INTRODUCTION

The rise of multinational corporations (MNCs) during the past three decades has played a critical
role in the growth of international trade and capital flows. They dominate the worlds trade and
investment activities by producing most of the well-known products we consume and
undertaking significant amounts of foreign direct investment in host countries. The worlds most
famous brands are the standard names for the products, they represent in markets throughout the
world. The size and range of their operations significantly influences the development and
growth of the world economy. They are often viewed as agents responsible for the changing
world economic, political and social order. These huge business firms from world economic,
political and social order. These huge business firms from USA, Europe and Japan present a
unique opportunity and a host of serious problems for the many developing countries in which
they conduct their business.
Till the end of World War I, their activities were primarily resource oriented i.e., they tried to
ensure uninterrupted production in their home countries. By employing vertical integration
(gringing under one management the successive stages of production and distribution) they were
able to maintain markets for their products. In the period between the wars, they concentrated
their operations on obtaining exploration rights from host governments to explore and extract
raw materials. In return, they have contributed to economic development in their host countries
by providing expertise and capital for social and infrastructural projects.
After World War II, there was rapid expansion and proliferations of MNCs. They continued
deepening their vertical integration to exploit comparative advantages by using their firm
specific assets (FSAs). They have also increased their efforts to exploit markets abroad by means
of licensing and franchising agreements. In the recent years, this rapid expansion and
proliferation has been extended to include the service industries such as banking and other
financial services, telecommunications, public utilities and transport.
MNCs carry with them technologies of production, tastes and style of living, managerial
services and diverse business practices including cooperative arrangements, marketing and
advertising. They engage in a range of activities, many of which have little to do with the
development aspirations of the countries in which they operate.
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MNCs are called now by United Nations as transnational Corporations (TNCs). At the beginning
of the 1990s there were about 37000 TNCs in the World and they controlled about 1,70,000
foreign affiliates. Ninety percent of these TNCs are headquartered in developed countries. The
five major home countries are France, Germany, Japan, the United Kingdon and the United
States. About 60 percent of all parent TNCs are in manufacturing, 37 percent in services and 3
percent in primary production such as forestry and mining.

MEANING AND REASONS FOR INVESTMENT

The multinational Corporation is also known as multinational enterprise, transnational
corporation, international firm, global firm and so on. Many academics prefer to use the term
multinational enterprise because not every multinational firm is a corporation and the term
enterprise has a greater and more useful application in the analysis of international business
since it includes firms which may be owned privately or by the state, or whose ownership may be
a mixture of the two.
The multinational enterprise is defined as an enterprise which owns (in whole or in part),
controls and manages value-adding activities in more than one country. In doing so it engages in
production and/or service activities across national boundaries financed by foreign direct
investment. The essential elements of multinational operations are:
i)

Direct investment as opposed to portfolio investment abroad, giving the power of

ii)

control over decision making in the foreign enterprise.

Effective transfer of a package of resources, involving factor inputs such as capital,
technology, entrepreneurial and managerial skills and access to markets for trade and

iii)

foreign production.
The value-adding activities of the enterprise are located in at least two countries.

The United Nationals regards multinational enterprises as transnational Corporations which are
enterprises which own or control production or service facilities outside the country in which
they are based. This definition emphasizes on the ownership, control and multinationality of their
production with centralized managerial control of the business based in the firms home country.
J.K. Weekly and A. Aggarwal defines multinational corporations as a group of business units
located in different countries, whose operations are coordinated by a management control center
that makes decisions on the basis of global profit opportunities and objectives.
Caves R.E. defines multinational enterprise as an enterprise that controls and manages
production establishments located in at least two countries.

Some writers make a distinction between the multinational corporation and transnational
corporation. Multinational corporations are usually organized around a national headquarters
from which international control is exercised. They still have a national identity, eventhough
their subsidiaries may not always care to allow that identity to obtrude in the markets they serve.
On the other hand, a transnational corporation is a multinational in which both ownership and
control are so dispersed internationally. There is no principal domicile and no one central source
of power.
REASON FOR INVESTMENT
The important reasons for a company to transfer some of its production beyond its home base
and thus becoming a MNC rather than producing everything at home and then exporting the
output are the following:
i)

Products are becoming more sophisticated and differentiated. Locating production of

such goods in large local markets allows more flexible responses to local needs that

ii)

can be achieved through centralized production at home

Trade barriers make location in large foreign markets, such as the US and the EU, less

iii)

risky than exporting from the home base.

Many MNCs are in the service industries such as advertising, marketing, public
management, accounting, law and financial services where a physical presence is

iv)

needed to produce a service in any country.

The computer and communications revolutions have allowed production to be
disintegrated on a global basis. Thus, components of any product are being
manufactured in many countries, each component being produced where the

v)

production is cheapest.
The production costs can be reduced by making use of cheap factors like labour and
also by reducing transport costs. This helps to improve the competitiveness of the

vi)

firm.
In order to exploit natural resources and to enjoy tax-havens firms make investments
in other countries.

