, particularly in high to middle level technology based industries (UNCTAD 2007). This is not pertinent for the apparel industry because it uses low-level technology that is easily learnable, replaceable, and fixable with low investment (Schoenberger 2000).

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Economics Global Trade And Finance

Also, some countries Bangladesh and Myanmar do not have the initial platform for technological innovation, and the exploitation of cheap labour is more profitable than improving technology. While developing countries compete to receive or retain their share of FDI, the playing field is not level. Investment-money follows proven success. 2006 FDI inflows to Asia maintain an upward trend at 15%, with the highest share destined for China and Hong Kong (UNCTAD 2007). The ten developing countries receiving the most FDI collectively gained 80% of all FDI in 1980. The list remains relatively the same a quartercentury later (UNCTAD 2007, Chan and Ross 2003). This concentration of FDI exacerbates South-South competition and negatively effects labour standards.

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Economics Global Trade And Finance

Merits and Demerits of MNC:

Advantages: -

* Research and development activities: Developing countries lack in research and development areas. Expenditure on research and development is essential for the promotion of technology. Multinational corporations have greater capability for research and development activities in comparison to national companies. Multinationals survive in the international market through their advanced research and development activities.

* Far-reaching effects on the economic, social and political conditions of the host country: Multinational corporations provide a number of benefits to the host country in the form of * Economic growth; * increased profits ; * Developing of new products; * Reduced operational costs; * Reduced labour costs; * Changing social and political structure, etc. Thus, it helps in the exploitation of resources of host countries for their own economic advancement.

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Economics Global Trade And Finance

* Product innovation: Multinational corporations have research and development departments engaged in the task of developing new products, diversification in the product line, etc. Their production opportunities are far greater as compared to national companies.

* Marketing superiority: Multinational corporations enjoy market reputations and face less difficulties in selling their products by adopting effective advertising and sales-promotion techniques.

* Financial superiority: Multinational corporations generate funds in one country and use such funds in another country. They have huge financial resources at their disposal as compared to national companies. Moreover, multinational corporations have easier access to external capital markets.

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Economics Global Trade And Finance

Advantages of MNC's for the host country:

The operation of MNCs will increases the investment level, employment level, and income level of the host country.

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

Gets management expertise from MNC's to the host country's business

The domestic traders and market intermediaries gets increased business in the host country from the operation of MNC's.

MNC's curb local monopolies, create competition among domestic companies and thus increase their competitiveness.

Host country can reduce imports and increase exports due to goods produced by MNC's in the host country. This helps to improve balance of payment.

The growth of MNC's in the host country will increase level of industrial and economic development.

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Economics Global Trade And Finance

Advantages of MNC's for the home country

. MNC's create chance for marketing the products produced in the home country throughout the world.

They create employment opportunities to the people of home country both at home & abroad.

Enhance to the industrial activities of home country i.e. it gives a boost to the industrial
activities of home country

Preserve favorable balance of payment of the home country in the Long-term operation.

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

MNC's help to maintain favourable balance of payment of the home country in the long run

International relations between countries tend to improve when there exists a good amount of trade and investment flow which can be of strategic importance to the home country.

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Economics Global Trade And Finance

Technology and management expertise accquired from competing in global markets

Acquisition of raw material from abroad,which is cheaper in cost. The MNCs can utilize the host country's natural resources and harvest such resources efficiently and manage to keep their costs low and thus increase their price competency.

The list of top ten MNCs working in Asia follows: 1. Microsoft 2. Nokia 3. McDonald's 4. IBM 5. Coca-Cola 6. Intel 7. Walt Disney 8. Nestle

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Economics Global Trade And Finance

Drawbacks Of Mncs.

1. Interference in the Economic Sovereignty of the Host Country MNCs affects the independence of any country. For example, one East India company came in India for business but it made India slave for 200 years. So, it is the biggest drawback of MNCs that these are the risky for freedom of any country.

2. Drainage of Resources MNC's main aim is to earn the profit by any way. So, it exploits developing country's natural resources. These MNCs increase pollution of air and water.

3. Strain on Foreign Exchange Reserves MNCs are very risky for foreign exchange reserves. India, there are lots of MNCs which transfer Indian currencies to their home country in the form of profit and dividends of foreign shareholders. With this, our foreign exchange reserve level is decreasing.

4. Minimum Transfer of Technology No MNC bring any new technology in India. They only produces zero technology products in the form of cold drinks and other which can easily make in each village of India.

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5. Exploitation of Labour MNCs do not create any emp. in the host country because these MNCs are only interested to exploit laborers by paying them less.All top posts are filled by their home countries employees.

6. Cultural Loss This is the one of biggest drawback of MNCs that it is risky for our cultural loss. Our culture makes us vegetarian but many MNCs employees eat meat and chicken. So, all these things are against our culture. Bad Indians copies MNCs employees and start to wear leather shoes. Due to this, animals of India are being killed . So, this activities are so bad.

7. Creation of Monopolies MNCs create also monopolies. With high advertising and other ways, these MNCs do not live domestic companies. After this, these MNCs increase prices and then get high profit by exploiting consumers of India.

8. Evasion of Taxes These MNCs do not disclose its all true account. So, with this, these MNCs save their tax liabilities.

9. Economic Power This is also one of the important drawback of MNCs that these MNCs misuse of their economic power. With economic power, these MNCs tries to change the economic policies. With this, they

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have to pay zero tax in host country.

10. Depletion of Natural Resources After increasing of MNCs in India, you can see that our all natural resources are decreasing very fastly. These MNCS are selling urea fertilizers. With this, our land is becoming useless.

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Economics Global Trade And Finance

The problems of Multinational Companies:

Language

Of course, this part is so important, how could multinational companies expand their market if those companies don't able local languages.

Culture

This aspect is must be considered by multinational companies because when they want to advertise the products to local, they must thing what they can do and what they can't do. Actually, not just in advertising aspect, but also employment.

Geography

Multinational companies must consider this thing because it is impossible if those companies build their branch offices at jungle or mountain. Who will buy their product or services?

Transportation

To avoid high cost on product distribution, I think this aspect is must be considered by multinational companies. I never heard there are multinational companies build their offices in Jungle.

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Economics Global Trade And Finance

Conclusion:In conclusion, MNCs are beneficial to less developed countries. They improve the foundations of a "backwards" economic environment through the diffusion of capital, technology, skills, and exports. MNCs have a direct effect on the development of a more citizen welfare conscious government. Accordingly, the number of jobs increases, consumer spending increases, the tax base grows and health care is more widely accessible. They also have an apparent lasting effect on the values and institutions of the host country. The values of the country change to reflect a country committed to staying in pace with a rapidly changing global environment; extending to political norms and nationalistic tendencies. Once there is openness to capitalism, or a more developed capitalist society emerges then there will be a more stable global society. However, in the end there really is no other more reliable way to improve the social, economic, and political environment of a state than by allowing a MNC to invest. The MNCs is fascinating and important for understanding economic globalization. There has been substantial progress in the literature in the past couple of decades. Multinational companies are not disadvantage to our country. India needs MNCs to become developed country. But employees of these companies should not take responsibility for overloaded work just for high salary. So that, there can have fulfillment of passion and also fulfillment of personal life.

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Economics Global Trade And Finance

Biblography