1

MULTINATIONAL CORPORATION
(MNC )
PROJECT WORK SUBMITTED TO THE
UNIVERSITY OF MUMBAI IN FULFILLMENT
FOR THE AWARD OF DEGREE OF

MASTER OF COMMERCE
IN
(MANAGEMENT)
BY
NIRMALA ALLWYN CRASTO

UNDER THE GUIDANCE OF
MR.GETTING KOLI



ST. JOSEPH COLLEGE OF ARTS & COMMERCE
SATPALA, VIRAR (WEST)








2
DECLARATION

I, NIRMALA ALLWYN CRASTO, hereby declare the Project
Work entitled MULTINATIONAL CORPORATION
submitted to Mumbai University in partial fulfillment of the
requirement for the award of the degree of MASTER OF
COMMERCE (MANAGEMENT) is original work done by me
under the supervision and guidance of MR. GATTIN KOLI it has
not formed the basis for the award of any Degree/ Diploma/
Association/ Fellowship or other similar title to any Candidate in
any University.




Signature

NIRMALA ALLWYN CROSTO

Place:
Date:










3
CERTIFICATE

I certify that the Project entitledMULTINATIONAL CORPORATION
submitted to Mumbai University in partial fulfillment for the award of
degree of MASTER OF COMMERCE (MANAGEMENT) is a record of
original research work done by NIRMALA ALLWYN CRASTO, during
the period of study 2013-14 in the Department of Commerce, Mumbai
University under my Guidance and Supervision and the dissertation has
not formed the basis for the award of any Degree/ Diploma/ Association/
Fellowship or other similar title to any other Candidate of any University.








SIGNATURE OF SIGNATURE OF
THE HEAD OF DEPARTMENT THE STUDENT



Place:
Date:




4
INDEX

SR.NO TOPIC
I INTRODUCTION
II FEATURE OF MNCS
III ADVANTAGES AND DISADVANTAGES
IV INDIAN MULTINATIONAL
V MNCS AND INDIAN INDUSTRIES
VI MNCS AND AGRICULTURE
VII MNCS FROM SOCIAL AND MORAL
VIII CHANGING LABOUR CONDITION
IX ARGUMENTS SUPPORT OF MNCS
X BENEFITS OF MNCS
XI MULTINATIONALISM BY INDIA
XII MORAL VIWEPOINT
XIII CONCLUSION.
XIV BIBILOGRAPHY.












5
INTRODUCTION

MEANING OF MULTINATIONAL CORPORATION (MNC):

Multinational corporation (or transnational corporation) (MNC/TNC) is a corporation or
enterprise that manages production establishments or delivers services in at least
two countries. Very large multinationals have budgets that exceed those of many countries.
Multinational corporations can have a powerful influence in international relations and local
economies. Multinational corporations play an important role in globalization; some argue
that a new form of MNC is evolving in response to globalization: the globally integrated
enterprise.'


xIndia Company and Dutch East India companies were there which came to India for trade
and by taking advantage of political conditions of India gained power. After adopting new
economic policy by government of India in July 1991 many MNCs came in the Indian
economic scene because the government of India gave many incentives to the foreign
investors. So it is clear that government opened the doors of Indian market to MNCs .Now
the question is how the MNCs are affecting Indian economy whether they are useful for our
economy or not? Let us analyze some brief impacts of MNCs on different sectors of the
economy.




An Indian MNC, a French MNC, a Dutch MNC, etc. what could these terms mean?How
can a company, which is said to be a multinational, belong to a specific country?
The answer lies in the origin of the company. An MNC may belong to a specificcountry if its
inception is in that particular country. By inception we could say the companys basic
ideology and concept originated in the country. E.g. Nestle is a Swiss MNC because its
concept of business and ideology originated in Switzerland.
A multinational corporation can be defined as one having a subsidiary or a branch or a place
of business in two or more countries or operating two or more countries or territories.
Therefore, a multinational can be called so by virtue of its physical presencein two or more
countries or by virtue of geographical scope of its operations in two or more countries.
Multinationals are sometimes also referred to as transnational corporations. The term
multinational is more of an American term whereas the term transnational is European.

6
Conservatively counted there are about 63,000 multinational corporations in the World.
Among the Fortune 500, all major multinational corporations are either American, Japanese
or European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW. On one
side, they create jobs and wealth and improve technology in countries that are in need of such
development and on the other hand, they may have undue political influence over
governments, exploit developing nations and create a loss of jobs in their own home
countries. Very large multinationals have budgets that exceed those of many countries. They
can be seen as a power in global politics. Wal-Mart is bigger than Norway, Royal
Dutch/Shell Group is bigger than South Africa and General Motors is over twice as big as
Nigeria. Of the largest 100 economic actors in the World today, 51 are corporations and 49
are countries. It has been estimated that the Worlds 500 largest companies controlled at least
70% of World trade, 80% of foreign investment, and 30% of global GDP. The 100 largest
had assets of $28,813 billion, of which 40% were located outside their home countries.
Multinationals World over are termed so due to there are ability to market their products and
services in various countries. However, they are binational or national
in terms of ownership and mangement personnel. To take an example, Royal Dutch/Shell
Group is binational in ownership and managerial personnel but multinational in
product/services. The Prolasca in Nicaragua is national in production but multinational in
ownership, marketing, finance and management. On the other hand, Unilever, which is now
been multinational in terms of ownership as well as product/services is a complete
multinational. Thus, multinational companies may have their management as binational and
their functions as multinational. We could also have multinational companies based on their
pattern adopted in each of the functions such as marketing, production, finance and
management. The first multinational appeared in 1602 and was the Dutch East India
Company. These corporations originated early in the 20th century and proliferated after
World War II. Typically, a multinational corporation develops new products in its native
country and manufactures them abroad, often in third World nations, thus gaining trade
advantages and economies of scale. India was an appendage of Great Britain and the imperial
preference policy of Great Britain converted India into an agricultural hinterland. The East
India Company used to import raw materials from India at throwaway prices and export the
finished goods at high price leaving their colony impoverishedas a debtor country. During the
last two decades of the 20th century many smaller corporations also became multinational,
some of them in developing