CHARACTERISTICS OF MNCs
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The important characteristics of MNCs are explained below:

1. Size: A large number of MNCs are large corporate entities with substantial and
technological resources which they use to gain power and influence in the markets in
which they operate. According to the UN Year book 1995, the worlds multinational
enterprise population includes some 40000 parent firms and some 250000 foreign
affiliates. According to UN figures, over 500 of the worlds largest MNEs produce more
than one-half the worlds output and account for 80 percent of its FDI by value. The
economic power of MNCs is greatly strengthened by their predominantly oligopolistic
market positions, i.e., by the fact that they tend to operate in product markets dominated
by a few sellers and buyers. This situation gives the ability to manipulate prices and
profits, to collide with other firms in determining areas of control, and in general restrict
the entry of potential competition by means of their dominating influences over new
technologies, special skills and through product differentiation, advertising, and
consumer tastes.
2. Geographical diversity: They operate in two or more countries in addition to its own.
The number of countries in which MNCs operate varies depending on the product range,
competition, and marketing requirements. Since World War II, MNCs have become more
active in manufacturing and related activities requiring them to be close not only to raw
materials but also to their major markets. This has led to further expansion in the number
of locations in which they operate.
3. Revenue: A large part of MNCs revenue come from its activities outside its home
country. The proportion of the firms total revenue generated from outside its home
country may vary from 50 percent to 75 percent. A significant proportion of foreign
earnings of MNCs come from the activities of its subsidiaries and affiliates, including the
royalties earned through licensing and franchising agreements.
4. Net Working: The geographical diversity enables the MNCs to engage in interfirm trade
whereby they supply components, equipment and raw or semi-finished raw materials to
other manufacturers. It also provides scope for inter-firm or intra-group trade which takes

place between the MNCs subsidiaries. In this way, the parent company is able to create a
series of networks to take advantage of locational opportunities.
5. Ownership: Another important characteristic of MNCs is with regards ownership. The
primary aim of ownership is to have control over decision-making in key operational
areas. The extent of control a MNC is able to exercise depends upon the type of
ownership. In the case of wholly owned subsidiaries the MNC has complete control over
all strategic and operational aspects of its subsidiaries. In a joint venture, the ownership is
shared between the MNC and the local partner.

ROLE / MERITS OF MNCs

MNCs are considered as agents of much needed changes as well as channels of FDI with many
advantages to the host economy. 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 MNCs generated income, allowing developing
countries to improve their infrastructures and to strengthen their human capital. By improving
the efficiency of capital flows and income levels, MNCs help to reduce world poverty.
The important roles of MNCs in the host country are the following :
1. Transfer of Technology: They help in the transfer of technology in the form of technical
know-how, managerial skills and marketing techniques. Technology transfer is a
significant benefit of investment by MNCs. MNCs provide immense resources and
investments, technology, innovation and expertise to the host societies. A culture of
research and development is encouraged and human resources are developed, at least
within the organization. They create externalities or spillover benefits which may
penetrate local firms and government departments leading to improvements in
productivity.
2. Improve Quality of Labour: The transfer of technical know-how and managerial skills
may become instruments for improving the quality of indigenous labour, management
and education especially in the developing countries. This improvement may enable the
developing countries to accelerate the process of economic development.
3. Brings Necessary Capital: MNCs bring in much needed capital into host countries.
Especially in developing countries. Foreign Direct Investment (FDI) is the most desired
form of capital flow. FDI does not contribute to the external debt problems of developing
countries. They also help to bring about necessary reforms and modernization in the
financial sector. This helps to increase the productivity of capital.
4. Genration of Income and Employment: The investments undertaken by MNCs in the
host countries contribute directly in income and employment generation in the host
countries. Even though MNCs create employment opportunities, they may not create
much employment in the host developing countries because they have a tendency to use
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capital intensive technology developed in an industrialized country. MNCs also offer

