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DRIVE- FALL 2013

PROGRAM/SEMESTER- MBADS (SEM 3/SEM 5) / MBAN2 / MBAFLEX (SEM 3) / PGDIB (SEM 1)


SUBJECT CODE & NAME
IB0012 Management of Multinational Corporations

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Q1. Discuss the meaning, objectives and difficulties of international business.


(Meaning-3 marks, Objectives-3 marks, difficulties-4 marks) 10 marks
Answer.
International Business
International business is any type of business activity that takes place between two or more countries. A company which
engages in international business is known by different names such as International Company, Global Company,
Multinational Company, Multinational Corporation, Transnational Company, etc. In the simplest form, international
business is defined as a business which sells its products or services to a buyer who lives in another country. At the other
end of the definitional spectrum, international business is equated with multinational companies, which have their
operating units outside their home country such as General Motors, Ford, Samsung, and Toyota. In-between these two,
international business may take the form of joint ventures with foreign firms or governments.
Objectives of International Business
Companies across the world engage in international business keeping in view the following objectives:
i) To expand sales When a company enters into international business it increases its customers and ultimately the sales
expand. Increased sales are a major objective of any business intending to become global. Many multinational companies
derive major sales from international sales.

ii) To acquire resources Some companies enter international business to acquire resources which are readily not
available in their home country. Acquiring resources from abroad may enable a company to improve its product quality
and gain an edge over their competitors.
iii) To minimize risk Companies enter foreign markets to minimize risk and take advantage of business cycles-recession
and expansion. All the countries of the world may not face recession at the same time. Seasons also vary in different
countries at different times.
Difficulties in International Business
International business and domestic business have some similarities as well as some differences. It is because of
differences that international business faces difficulties which are not there in case of domestic business. The special
problems faced in international business are discussed below:
i) Differences in currency Every country has its own currency and currency of one country may not be acceptable in
another country. Exchange rate fluctuations also enhance the risk. These may sometime become a serious problem.
ii) Differences in the language Every country has its own language and different dialects. Even same words in a
language may have different meanings in different countries. In anyway, language hardly creates a serious problem in
international trade as English language has virtually become business language across the world.
iii) Cultural differences Differences in culture become a serious difficulty in marketing. Cultural differences sometimes
become hindrances even in domestic business. International managers need to be aware of these differences.
iv) Political and legal differences The political and legal environment in foreign markets may be different from the home
market. All these differences can and do have major implications on international business. In international business a
firm has to change its strategies depending upon political and legal set up of the country of its operations.
v) Trade Restrictions International business may face the problem of import control and licensing in certain countries.

Q2. What is the impact of Globalization on world economy? What are the devices of globalization?
(Impact-5 marks, devices-5 marks)10 marks
Answer.
Impact of Globalization on The World Economy
There has been an explosive growth of global firms all over the world. The globalization has led to fast economic growth
of the economy of nations across the world. The impact can be seen in following:
i) The volume of world trade has increased massively.
ii) Global economy has become more integrated.
iii) The barriers to trade in goods and service have disappeared. Many countries are following the policies of liberalization
in their foreign trade policies.
iv) The mobility of labor and capital has been facilitated.
v) Multinational corporations have appeared on the horizons of international trade.
vi) Innovations are taking place in goods, services and technology.

Devices of Globalization
A number of devices may be used by firm for globalizing their operations. Some of which are discussed below:
1. Export-Import Trade
The most common form of internationalization of business of a firm is to enter into export-import trade. This method
involves the firms to source the requirements of their inputs and capital goods across the world and find buyers for their
goods globally.
Under this method, one person is made responsible for handling the export-import business of the firm. Separate exportimport department may be set up.
2. Subsidiaries
After having achieved some experience in international trade, a firm may decide to set up its own subsidiaries in foreign
countries. Many multinational companies follow this method to go global.
3. Joint Ventures
A firm may have joint ventures with other firms to get entry in the global market. Joint Ventures may take the form of:
i) Joint venture with the local firms in a foreign country
ii) Joint venture between two multinational companies to do business in a third market
iii) Joint venture between a firm with the government in another country
4. Franchises
Internationalization of a firm is possible by giving right to a firm in foreign countries to produce or sell goods. Franchising
permits the franchisee to sell products or services under a highly publicized brand name, eg., Nokia, Coca-Cola etc. This
type of globalization device is very popular in hotel industry Hilton Group, soft drinks Coca-Cola, automotive
products Midas.

Q3. What do you understand by multinational corporations? Analyze the types of MNCs.
(Meaning-4 marks, types-6 marks) 10 marks
Answer.
Multinational corporations
There is no single definition of the term Multinational Company or Corporation. The concept of multi-nationality has a
number of dimensions. For some the criterion may be ownership of the organization whereas for others it may be
nationalities of the senior management. Some may decide on the basis of multi-country organization structure and
operations. Some of the criteria which are used to define multinational corporation are:i) Have a worldwide presence in certain minimum number of countries
ii) Produce abroad as well as in headquarters country
iii) Drive income from foreign operations
iv) Possess management team of different nationalities
v) Standardize operations worldwide

Considering the above criteria one can say that Multinational Corporation isone that owns production, distribution, service
and other units in many nations and utilizes its resources on the global scale. An MNC aims to maximize its revenues at
the global rather than national level. An MNC is also called by different names such as a Multinational Enterprise,
Transnational Corporation or Multinational Organization.