7
FEATURES OF MNCS :

The following are the main features of MNCs:

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

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

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

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

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

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

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

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
















8
MULTINATIONALS : ADVANTAGES AND DISADVANTAGES

ADVANTAGES :

The foray of multinationals into a country requires labour thereby ensuring new job
oppurtuities.

They will bring in advanced technology and management style.

The pressure of competition forces companies to undertake product innovation as a result of
which new and better products flock the
market.

Better logistics management and financial strength enjoyed by multinationals sets new
standards in the prevailing markets.

Expands and creates new markets.

Improves the income to the exchequer by way of direct and indirect taxes.

Provides economic support for developing nations





























9
DISADVANTAGES

Share of profit remitted to the parent company reduces the amount of money created.

A strict money-making oriented approach of multinationals may prove to be nonbeneficial.

High and regulated transfer prices may increase the costs of operations.

The enormous financial strength and influence enjoyed by multinationals may be selfishly
utilize

Multinationals may abuse resources suchas labour and natural resources to gain competitive
advantage in international markets.






































10

INDIAN MULTINATIONALS



When some major Indian business houses established Greenfield manufacturing joint
ventures abroad, but most of them, with the exception of the AV Birla group, did not do very
well. The Birla groups own ventures abroad were as much the result of business opportunity
there, as of the frustration with the denial of industrial licenses in India. The situation has, of
course, changed dramatically over the last decade. have slowlyWith each passing day Indian
businesses are acquiring companies abroad becoming World-popular suppliers and are
recruiting staff cutting across nationalities. While Asian Paints is painting the World red, Tata
is rolling out Indicas from Birmingham and Sundram Fasteners nails home the fact that the
Indian company is an entity to be reckoned with. The economic reforms that began in the
early 1990s brought many large multinational companies to India. A major challenge for
these corporations was to manage the interface of global corporate culture and Indias
powerful, traditional and widely varying cultural practices.


































11
MULTINATIONALISM BY INDIA AND IN INDIA

Organizations now wish to concentrate on their core activities in order to increase market
penetration and become more competitive. Therefore, it becomes essential for businesses to
concentrate on what they do best and where they can add value in their value chains. With
this, outsourcing has become a strategy for forward thinking by managers. It is not only
respected for reducing costs, but also as a tool for adding value to business. It enables
organizations to concentrate on their core business,
carry out business re-engineering and provide information that is valid, timely and adequate
to assist decision making at the top management level and quality and cost control at the
middle and lower levels.





MULTINATIONALISM BY INDIA

In the past few years, whenever organizations around the World have outsourced activities to
India, the Indian counterparts have helped to cut costs, while maintaining high quality.
Moreover, all these cost and quality advantages are coupled with the use of state-of-the-art
technologies.
Indian companies have created value and thereby helped organizations around the globe gain
competitive edge. Many Indian companies themselves are now becoming multinationals.
Indian direct investment abroad has now gone past the $10 billion mark. And the driving
forces are quite different from what they were during the Permit Raj.
The situation has, of course, changed dramatically over the last decade. One can broadly
classify Indian foreign direct investment under the following categories:

Backward integration: Many large Indian companies in basic industry, steel, viscose fiber,
copper and so on, have acquired upstream companies in resource-rich countries such as
Canada and Australia.

Marketing: Information technology and pharmaceutical sectors have also established a large
number of companies outside
India.While some of them are trying to develop stand-alone
local operations, most act as marketing and market
intelligence arms for the parent companies in India.

Energy security: Some of the largest foreign investments have been madeby ONGC. Its
subsidiary, ONGC Videsh, is now active in 15 countries in oil exploration. Other public
sector companies like Indian Oil and Bharat Petroleum Corporation Limited are looking at
retailing in Sri Lanka,Singapore and south-east Asia, while Hindustan Petroleum Corporation
Limited was looking at an investment in a refinery in Saudi Arabia. Barring a major domestic
oil find, Indian imports of oil will keep growing and, clearly, the ministry of petroleum is
encouraging investments abroad, including In gas pipelines, to improve Indias energy
security. In size, if not in number, the oil and gas sector will probably remain the largest
single foreign investor for the foreseeable future.