wages that are high relative to other wages in a developing countries. These investments
indirectly contributes to regional and sectoral development and improvement
5. Reduce Monopoly Power and Encourage Competition: The entry of MNCs to the host
country through direct investment rather than through mergers and acquisitions, may help
to reduce the monopoly power of indigenous firms and at the same time encourage
domestic competition. Competition has compelled MNCs to provide the world with an
immense diversity of high-quality and low-priced products. Competition, given free
trade, delivers mutually beneficial gains from exchange and lead to production of
commodities efficiently. Free markets protect consumers from prolonged abuses by
government sponsored monopolies and cartels.
6. Increase trade and Investment: In order to attract MNCs to make investments
governments may try to liberalise their trade and investment policies by lowering or
removing barriers to free trade. This is likely to increase trade and investment and,
therefore, increase worlds prosperity.
7. Improve Balanced Payments: MNCs may also help to improve the host countrys
balance of payments by producing goods that used to be imported and by exporting their
goods.
8. Consumers Welfare: MNCs make important contribution of consumers welfare by
producing better quality of goods and wide variety of goods. Large scale economies,
quality control and a healthy competition lead to price cuts and other benefits for the enduser. People have more access to the comforts of life with a large variety of choices.
9. Help to Access World Markets: Developing countries find it difficult breaking into
world markets because they lack connections and knowledge of how the markets work.
MNCs, using their connections and knowledge of international markets, have helped
developing countries enter international trade.
10. Good Business Practices: Good governance, organizational transparency, clear
command structures, and performance based evaluation and incentives programs for
employees encourage the merit system. MNCs introduce a professional working
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environment and culture for local organizations to emulate, thereby promoting sound
management and business education.
11. Infrastructure Improvement: Many MNCs help in improving the infrastructure and
provision of basic needs in their specific areas of operation. They either do so directly or
provide funds for this purpose to civil society organizations. This also improves business
conditions within and in the vicinity of the areas where they are operating.
12. Logistics: Creation of a national distribution system both in terms of trade and logistics
was an important role played by the MNCs. HUL, ITC and P&G have been leaders in this
area. The supermarkets in the developing countries are gradually changing the way retail
trade will be carried out in the future. Here again MNCs have provided the model and
systems for Indian entrepreneurs to follow.
13. Research: Another role that the MNCs have played, although in a small way, is to bring
in research as part of managing the enterprise through product and process development.
Some MNCs have set up research stations in India and many employed scientists for
process and product development as well as pure research scientists. The Hindustan Level
research centres and other like Glaxo etc. are part of trend. The new WTO regime has
also pushed Indian pharma companies to engaging in research and this would have been
difficult without the competitive threat from MNCs
14. Protecting Environment: MNCs are not committed to the destruction of the worlds
environment, but instead have been the driving force in the spread of green
technologies and in creating for green products. Market incentive(e.g., the threat of
liability, consumer boy cotts, and the negative impact on reputation) have forced firms to
police their foreign affiliates and to maintain high environmental standards. The UNs
1999 World Investment Report notes several studies that confirm foreign affiliates having
higher environmental standards than their domestic counterparts across all manufacturing
sectors. The UN also noted the efforts initiated by MNCs to assist domestic suppliers
(regardless of ownership) to qualify for eco-labeling and to meet the ISO 1400
certification.

15. Poverty Reduction: Evidence supplied by the World Bank and the UN strongly suggests
that MNCs are a key factor in the large improvement in welfare and reduction in poverty
that has occurred in developing countries over the last 40 years.

DEMERITS OF MNCs
Even though MNCs are considered to be beneficial to host countries, they have been feared for
being too concerned about the size of their profits rather than the interest of the country in which
they operate. In this process they may amass huge amounts of wealth that may have adverse
effect on the growth of developing countries. Critics of multinational firms have long argued
against the rosy picture given above. They claim that multinationals monopolise resources,
supplant domestic enterprise, introduce inappropriate products and technology, and aggravate the
balance of payments problems through high remittances. They may also come to wield
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considerable political influence, distort the path of development, worsen income inequality and
exploit the weak environmental standards in developing countries (e.g. the Union Carbide
disaster at Bhopal in 1984)
The important demerits of MNCs are explained below:
1. Inferior Technology: The technology brought in by MNCs may be of an inferior type or
may not be suited to the needs of the host country. It may not create many jobs in the host
country as expected. The MNCs may end up dominating the industry by using the
advantage of technology as an effective barrier to the entry of new firms.
2. Threat to Sovereignty: The presence of MNCs is sometimes regarded as a threat to the
sovereignty o the developing countries. The development programmes of LDCs may be
dominated by the conditions formulated by MNCs for the inflow of FDI. The decisions of
subsidiaries of MNCs are made by the headquarters of parent company and they may not
be relevant to needs of developing countries.
3. Use Influence to obtain Concesions: MNCs may use their power and influence to obtain
concessions from the host countries. In this way they may interfere in the host
governments economic and political policies for their own interest.
4. Breed Discontent and Unrest: They pay very high salaries to the staff coming along
with MNCs as well as to the locally employed labour force. This not only leads to social
inequality but also breed discontent and unrest among the workers employed in
indigenous industries.
5. Destroy Competition: When there is competition from local industries, they may
undercut them by charging low prices for their products. In this way they may push them
out of the markets. They may also try to take control of local firms by buying their
majority shares or by merging them in order to exercise control over them. In this way
they may destroy competition and acquire monopoly powers.
6. Price Manipulation: The MNCs may pre-empt local savings by overpricing the imports
and underpricing the exports of host countries.