12


MULTINATIONALISM IN INDIA - OUTSOURCING


The economic reforms that began in the early 1990s brought many large multinational
companies to India. A major challenge for these corporations was to manage the interface of
global corporate culture and Indias powerful, traditional and widely varying cultural
practices.
The story of outsourcing is about extremely fast-paced change. It has been affecting the lives
of many. Interestingly, it had a quiet beginning in the early 1990s when pioneers such as GE,
Citibank, Amex and British Airways set up captive units in India. Now this trend has
burgeoned into a huge industry with third party Information Technology Enabled Services
(ITES)/Business Process Outsourcing (BPO) company bagging prestigious remote services
projects from leading global organizations.
In 2003-04 alone, outsourcing in India grew over 25 per cent, and India continued its
domination over other competing countries such as China, Ireland, Israel and the Philippines.




Based on these factors, projections are flying thick and fast

The McKinsey Global Institute (MGI) estimates that the volume of offshore outsourcing
will increase by 30 to 40 percent a year for the next five years.

Forrester Research estimates that 3.3 million white-collar jobs will move overseas by 2015.

In one May 2003 survey of chief information officers, 68 percent of IT executives said that
their offshore contracts would grow in the subsequent year.

The Gartner research firm has estimated that by the end of this year, one out of every ten IT
jobs will be offshored.

Deloitte Research predicts the outsourcing of two million financial-sector jobs

According to business intelligence major International Data Corporation (IDC),1.2 trillion
by 2006 end. With growth projected at 11 percent annually, the Information Technology
Enabled Services (ITES)/Business Process Outsourcing (BPO) segment will provide one of
the most significant business opportunities for the Indian software and services industry.
Fortunately, India appears to be in a position to cater to the demands of the market. Its
biggest strength is its vast supply of over 2 million graduates and 300,000 post graduates that
pass out of its colleges each year. Its vast resource of English-speaking college-educated
workforce and low-cost labour gives it an edge in the offshoring World.It isnt only the cost
factor that continues to make India an attractive outsourcing destination. The quality of
manpower combined with an extremely sophisticated vendor base and improvements in local
infrastructure have put it ahead of other offshore destinations. A review of Indians in one of
the news articles abroad speaks as follows New generation Indians employed in GE and
other MNCs that grew up in posteconomically liberalised India, are a new breed with a zip in
their step. Theyre interviewed so many of these call centre workers. You bring up Pakistan

13
to them say, Pakistan? Kashmir? Theyll say they got better things to do. Its about the global
supply chain. You see, when India is part of GEs global supply chain, when they are actually
involved in the day-to-day operation of GEs health care, call centers, payroll, they cant take
a day off for war.
Indian manpower has been reputed as brilliant and educated. They have now taken lead in
colonizing cyberspace. India and its millions of World-class engineering, business and
medical graduates are becoming enmeshed in the global new economy in ways most people
are only beginning to fathom.






























14
MNC AND INDIAN INDUSTRIES:


Some economists think that MNCs are helpful for Indian industrial sector they think that
Indian companies learn new technique of production and new management techniques with
the arrival of MNCs in the Indian economic scene. MNCs increase competition in the
industrial sector so when Indian companies compete with global giants they also improve in
their working. With the entrance of MNCs in India demand for skilled persons increased to a
great extent so more and more people are becoming skillful and the problem of skilled
persons is solved for Indian industries also. MNCs also bring foreign capital in the country,
which help to expand the market and Indian industries also take benefit of it.


There are some economists who have some different opinion according to them the
technology transferred by them is not useful for countries like India because MNCs use
capital intensive technique and developing countries have scarce capital and labour abundant
so the technology they transfer is of little use. The competition increased by MNCs is also
disastrous for domestic industries only few strong domestic industries have enough strength
to face the competition with global giants. As well as skilled persons are concerned MNCs
give higher salaries to the skilled persons and thus able to explore the services of the most
skilled persons and the Indian industries are still out of the services of these skilled people.
No doubt MNCs bring foreign capital in India but this capital later becomes the cause of
reimbursement of profit to the MNC's parent countries, which cause capital flight from the
country.









Indian economy is an agrarian economy; a major part of the population depends on
agriculture directly or indirectly. If we go back to past few decades Indian agriculture was
considered backward but now the time is changing and MNCs such as Mahyco-Monsanto
help in modernizing Indian agriculture. They provide modern agricultural inputs such as





15
MNCS AND AGRICULTURE:
HYV seeds, pesticides, fertilizers and modern agricultural equipments to the Indian farmers
and thus Indian agriculture has turned itself from subsistence level to making profits. MNCs
also encourage research activities in the field of agriculture in developing countries like
India.




If we see the other part of the picture India with billion plus population, has put agriculture at
the heart of its economy and food security at the center of its agriculture policy. In
developing countries, MNCs encourage commercial farming because they need cheap raw
material. Farmers also get good amount for their crop so the result is danger of food security,
which the world is facing these days. A big number of Indian farmers are small and medium
farmers who are not able to use expensive agricultural equipments so the gap is widening
among rich and poor farmers, which is disastrous for the agriculture. Moreover MNCs are
making Indian farmers dependent on HYV seeds provided by them and thus the biodiversity
of Indian varieties are in danger.






MNCs from social and moral viewpoint:



MNCs are not fair in their working in the developing countries. Many MNCs are not paying
their tax liability, they prefer to establish in that country where tax laws are not strict
similarly they prefer to establish in that country where environmental laws are also not much
strict and these are mainly developing countries. They even send their toxic waste in these
countries by taking advantage of loose environmental laws even the quality of their products
vary with country to country we can take the example of coca cola which is of superior
quality in USA and is of inferior in India. MNCs also responsible for misallocation of
resources in the developing countries. They provide mainly luxurious products because there
is more profit in it. Thus demand for these products increase due to demonstration effect and
this leads to misallocation of resources towards luxurious goods but the need of developing
countries is to produce more and more necessary goods because most of the people belong to
poor or middle class.

Another aspect, which judges MNCs morally, is political interference. Generally it is the
practice of MNCs to gain the economic power in developing countries and then get political
power by giving help to the politicians at the time of elections and then manipulate industrial
policies in their favor they also interfere in the important political matters of these countries
which can cause a big danger to the sovereignty of developing countries.

16
MNCS CHANGING LABOUR CONDITION


Positive

In the last 20 years MNCs are contributing strongly to economic growth in developing
countries through Foreign Direct Investment but also through knowledge transfer and raising
productivity in domestic competitors and suppliers. Foreign Direct Investment which is
normally used as an indicator for internationalisation of economies has grown from 10
percent of world GDP in 1990 to 25 percent in 2006 (Hijzen, Alexander, 2008).
FDI is not the only way MNCs influence economic growth and therefore labour conditions in
developing countries, due to the introduction of modern management and production
methods MNCs raise their productivity level compared to domestic competitors. Therefore
higher wages and better working conditions can be promoted by MNCs, because overall costs
go down due to higher productivity. Furthermore wages of skilled workers are more likely to
increase in an industry with an MNC in it because of the competition for skilled labour
between the MNC and domestic competitors. As a result productivity increases in those
industries and especially wages of high skilled labour. A general figure about wages, which is
given by the OECD report Do Multinationals Promote Better Pay and Working Conditions
is, that MNCs pay 40 percent more than domestic competitors in developing countries. A
reliable comparison is quite difficult because single wages such as for low skilled workers
might not be higher in MNCs than in local firms. High skilled jobs are better paid by MNCs
than domestic firms and therefore the comparison of general wages is not suitable in many
aspects (Hijzen, Swaim, 2008).
Besides the direct improvement of wages and working conditions MNCs could improve them
by stimulating local competitors, there are several ways MNCs can stimulate local
competitors. Due to higher productivity and lower costs MNCs have a competitive advantage
over their local competitors. As a result local competitors must improve their productivity
and also working conditions, otherwise they will loose market share to the MNC.
Another aspect is a knowledge transfer between MNCs and local suppliers which are
incorporated in their value chain. Sometimes MNCs provide technical and training support
to local firms incorporated into their supply chains (Hijzen, Alexander, 2008). This aspect is
also corresponding with Porters Theory of competitive advantage through clustering and is
featured in Porters Diamond. By building clusters in developing countries suppliers are likely
to get a knowledge transfer from MNCs to raise productivity and labour conditions by new
management and production methods. MNCs demand from their suppliers higher standards
for products, raising quality and productivity but also raising labour conditions. Especially
labour conditions demanded by MNCs from their suppliers got more important over the
recent years due to increased public awareness, which the Nike case of sweatshops is a good
example for. Corporate Social Responsibility campaigns and public pressure increased the
demand of MNCs for good working conditions not only at their own factories but also at their
suppliers (Hijzen, Alexander, 2008).
Going back to Porters Diamond we can definitely say MNCs put pressure on suppliers to lift
productivity and quality but also labour conditions, otherwise they will not be incorporated in
the supply chain of the MNC.
Another point raised by the OECD report is a knowledge transfer between MNCs and
domestic competitors in developing countries due to the fact that managers which worked for
and were trained by the MNC start to work for domestic competitors. They bring of course

17
modern management and production methods to the domestic competitor, raising
productivity and therefore also labour conditions (Hijzen, Swaim, 2008).
Furthermore other benefits apart from wages can be increased by MNCs in developing
countries, such as insurance, holidays and training. As a result domestic competitors are
forced to improve their working conditions in this case their benefits, otherwise they will
loose skilled labour to the competition. This scenario is very likely especially for skilled
workers, because they can demand better working conditions and benefits due to the fact that
they are needed by local competitors. Low skilled workers do not have so much bargaining
power over their employer even though MNCs raise benefits and working conditions also for
them due to the fact that supply of low skilled workers is higher in developing countries than
of high skilled workers (Robertson, Raymond, 2008).