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7. Adverse Balance of Payments: The positive balance of payments effect may not be
materialized if the MNCs produce only for the host countrys domestic market.
8. Technological Dependency: The transfer of technology by MNCs may lead to
technological dependency by the host country, a fall in R&D, tied imports and a decline
in employment.
9. Transmit Cultural: By introducing new technology and work practices and challenging
management philosophies, MNCs may transmit cultural changes into the host country.
10. Depletion of Non-renewable Resources: MNCs may cause fast depletion of some of the
non-renewable national resources in the LDCs.
11. Retard Growth of Employment: MNCs may retard growth of employment in the host
countries.
12. Lobbying: Given their huge capital resources and production capacities, MNCs are able
to dictate their own terms in economic dealings. For the sale of their enormous
production, MNCs require access to large markets. However, tariff issues, acces
restrictions and similar barriers to trade are hurdles the MNCs face. What MNCs need
Is a global system for the free flow of their goods. They therefore use their sheer
economic weight to influence international trade rules. With their huge resources, they
employ lobbyists with the highest expertise and influence at international trade
organizations. The rich North, influenced by such lobbying, makes decisions in favour of
the MNCs, irrespective of the economic, social or cultural consequences for the poor of
the world.
13. Inducing Buyers and Capturing the Market: MNCs capture the market using a variety
of strategies and tools, including social and market research, opinion building, developing
interest groups, lobbying, sponsorship, etc. The media plays an important role in this
compaign. They use, develop and continually refine their marketing tactics to create
demand for their products. They use social marketing and stars from the worlds of sports
and show business to project their products, especially affecting the youth, women and
children as they are generally attracted to glamour. Special events, festivals and
campaigns are organized to create type.
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14. Create Materialism and Consumerism: MNCs promote a culture of conspicuous

consumption. The product models change very fast and the older ones lose relevance in a
short span of time. Consumerism has an overwhelming impact on societies. For example,
departmental stores and shopping malls/plazas are mushrooming everywhere both as an
outcome of and an impetus to further consumerism. Eating habits are also changing. With
increasing consumption of processed, instant, fast and junk food, especially products of
international brands. The emphasis is on instant access and quick relief. Many products
also glamorize life in the fast lane, leading to increase consumption of faster
communication products, cars, as well as stimulants such as cigarettes and alcohol. As
outward looks become central in the vision of success, a vibrant fashion industry is
changing the dress and outlook of ordinary people. Spending priorities have changed.
Contrary to the conventional view, taking loans is now considered a status symbol. The
availability of easy credit, consumer financing, credit cards and personal loans by the
banks to the middle class is promoting a culture of people living beyond their means.
Simplicity is losing and people strive to live in luxury. Previously, education was aimed
at developing a balanced personality and ethical and social values and character building
were emphasized. Now, however, materialism has taken over.
15. Promotion of Non-Issues: Importantly, poor people are not the target of MNCs. They
target the middle classes, who have the buying powers, and trying to change their
priorities in everyday life, spending and consumption. MNCs establish close linkages
with intellectuals, legislators, media and some non-government organizations (NGOs) to
highlight specific issues that suit their business interests.
16. Negative Marketing: When introducing their products, MNCs exaggerate the qualities to
the level of cheating and lying. Aggressive campaigns with false claims are launched.
Local products are ridiculed. Children, youth and women are special targets. This may
affect the existing value framework of the societies.
17. Violation of Human Right: Exploitation of workers by large business corporations is a
common phenomenon. Most workers are exposed to hazardous and inhuman conditions,
overexertion and financial abuse. This happens despite the fact that many of the worlds
largest business associations, including the International Chamber of Commerce, have
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endorsed the UN Secretary Generals Global Compact, a mechanism for self-regulation

by business companies.
18. Stresses on the Family: MNCs affect the host societys family fabric in many ways. The
new cultures and lifestyles introduced by MNCs are proving harmful to the family fabric
in host societies. Overspending and living beyond means eventually creates economic
pressures and develops tensions and stressed within families. Various indicators also
prove that women working with MNCs and other big corporations undergo extra stress
when entering into marriages and bearing children. Parents have little time for their
families, particularly children. However, it should be noted that MNCs are not simply the
agents of exploitation but they also act as agents of development. What is needed is to
control and curtail the damaging effects of MNCs and harness them to get maximum
benefit. Further, the feeling that MNCs and foreign brands will have a runaway success
and domestic firms will not be able to survive their competition is not right.

ROLE OF MNCS IN UNDERDEVELOPED COUNTRIES

MNCs have contributed significantly to the development of world economy at large.

They have also served as an engine of growth in many host countries. Their importance in a
developing country may be traced as follows:

1. MNCs help a developing host country by increasing investment, income and employment
in its economy.
2. They contribute to the rapid process of development of the country through transfer of
technology, finance and modern management.
3. MNCs promote professionalisation management in the companies of the host countries.
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4. MNCs help in promoting exports of the host country.

5. MNCs by producing certain required goods in the host country help in reducing its
dependence on imports.
6. MNCs due to their wide network of productive activity equalize the cost of production in
the global market.
7. Entry of MNCs in the host country makes its market more competitive and break the
domestic monopolies.
8. MNCs accelerate the growth process in the host country through rapid industrialization
and allied activities.
9. The growth of MNCs creates a positive impact on the business environment in the host
country.
10. MNCs are regarded as agents of modernization and rapid growth.
11. MNCs are the vehicles for peace in the world. They help in developing cordial political
relations among the countries of the world.
12. MNCs bring ideas and help in exchange of cultural values.
13. MNCs through their positive attitude and efforts work for the establishment of social
welfare institutions and improvement of health facilities in the host countries.
14. Growth of MNCs help in improving the balance of payment status of the host country.
15. The MNCs integrate national and international markets. Their growth in these days has
remarkably influenced economic, industrial, social environment and business conditions.
In short, through basically seeking maximization of profits by using all types of resources
and strategies of the global economy, eventually globalization has become the main focus of

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their business. In this way, it has become a main propelling force behind the expansion of world
economy at large.