Negative

On the other side the appearance of MNCs in developing countries rise much controversy and
many social concerns. MNCs have a substantial amount of power that allows them to easily
find large quantities of relatively cheap labor as well as influence governments (Close,
Romero, 2004). Due to the great mobility of MNCs, they have quick access to cheap labor
and are relatively free to leave a country at any time they want. Many times, the countrys
economy depends on the jobs given to its laborer by the MNC. If the MNC leaves, that
country now has a great unemployment problem where many are suddenly left stranded
(Hijzen, Alexander, 2008). Because of this fear governments of developing countries fail to
enforce human and labor rights effectively, however MNCs have been accused of infringe
workers either human or labor rights. To stop this helplessness of the host countries many
OECD countries appealed to MNCs to respect international labor standards anywhere in the
world, even if a country has no such norm.
The OECD report shows, that MNCs often adopt management style and labor conditions of
their host countries, therefore exploiting developing countries, which have not high labor
standards, due to the bargaining power of the MNC (Hijzen, Swaim, 2008). MNCs tend not
to have a certain loyalty and social responsibility towards the developing country in which
they are operating in. Therefore plants will be shut down rather in developing countries than
in their home country, because of bad publicity and pressure from the home government.
Additionally there is a trend in the recent years that MNCs move from one developing
country to another in search for cheap labor. If the labor conditions are getting too expensive
to manufacture certain products, MNCs could move on to another developing country, where
unskilled labor is cheaper(UN Committee on Trade and Development, 2002)















18
AN ANALYSIS OF THE EFFECTS OF MNCS ON INDIA SINCE
LIBERALIZATION

Since 1991, India has experienced a dramatic increase in the presence of multinational
corporations (MNCS), and with it, a tremendous expansion in the amount of foreign direct
investment (FDI) inflows to the Indian economy. This paper will analyze the effects which
this change has had on Indian society. In particular, three questions will be addressed: How
and why did this dramatic change occur? What are the costs and benefits to India associated
with this change? and What must India do to continue its development? The overall
conclusion reached is that the increased presence of MNCS has had a positive impact on
India. However, India has not even come close to reaching its potential, and thus, much more
change needs to occur.





FACTORS LEADING T0 THE LIBERALIZATION OF lNDIAS
ECONOMY

While it can be argued that Indian liberalization began before the 1990s, most will agree that
it was in 1991 that the Indian government first began in earnest to adopt policies of
liberalization. However, the reason for which these policies of liberalization were embraced
is not always clear. There were, in fact, three distinct forces which guided India to this
watershed moment in its history, two of which were external forces,
and one which was an internal force.
The internal factor which directed India toward liberalization was the severe economic
situation it was faced with at the time. The central problems were soaring inflation, a rising
fiscal deficit, a trade deficit, and an enormous foreign debt (India and Pakistan, 16) In fact,
India was on the verge of default on its foreign loan, but was saved that humiliation by the
IMF . Now, these economic problems were all rooted in one fundamental problem, namely,
inefficiency. India was inefficient because of such things as inadequate infrastructure,
various bottle necks, allocation of resources, imbalanced regional development, the presence
of parallel economy, the urban-rural development gap, and the demand-supply gap Indias
dire economic situation forced its government to accept the fact that major structural changes
were needed in India.
One of the external factors was the success of export-promotion (EP)
Industrialization along with the failure of import-substitution (IS)
industrialization . industrialization is an economic path to development which came to
prominence in the 70s and 80s, largely through the stunning performance of those countries
which embraced such a policy. The greatest success stories were Southeast Asias newly
industrialized countries (NCS), many of which have averaged growth rates of more than 8%
a year for the past thirty years Asian Miracle, 1997, p.23).. This began with the fall of the
Soviet Union in 1991, which signal the end of the Soviet Union as a beacon for
centralization and quickly resulted in the global retreat of socia1ism( The impact this had
on India was huge. Since 1947, when India gained its independence, Indian government
policy had been one of strong socialism (olen modelled, in fact, after the USSR), and central
to this policy was IS industiialization. Thus, the collapse of the USSR caused India to rethink
its well-

19
entrenched socialist policies. The combined evidence often success of the Asian NICs and
the failure of Soviet socialism forced India to reluctantly conclude that EP was better than IS
industrialization.
Another external force which was challenging Indias tradition of centralized and
inwarddirected business policy(Howe11, p.37) is what is termed globalization, that is, the
internationalization of the world economy(Foreign, 34). It became clear to developing
countries (LDCs), such as India that, with the worldeconomy becoming increasingly
interdependent, it was vital that they devote greater efforts to linking economy(Foreign,
34). Now, at the heart of globalization are the MNCS, which have brought about global
diffusion of production technology and worldwide of markets. In fact, it can be argued that,
the worldwide resources at their command, it is the MNCs which have spawned an
integrated international economic system.
Consequently, India realized that, in order to link itself with the world economy, it was
essential that it first link itself to the driving force behind globalization, namely, the
multinationals. So, it was through its economic problems that India became open to the need
for change, and it was through the changing patterns of the global economy that India came
to realize what changes needed to be made, Thus, India concluded that liberalization was the
solution. As Indias finance minister put it, the time had come to convert India fiom a
regulated and contro1-bou.nd, inward-1ooking economy into market-friendly, outward-
looking one). As well as changing its attitude toward EP industrialization, India also changed
its attitude toward FDI, as MNCS were now seen as legitimate and effective agents of
change for Indias economy .





























20
ARGUMENTS IN SUPPORT OF MNCs IN INDIA

One cause of Indias changed attitude toward MNCS was that there had been a positive
change in the perception of the MNCS across the MNCS which did not bring with them the
historical baggage of neocolonialism, as well as the United Nations involvement in the
development of the Code of Conduct for MNCs .
More important, however, are the sound economic arguments in support of MNCS, many of
which can be applied to Indias situation. The most basic argument in favour of MNCs is the
need for investment. Domestic savings are often inadequate to support the amount of
investment that is required for development, and this is true for India . When the economic
crisis came to a head in 1991, the central and State governments of India were forced to cut
back on their torrid spending, which meant that they had to choose between public
investment which is useful for patronage purposes and subsidies which are useful for
reelection .Thus, there
occurred a shortage of investment, and this necessarily meant turning to the private sector
and foreign investors to take care of investment.In
this way, MNCS are seen as a way of filling the gap in savings, by bringing saving from
abroad so that domestic investment can be larger than domestic saving.