10 BEST MNCS ALL OVER

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1.
Microsoft Corporation, an American multinational corporation is headquartered in
Redmond, Washington, United States that develops, manufactures, licenses, and supports
a wide range of products and services mostly associated with computing through its
various product divisions.

2.
NetApp previously known as Network Appliance is a proprietary computer storage and
data management company headquartered in Sunnyvale, California.

3.
Google, an American multinational Internet and software corporation specialized in
Internet search, cloud computing, and advertising technologies is headquarters in United
States. It develops numerous Internet-based services and products, and makes profit
primarily from advertising through its Ad Words program.

4.
FedEx Express is a cargo airline based in Memphis, Tennessee, United States. It is
considered the world's largest airline in terms of freight tons flown and the world's fourth
largest in terms of fleet size

5.
Cisco Systems is, an American multinational corporation headquartered in San Jose,
California, United States, designs, manufactures, and sells networking equipment

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6.
Marriott Corporation, a hospitality company was founded originally by J. Willard
Marriott and Frank Kimball as Hot Shoppes

7.
McDonald's Corporation today is the world's largest chain of hamburger fast food
restaurants, serving around 68 million customers daily in 119 countries

8.
Kimberly-Clark Corporation is an American corporation that manufactures mostly paperbased consumer products.

9.
S.C. Johnson was earlier previously known as S. C. Johnson Wax is a privately held,
global manufacturer of household cleaning supplies and other consumer chemicals based
in Racine, Wisconsin

10.
Diageo is a global alcoholic beverages company headquartered in London, United
Kingdom. It is the world's largest producer of spirits and a major producer of beer and
wine.

LITERATURE REVIEW
Simply put, multinational corporations refer to firms whose scope of investment in
international or in countries outside their immediate origins or outside their national frontiers.
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Langdon (1981) posits that multinational corporations repatriate their profits and more large
amounts of currencies across borders especially in the event of a relocation of plant for various
reasons, this result in reduction in value of the host countrys currency occasioning inflation
hence making the value of imports rise ruining the economy of a developing country. This
project explores around the three specific objectives of; (1) impact on employment creation (2),
transfer pricing and (3) poverty and dependence
Impact on employment creation
A multinational corporation is a firm with productive capacity in a number of countries. The
profit and income flows that they generate are part of the foreign capital flows moving between
countries. As local markets throughout the world are being deregulated and liberalized foreign
firms are looking to locate part of the production process in other countries where there are
advantages. Although LDCs may present higher levels of risk they also present higher levels of
returns in terms of profit. Many LDCs with growing economies and increasing incomes may
provide future growth markets (Kotler, 1994) Multinational corporations contribute to 65% of
the non-governmental employment opportunities available at any given country of host (Reid,
2001). Schermerhorn (2002) argues the fact that for the case where many LDCs are often
endowed with potentially large low wage labour forces and high levels of unemployment, this
might be considered inappropriate technology and MNCs come in to equip the countries with
intrinsic knowledge aimed at acquiring a skilled work force in the industry
Gerrefi (2003) maintains that the cycles of poverty will not be broken from within the
domestic economy. The level of investment needed to raise productivity and incomes is not
possible. Thus a foreign direct investment through multinational corporations is essential
(Mulwa, 2000). By investing in areas and utilizing the factors of production where the LDCs
have an absolute and comparative advantage MNCs will lead to a more efficient allocation of the
worlds resources (Gesso, 1999)
Schermerhorn (2001) defined ways to engage developing countries into development with the
aid of the MNCs. They are sanctioned non-engagement, principled non-engagement, constructive
engagement or unrestricted engagement. It is the responsibility of a developing nation to offer
enough allocation opportunities to its people so that the society can provide skilled labour for the
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worldly market (Mundane, 2003). Langdon (2000) posits that Education is a contingency for
paying employees a wage that is well above the poverty line in multinational company context.
Marxism (1998) argues that it is the ethical obligation of MNCs to pay educated employees
wages of the activities that are well above the poverty line
It is the responsibility of MNCs to consider developing countries for their labour supply,
because if executed property, it will create stockholder value (Kaburu 2005). Domar (1994)
suggests that the level of investment is important in determining the level of economic growth
and poverty reduction in LDCs. Multinational corporations provide employment. Although
wages seem to be very low for us, people in developing countries often see this job as preferable
to working as a subsistence farmer with even lower income (Kitche, 2001)
Langdon (1990) stresses that heavy advertisement on the part of MNCs distorts the structure
of local demands and destroys indigenous industries which cannot afford the costs involved.
According to Lall (2002) Informal employment is at record levels worldwide with severe
consequences for poverty in poor countries
The financial crisis is throwing many people out of work and, in developing countries with no
unemployment insurance but dependency on MNCs; they are forced to take informal jobs with
low pay, no protection and high risk exposure. The study by Domar (1994) finds that 1.8 billion
people, or more than half of the global labour force, are working without a formal labour contract
and social security. Even during good times with robust growth rates, in many developing
countries informal employment increased in some regions with the existence of MNCs, says
Johannes (2008)
Jutting (2003) warns of the potential draw-backs of a further increase in informal employment:
lower wages and incomes in poor countries that do not have the means to provide comprehensive
safety nets. Women who constitute the majority of workers in poor quality jobs will be
particularly affected, as will youth and the elderly.
The majority of the 1.4 billion poor people in the world depend exclusively on their labour for
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survival. Low pay, with no social benefits, increases the likelihood that the Millennium
Development Goal of halving poverty world-wide by 2015 will not be met if the MNCs cannot
be in the position of supporting the rapidly growing population, (Buckley P J Et al, 2008). 1.8
billion People work in MNCs compared to 1.2 billion who benefit from formal contracts and
social security protection (Coughlin, 2006)
The share of informal employment tends to increase during economic turmoil. For example,
during the Kenyan post election violence (2008), the countrys economy shrank by almost onefifth, while the share of informal employment expanded from 48% to 52% (Wangari, 2009)

Figure 1
Source: OECD Development Centre Is Informal Normal? (2009), based on Kenyan
development trends, 2009
Transfer Pricing
MNC is likely to be diverse in terms of products and geographical markets. They have
a range of different types of business in the form of subsidiary companies within a holding
company structure or divisions within a multinational structure. Despite the MNCs being
regarded as the principal agents by whom technological transfer occurs, it remains a fallacy or
misplaced notion because MNCs scarcely have the appropriate to transfer.
MNCs engage in transfer pricing where they shift production between countries so as to
benefit from lower tax arrangements in developing countries (Schermerhorn, 2000). Ake (2002)
points out that, what passes as technology transfer occurs is not that the technology transferred
is appropriate but that it is available. This is because it is produced in response to the needs of the
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environment that are quite different from those of host countries. The transferred technology is
not integrated into the local center and system of production and so its ability to stimulate further
technological development is severely limited.
As it has been mentioned in the preceding sections, transfer pricing has adverse effects on the
LCDs. It is a strategy aimed at lowering total taxes paid by the MNC to the host country. Intra
corporate sales rates and purchase of goods and services are artificially invoiced so that the
profits accrue to the branches located in low tax countries. The offices in high tax countries show
little or no taxable profits in their books. This manipulation is common with intra firm trade
though unrelated companies sometimes collude to transfer funds across boundaries (Lull, 1991)
MNCs pay for higher prices than other Kenyan firms. In 1984, a MNC quoted a price of US
$115/KG of methyldopa drug to a licensed manufacturer though others sold it for US $ 68/kg.
Another sold Diazepam drug at US $ 600/kg to a local licensee while the product was available
for US $ 60/kg. These products are specialists produced in Kenya under licenses from big MNCs
(Ake, 2002). The overpricing here could be due to transfer pricing or high production costs.
According to Langdon (1981), MNCs repatriate their profits and move large amounts of
currencies across borders especially in the event of a relocation of plant for various reasons.
MNCs have cast the stigma which characterizes their predecessors associated with
colonialism, (Abdullah, 1997). Contrary to the expectation of most countries, the MNCs
transfer of technology is of no economic significance to the host state. Ake (2002) points out that
what passes as technology transfer occurs is not that the technology transferred is appropriate but
that it is available. The technology so transferred is often obsolete, archaic, expensive and often
unsuited to the application and demands of the host state. The MNC may transfer obsolete
technology to developing countries such as expired pharmaceuticals, radioactive goods such as
union carbides toxic products or the DDT. Hahlo et all (1997) establishes that an average MNC
welds more economic power twice or thrice that of the nation state. Over two decades ago, the
annual turnover of General motors corporations was equal to the GNP of Switzerland, Pakistan
and South Africa combined.