Now, the foreign investors supply of capital to the LDC, which the domestic investors were
unable to supply before. This extra investment in the economy leads to an increased need for
labour, which results in a rise in wages paid to labour, equal to ECG. Notice also that GCDH
of income is transferred from the domestic capitalists to the labours , implying a move
toward income equality. Thus, there are two principal benefits of FDI for an LDC such as
India: increased aggregate income, and income equality.
The second major argument for FDI is concerned with technology transfer. Economic
growth in DCs is increasingly dependent on new technologies, and most LDCs are in
danger of falling even further behind unless they can gain access to this new technology
and learn how to apply it But where all LDCs get the new technology from? Again the
answer lies in FDI. In fact, MNCS have been prominent in the development and
dissemination of new technologies in both the nature of products and methods of
production Along with new technology, MNCS bring the skills which LDCs learn to
duplicate, such as managerial ability, organizational competence, and the capacity to avoid
inefficiencies .

However, the ability of an LDC to absorb new technology depends considerably on the level
of education and skills of their labour force, and the existence of institutions . capable of
providing the training needed Indias labour force is one of the most highly trained and
skilled of all LDCs, and therefore, India is able to effectively absorb new technologies and
benefit from FDI in this way. next major argument in favour of MNCS is the close
connection between FDI and exports. First, the benefits of exporting, with reference to India,
will be considered, and then the connection between MNCS and exports will be explained.

There are many economic theories which support the growth of exports, and one of the
oldest and most renowned theories is Adam Smiths theory of gains from trade . argues that
the narrowness of domestic markets does not permit a high degree of specialization, which
serves to limit production possibilities. However, trade opens a countrys economy to a more
extensive market, which leads to a greater division of labour, increased efficiency, and
therefore a rise in production. Now, Indias

21
domestic market is anything but narrow, so it can be argued that Indiaslabour is sufficiently
specialized. However, relative to the world market, Indias market is small, and thus, greater
specialization is possible. The evidence of this is the chronic inefficiency of Indias
economy, which has been discussed. Thus, it can be argued that, in Indias case an increasing
focus on export production would lead to greater efficiency and increased GNP as a result
Now, as LDCs, such as India, have come to see the advantages of placing a greater
emphasis on exports as part of their development strategies, they have looked to
transnational corporations to aid them in doing so. But why is this so? The reason lies in the
unique advantages which MNCS have to offer, such as management skills, technology and
linkages with world markets). In fact, MNCS can often export more easily from the LDCs
because of their distribution and marketing networks. Thus, through MNCS, LDCs gain
better access to external markets, which increases their efficiency and therefore makes them
more competitive internationally. Now, in 1991, India was aware that it had the potential to
become an important centre of international economic activity, as it is located at the
crossroads between Asia, the Middle East and Europe.
Thus, it was clear for India that a policy of EP was needed, and IS was to be discarded.
The effects of the last two arguments, technology transfer and EP industrialization, can be
illustrated by a production possibility curve (PPC) in Figure 3. Thus, through the increased
efficiency technology brings, as well as the increased efficiency exporting brings through
greater specialization, the productivity of Indias existing resources increases, and therefore,
its production possibilities expand.

The final argument in support of MNCS compares foreign investment to borrowing. The
simple fact is it is cheaper to service FDI than borrowing. Even when profit is repayment .
no outflow will occur unless a profit is actually earned by the MNCS, whereas with debt
servicing, the outflow of interest and repayment of principal will occur in good times or
bad As well, even if profits are made by MNCS, they may not all be repatriated, as some of
the profits may be reinvested, and some may be used in buying local inputs, . Another
advantage of FDI over borrowing is that, with FDI, the host counties are less vulnerable to
economic shocks, and the debt crisis of the 1980s
attests to this fact.

some of the profits may be reinvested, and some may be used in buying local inputs, .
Another advantage of FDI over borrowing is that, with FDI, the host counties are less
vulnerable to economic shocks, and the debt crisis of the 1980s
attests to this fact.






22
THE ECONOMIC BENEFITS OF LIBERALIZATION TO INDIA

The effects of liberalization on Indias economy have been overwhelmingly positive,
and the statistics confirm this. Due to the crisis of 1991, the growth rate that year was
only 1,2% (Shanna, 108). Three years later, a growth rate of 5.5% was reached, and
then the economy took off in 1995 and 1996, achieving growth of 7. 1% and 7.5%
respectively). In fact, since 1994, the Indian economy has grown at an average of 7%
per year, placing India among the worlds leaders in economic growth.
However, because of Indias high population growth rate it is necessary to consider
the GNP per capita flgures.

In 1991, real GNP per capita, adjusted for purchasing power,
was $1,150). In 1997, it had grown to $1,385, (India and
Pakistan, 18) and by the end of 1998 it is projected to be $1,500 (Sidhva, 59). Thus,
Indias high growth has been large enough not only to balance the population growth
(http://w\x'w.indiawor1d.coin) are the decline of Indias death rate, from 10.1 per
1000in 1991, to 9.0 per 1000 in 1994, and the increase in life expectancy, from 55.9
in 1990, to 63.5 in 1995.

The question which remains, is to what degree can the improvements in
Indias economic situation can be attributed to the MNCS? The benefits and
advantages which MNCS bring to host countries have already been discussed, and it
was argued that MN Cs could have a significant impact on Indias economy. Thus, it
can be presumed that MNCS played a vital role in the economic development India
has experienced over the past several years. However, rather than speculating on how
much
of Indias progress can be credited to the multinationals, the essay will turn instead to
the tangible and direct benefits which India has gained through MNCs.






















23
DIRECT BENEFITS T0 INDIA OF THE INCREASING
PRESENCE OF MNCS


An emerging trend of increased multinational presence in India is that about 2,000
Indians leave India annually to take up middle and senior management jobs
elsewhere in Asia). As MNCS expand operations all over Asia, they eventually
experience shortages of qualified people to fill managerial positions, and Indias
business schools have come to be seen as a good source of managerial skill .The
reason for this is Indias good education system, its above average English-language
skills, and its business students, who are quite enterpreneurial in their outlook).
The positive this has on India include increased incomes for those Indians which
Itake these managerial positions, and increased incomes for Indians in general, as
much of the income would be brought back into India as repatated eamings and
would trickle down through the economy.

Another emerging trend resulting from rising FDI is that instead of Indias federal
government inviting foreign investment and then allocating inflows to the states, the
initiative now lies with the states themselves, and as a result, attracting foreign
capital has become top priority on every state govemments agenda .
The result is that Indias states are now competing with each other for FDL and
among the few progressive states, this has led to a battle of incentives and the
abolishment of many bureaucratic delays .Now, the benefits of this are not just the
increased level of FDI which can be expected to result from these changes in state
policies toward MNCS. As well, state govanments are free to identify the industries
in which they want private investment, although they must stay within the national
objectives (Thus, FDI is more eifectively allocated, as state governments understand
better than the federal government where the FDI should be directed so that the
benets to the people of that state . Another benefit concerns Indias growing middle
class. Estimates ofthe size of the middle class are wide ranging, but evm modest
estimates such as 200,000,000 still indicate that over 20% of Indias population can
afford durable and semi-durable goods, such as household appliances and cars.
The role here for MNCS is obvious: to supply India with the international brand name
consumer goods it wants. The central economic benefit of this is that Indian
consumption is now able to expand, rather than being limited as it was when only
domestic producers were supplying consumer goods, and this implies that Indian
consumers gain utility, or satisfaction.

Connected to this is the fact that many MNCS rely on India as a source of
inputs). India has a huge reservoir of trained,skilled and
relatively inexpensive labour, such as engineering talent,
(Indian is not Mexico, 160) as well as an even larger supply of unskilled workers.
In addition to supplying labour, India also provides MNCS with other inputs to
production such as intermediate manufactures. In fact, Japanese MNCS in India rely
on local
sourcing for 77% of their inputs, as compared to 50% in China .
Thus, MNCs are effective in stimulating Indias domestic production, which oen
leads to greater competition, increased efficiency, and hence, a rise in production. An
example of an MNC which benefits India in this way is MacDonalds .
Since entering the Indian market in 1996, this franchise has made a

24
point of projecting itself as a local enterprise, in that it relies entirely on local
sours for its ingredients, and control of management is equally split between
foreigners and Indians.





MNCs have also played a crucial role in helping to supply Indias ever increasing
demand for infrastructure. Electricity is one of these critical sectors, as Indias
demand for power is simply massive. Since Indias government opened this sector to
private investment, 41 contracts have been awarded, the most notable of which is the
enormous $2.8 billion, 2,015-megawatt plant by Enron which began construction in
1997. Despite these advances, the Indian government estimates that it will require
$170 billion in investment over the next 15 years, in order to meet its demand for
power, most of which is expected to be FDI. Another sector in which FDI has helped
to fill the investment gap is telecommunications. In the next decade, India expects
foreign investor to provide it with $50 billion, and approvals for FDIin cellular
phones alone total $5 billion). Thus, MNCS have played, and will continue to play a
pivotal role in India in terms of infrastructure development.

CRITICISMS OF MNCS IN INDIA, AND ECONOMIC
COUNTER-
ARGUMENTS

There are those who argue, however, that MNCS have brought significant
disadvantages to India. While such views may not be based on reality,they are
nonetheless a strong fonce opposing the expansion of FDI in India. The first criticism
which is usually made is that MNCS bring inappropriate products to India. Here,
theargument is usually made that non-durable products, such as foodstuffs, are better
left to
the domestic market, which is more in touch with Indian tastes and needs. As a result,
some MNCs, such as Pepsico, Kentucky Fried Chicken, Pizza Hut and MacDonalds,
have experienced opposition over the years). As well, the argument is made that
Western brand names frequently mask products which are inferior imitations, and
unknowing Indian consumers waste their money, sincerely believing that these goods
can make them happy or beautiful). Now, the common economic argument which
counters these two views is that consumers are free
to make choices; consumers are, in fact, all-powerful, and what they do not want to
buy will not be produced. Thus, the MNCS argue, they are meeting a demand which
the Indian domestic market cannot provide, and are therefore helping to raise the
utility of Indian consumers.