22

Overall incidences of absolute poverty were estimated at 52% based on welfare monitoring
survey 3 of 1997. The number of the poor increased from 3.7 million (1972-1973) to 11.5 million
in 1994 and now estimated to be 15 million (Gerrefi; 2002). Transfer pricing is common with
intra company trade though unrelated companies sometimes collude to transfer funds across
boundaries. This is a problem brought by MNCs and the effect on trade and development is
disastrous, and (Lall, 1993) confirms this assertion.
Studies of the drug industries in several countries show that MNCs make huge profits at the
home base by rising for materials supplied and services rendered to their subsidiary companies.
Lall (1991) and Gerrefi (1993) concur on this statement. According to studies by Owino (1991),
an examination of company invoices at CBK and suppliers quotation for 1983 and 1984 had
evidence of this. Comparison revealed manipulation through over invoicing with MNCs paying
higher than other companies. Desmond (2002) elaborates that today GM controls 90% of all
exports to East and Central Africa. Transfer pricing is a problem in Kenya. A subsidiary of a
large textile firm in Kenya purchased all inputs from the parent company until recently at much
higher than competitive prices. Langdon (1991) and Coughlin (1996) also expose over pricing of
imported inputs in the textile industry.
Silberztein (2008) posits that transfer pricing is a challenge for developing countries. A lot of
debate about tax and developing countries nowadays tends to focus on how to reduce revenue
leakage through offshore tax havens. But there is another hot issue called transfer pricing which
developing countries have to be mindful of, particularly if they want to avoid the risk of losing
out on tax revenue from cross-border transactions carried out by multinational enterprises. A
large proportion of world trade is accounted for by cross-border trade taking place within
multinational enterprises, where branches or subsidiaries of the same multinational enterprise
exchange goods or services (Hahlo et al, 1997).
Brooks (2005) argues that one key difficulty in applying transfer pricing methods is to find
open market transactions between independent enterprises that are comparable to the controlled
transactions within a multinational enterprise. This is an issue for developed as well as
developing countries, although it is magnified for developing ones due to the smaller size of their
23

economies and smaller number of independent enterprises operating in their markets that can be
looked to for comparisons.
Poverty and Dependency
Nyongo (1998) strongly contends that nation-state building requires politically strong
nationalistic local entrepreneurs. Unfortunately, for example in Kenya, the manufacturers are (1)
either the MNC subsidiaries with global interests that often conflict with the national desire to
build up local technological capacity, (2) or Asian businessmen without political clout to stop the
imports that idle local factories. The structural transformation of the world economy through
internalization of big businesses has become a real threat to the economic to the economic as
well as political independence of the nation-state. In Kenya for example, despite various forms of
interventions and economic policies the country continues to perform poorly. This continues to
be despite the long regime of MNCs.
Eglin (1994) further points out that the artificial differentiation of products comes as a result
of a single firm monopolizing the domestic market and wants to increase the sale of its products
through advertising different brands names for basically the same product. This is true of firms
making soap, soft drinks, paints, cosmetics, dry cells, food industries A sound economy
facilitates employment by empowering the skilled and the less skilled. (Cowen, 1993) This view
is true to a large extent since skills are the input to work and as work, so employment and
therefore income and economic development.
A study to determine the MNCs perpetuation of poverty that was held at the cities of Kenya
indicated the prevalence of poverty by regions. National percentage stood at 52%. Urban
prevalence of absolute poverty is overwhelming despite the fact that MNCs operate in major
urban centers. Kisumu has the highest percentage of absolute poverty, food poverty and hardcore
poverty respectively. Urban food poverty stood at an average of 35% while overall poverty stood
at 45%. (Muller, 2005)
Singh (1999) explains the social-cultural effect of a peoples changed consumer taste is the
desire to get what is beyond their reach. This breeds corruption, robbery and any measure that is
24

sure to avail money, ethical and moral consideration notwithstanding. Almost half of the urban
population lived below the absolute poverty line. The wealth of a nation and living standards are
a direct reflection of the performance of the economy. The activities of the MNC directly affect
the growth of the economies of the host states. Relocation of business has a sudden economic
disorientation which affects economic performance. MNCs relocate operations without notice.
However, Coughlin and Ikiara (1996) disagree by stating that MNCs assisted host countries
economically and continue to do so. These authors disregard the exploitative nature of MNCs.
Langdon (1991) narrates that the effects of class formation leads to poverty. The erosion of
nationalism among the educated elite leads to their association with MNCs to further narrow
interests in the process of class formation. The effects of this are denial of a country of the input
of her educated manpower that is expected to plough back to the economy what resources they
were trained with.
Donna (2000) adds that the social cultural effects of a changed consumer taste leads to
massive corruption and robbery which adversely affect the economy. They are indoctrinated to
desire what desire they cannot afford. The technology of MNCs is usually misplaced in LCDs
while the small economies are integrated into those of MNCs in most strategic sectors rendering
the small economies subsistence and incapability of self generation and growth.
Turner (2001) asserts that corporate managers of MNCs have the ultimate powers to shift and
relocate capital (resulting in massive layoffs), develop or suppress technology. They defend
brand loyalty and have the power to make daily decisions on what people should eat, live, wear
and what sort of knowledge is to be taught in schools and universities. These decisions have
some impact on the host government since they result to serious cases of poverty if altered and
dependence upon the foreign MNCs which may decide to relocate themselves any time. Langdon
(1991) stresses that heavy advertising distorts the structure of local demands and destroys
indigenous industries which cannot afford the costs involved
Majority of Kenya urban poor live in peri-urban and slum settlements that are characterized
by low quality basic services such as water, schools and health. They have no regular job and no
25

regular income. 25% of their little income is used on rent. (Corey et al., 2003). MNCs are a key
factor in the large improvement in welfare that has occurred in developing countries over the last
40 years. In those countries (the LDC) where the presence of MNCs is negligible, severe poverty
rates persist and show little sign of improvement (Lull, 1991).
Brooks (2005) argues that the main role of MNCs is underappreciated they have provided
developing countries with much needed capital, jobs, and environmentally friendly technologies.
Ake (2002) posits that through free market initiatives, MNCs create wealth, which provides the
income flow necessary for welfare improvements. If the desideratum of developing countries is
to escape severe conditions of poverty, they need to privatize, deregulate, protect private property
rights, and establish a rule of law the MNCs will then provide the capital. Never accept
statistics about global poverty at face value and always remember that each household behind the
figures has its own human story to tell. Whatever the difference of opinion on the extent of
global poverty, one thing is certain: a significant proportion of the worlds population is excluded
from our prevailing economic system of wealth creation. The symptoms of its inherent instability
recession, volatile food and fuel prices, and climate change - impact disproportionately on the
poor. (Weitzman, 1999)
Extreme poverty strikes when household resources prove insufficient to secure the essentials of
dignified living. The consequences of persistent poverty include insufficient food, children out
of school, diminution of household back-up resources and exclusion from valuable social
networks (Kaplinsky R, 2001). Expressing poverty as a percentage yields more favorable
results due to rising population. For example, extreme poverty in sub-Saharan Africa fell
slightly from 58% to 51% between 1990 and 2005. (Todaro, 2000)

METHODOLOGY
The researcher adopted both descriptive and analytical survey methods with an objective of
finding out the impact of MNCs on development of their host countries. This is because these
26

methods report the way things are in order to look closely to the statement of the problem and
thus in line with the research objectives. This study targeted the universal set up of managers
working with the General Motors Company with the procurement department, purchases and
sales department and the publicity department. The reason behind the target population of
managers was because managers are the ones the researcher opted could be having the
required information to fill the research questionnaires. The company has 50 managers
employed on both full time and part time basis but only a total of 30 successful respondents
were found upon which the results of this study is based as shown below;
Table 3.1 target population
Population
Procurement
Sales and purchases
Publicity
Total

Number of managers
15
10
5
30

Respondents per category

50%
33.33%
16.67%
100%

Some information was also obtained from the webpage of ministry of planning and vision
2030, Kenya on how GM has been contributing towards the development of Kenya as a
developing nation. A total of 11 managers from procurement, 5 from purchases and sales and 4
from publicity were picked at random. The researcher used the simple random sampling
method to group the sample population into a manageable sample of 20 respondents that
represented 66.67% of the population which is above the average as shown below;

Table3.2 sampling procedure

Population

Estimated

Units

per %

Category

number

of sample

category

Procuremen

mangers
15

11

36.67%
27

per

t
Purchases

10

16.67%

and sales
Publicity
Total

5
30

4
20

13.67%
66.67%

The research was conducted through administration of closed ended questionnaires to

respondents who shall fill and return them for analysis. Both primary and secondary data was
viable for this study. The primary data was collected through use of structured questionnaires
from the respondents which will form the main data instrument. The questionnaires were
administered through telephone and face to face interviews with the respondents. After data had
been assembled, descriptive statistics such as measures of central tendency and dispersion and
seasonal patterns (use of trends) were employed in the final analysis.

FINDINGS AND CONCLUSION

This chapter reviewed the general context of MNCs and their pros and cons in the developing
countries where many of them are hosted. It looked keenly unto the three objectives of the
researcher i.e. employment creation, transfer pricing and poverty and dependence reduction. The
researcher found that the MNCs do create rigorous employment opportunities in the country,
28

have fostered towards the reduction of poverty and dependency although much of the gains are
again lost through transfer pricing to the main branches of this MNCs in the developed countries.
The research also found out that many of these MNCs do have a multiplier effect towards
poverty reduction through their contribution to relevant schemes like the Red Cross scheme and
other social corporate responsibilities. Many managers in the General Motors Corporation are
satisfied with their employment benefits in the procurement, sales and publicity departments.
The employment criteria is based primarily on both academic qualification in which case many
managers are employed with the post university qualifications and also experience as a
benchmarking qualification to employment. The corporation has substantially reduced the
poverty levels mainly by the creation of employment opportunities to the locals and also
substantially by their schemes of contribution to the poor that they reveal is ideal and active.
On the basis of facts presented in this study, the MNC has outlived the usefulness as a
development agent. The role of MNCs should be redefined in the context of the LDCs in which
they operate finally; LDCs should ensure stable political systems to ensure sound economic
policies. The study also concludes that the government should take a prerogative role in
supporting the operations of the MNCs since they have boosted the economic development of the
developing countries with a drive towards full employment. However, the over-dependence on
these MNCs should be avoided at all costs.

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AUTHORS
First Author Econmic of Global Trade and Finance Johnson Mascarenhas
Second Author Ondabu Ibrahim Tirimba, PHD Finance Candidate, Jomo Kenyatta
30

University of Agriculture and technology

Third Author George Munene Macharia, PHD Finance Candidate, Jomo Kenyatta
University of Agriculture and technology

31