Connected to the power of brand names in India is the criticism that MNCS often
crowd out Indias domestic industries. It is true that brand name goods are more
popular in India, and in fact, the top three brands in 17 categories of consumer
products hold a market share of more than 50% .The general tendency for MNCS to
adopt non-price methods of competition, which domestic are unable to afford, raises
baniers to entry for new firms, and the result is that monopolistic or oligopolistic

25
market structures oen exist. The negative effect which this has on consumers is that
prices will tend to be higher than nonnal, and the MNCS reap the benefits in terms of
greater profits repatated To counter this, some argue that it is good for the Indian
economy to weed out those inefficient producers which have been protected from
competition for too long, as this will lead, in the to increased productivity and lower
prices for consumers.
Another criticism of MNCS in India concerns child labour, According to the
International Labor Organization, at least 100 million children are at work in
factories and fields around the world, and India alone has about 55 million of these
.
This criticism, however, does not take into account the fact that, in most of Indias
cases, the children are only working because their families depend on them for
survival. Also, schooling is not an option for many Indian children, as education in
many Indian states remains limited. Another criticism is that Indian workers are
often exploited and paid low wages by MNCS. This argument, however, is not
backed up by evidence. In fact, the statistics show that workers in MNCS facilities
earn around four times Indias minimum wage .


































26


CONCLUSION

Although MNCs help distribute Foreign Direct Investment and therefore catalyse
economic growth in developing countries, they are particularly notorious for
exploiting countries causing problems regarding aspects of human rights environment
and working conditions (UN Committee on Trade and Development, 2002, p. 6). As a
result, workers are exposed to risky conditions, exhaustion and overall exploitation by
MNCs. To oppose this issue the United Nations Conference on Trade and
Development should create a council which regulates working conditions especially
in developing countries.
Local governments in developing countries must be encouraged by the United
Nations to apply international labour standards to MNCs and domestic competitors to
raise working conditions and overall wages (Hijzen, Swaim, 2008). In addition
international non-governmental organizations must monitor and create public
awareness for the exploitation of human labour, to create an environment for MNCs
and governments to act upon international labour standards. As a result real
improvement on labour conditions and wages can only happen, if MNCs are closely
monitored and the bargaining power towards local governments in developing
countries is reduced to enforce higher labour standards (Hijzen, Swaim, 2008). The
OECD created codes of conducts for various industries and also NGOs were created
to monitor MNCs, a problem is of course that certain business data is confidential.
For example the locations of plants or pay grades are normally not offered to the
general public.
Another problem is the monitoring and auditing of MNCs taken out by business and
auditing firms, which could find a conflict of interest towards their customers,
because they profist from future company growth of their customers (Brown,
Deardorff, Stern 2002). On the one hand there has been movement towards a
voluntary monitoring and certifying system by many MNCs, because they see the
impacts of bad publicity directly on their sales and profits. A good example is Nike
which was accused of using sweatshops in Asia by the general public and as a
reaction enforced a monitoring system through a Corporate Social Responsibility
campaign (Hijzen, Swaim, 2008). On the other hand the monitoring system is far
from perfect and it is not binding for the MNCs. Furthermore many suppliers of
MNCs in developing countries are not monitored at all (Brown, Deardorff, Stern
2002). With the Nike incident there was a big discussion in the public if Nike is also
responsible for working conditions at their suppliers in developing countries.
So far the international community has failed to take up the challenge to monitor and
control the impact of MNCs activities efficiently. In addition many governments
especially in developing countries claim that human rights law does not apply to
non-state actors like MNCs (Close, Romero, 2004).
Only with the assistance of economic growth from globalisation true improvements in
labour conditions are possible. Some opponents of core labour standards, mostly the
developing countries, object that such standards are merely another form of
protectionism on the part of the developed world (Global Trade Negotiation
Summary, 2004). As exports of developing countries are almost always labour-
intensive, due to the fact that labour costs are low, they think that the developed
countries try to keep them away from the worlds markets by restricting their trades
due to high labour standards (Global Trade Negotiation Summary, 2004). This

27
argument is even more controversial in the light of the ongoing economic crisis,
where governments resolve in protectionist measures to keep jobs in their home
country. These protectionist measures include raising tariffs in the WTO barriers and
engaging in anti dumping-cases. Therefore governments see cheaper labor costs in
developing countries as a thread for local jobs and there could be an enhancement of
affords for better labor conditions in developing countries by governments of
developed countries.
To sum it up MNCs are very important for the economic growth and prosperity in
developing countries, because of FDI, knowledge-transfer and modern management
methods to enhance the productivity of suppliers, but also local competitors. Wages
and overall labour conditions have improved in developing countries due to MNCs,
however an international monitoring system run by NGOs is very important to impose
international labour standards to MNCs operating in developing countries.
Furthermore local governments in developing countries must engage in monitoring
and imposing international labor standards to make sure that the workforce is not
exploited by MNCs, but also by domestic competitors.



































28


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