Types of MNCS
i) Equity based MNCs when a firm takes equity stake in some foreign based business entity, it acquires managerial
control. Such MNCs may fall into following types:
a) Public Utility MNCs
b) Resource based MNCs
c) Manufacturing MNCs
d) Service Industry MNCs
ii) Technology based MNCs In such MNCs the source of multinational managerial control is technology including
management expertise. These types of MNCs are found in hotel, mining and construction industries. They are also called
no-equity MNCs. Technology based MNCs may be formed through:
a) Management Contracts: When the owners of certain entities lets the MNC take over possession and management of
its business and profits are shared on agreed basis, e.g., in case of hotel industry.
b) Production Sharing Arrangements: When the outputs are shared instead of profit in case of resource based industries.
This type of arrangement may have additional obligations like training the local nationals and technology transfer.
c) Industrial Lease Agreements: When the owner leases a complete industry facility to an MNC for a fixed period. The
rent may be a fixed amount or fixed amount plus amount depending on output.
d) Technology Transfer Agreements: In high technology industries, the host countries may enter into a joint venture with
the MNC who is responsible for providing technology and other facilities are provided by host country companies. These
types of agreement are quite common in case of aircrafts, computers, bio-chemicals and electronics industries.

Q4. Enumerate the factors which affect the organizational structure of an international firm. Explain the merits
and drawbacks of matrix structure.
(Factors-4 marks, Merits and drawbacks-6 marks) 10 marks
Answer.
Factors affecting Organizational Structure of an International Firm
The managements decision, to select a structure, is influenced by a
number of factors such as:i) Managerial preference
ii) Size of the business
iii) Extent of companys foreign operations

iv) Experience of international markets


v) The type of products and technology used
vi) Firms economic situation
vii) The foreign countrys environment cultural, economic, technological and political conditions
viii) Nature of competition
Considering the influence of above factors, one can say that organization structure which is suitable for domestic
operations may not be suitable for global operations. Initially when a firm ventures into foreign markets and its operations
are limited, multinational companies generally set up an international business division. Subsequently when the sales in
foreign markets increase, they may adopt regional structure. Similarly, when the number of products for foreign markets
increase, the product division structure may be found more suitable. Furthermore, a firm with increased foreign sales as
well as foreign product diversity tends to adopt the matrix structure.
Matrix organization structure has a number of advantages, such as:
i) It offers a practical and coherent device for analyzing the make-up of a firm.
ii) It facilitates face to face competition between managers with interests
in the same projects.
iii) The structure is flexible and can be dismantled on completion of a project.
iv) There is no departmental interference.
v) It provides specialized professional skills required for a project.
vi) Inter-disciplinary co-operation is facilitated.
vii) Increases job satisfaction.
viii) Improves individual motivation
ix) Overall Corporate global performance is highlighted.
Problems with Matrix Organization structure are:
i) There is duplication of facilities
ii) It creates lot of paperwork.
iii) Matrix structure is more complicated and costly to administer.
iv) As teams are appraised rather than individuals; it becomes difficult to identify the unsatisfactory employees.
v) Decisions become slow as decisions are made by a team which may be time consuming process.
vi) There may be too many bosses which may result in conflicting instructions.
vii) Team members may not be clear about the precise nature of their roles in the team and in the organization.

Q5. Discuss the various money management decisions in MNC.


(Explain the 3 major decisions) 10 marks
Answer.

Money Management Decisions


Money management decisions involve minimizing cash balances and reducing transaction costs. The issues relating to
money management are as under:i) Minimizing cash balances:
A firm needs certain amount of cash for day to day operations. There should not be idle cash; the excess cash may be
invested in money market to earn some return.
An MNC may normally have a centralized treasury to manage its working capital. The benefits of centralized approach
are:a) Ability to transfer financial resources to most profitable locations at short notice.
b) Capacity to convert idle cash into earning assets more quickly.
c) Improved management of currency exchange rate risk
d) Control and easy co-ordination of subordinates activities.
However, centralized treasury has certain problems; some of which
are:
a) Head office staff may be overburdened as they have to manage the cash of all their subsidiaries.
b) H.O may overlook the requirements of subsidiaries as they are more concerned with the global strategy.
c) H.O financial policies may result in confrontation with the host country governments.
d) The morale of the subsidiary managers might diminish as they lose control over their finance.
In real life situations, MNCs may adopt centralized policy in case of certain countries and decentralized policy in others.
ii) Reducing Transaction costs
Transaction costs are the commission, conversion cost and transfer fee which are incurred while transferring funds from
one country to another. Reducing transaction costs is a challenging task for international financial manager. Most of the
MNCs use netting operations to minimize the conversion requirements to settle transactions between subsidiaries.
iii) Managing Foreign Exchange Risks
A firm which has foreign currency receivables and payables is exposed to foreign exchange risks. In the case of MNCs
these risks become far more complex. One of the most important objectives of an MNCs financial strategy is to protect
against the foreign exchange risks of investing abroad.
The exchange rates are not fixed; they fluctuate both up and down. A change in the exchange rate can result in following
exposures:
Translation Exposure-MNCs have assets, liabilities, revenues and expenses in more than one country. The financial
statements of the foreign subsidiaries are to be translated from the currencies of their operating country to home
currencies. The combined effect of the exchange rate change on all assets and liabilities is either a net gain or loss.
However, this net gain or loss does not represent actual cash flow, it is paper gain or loss. This creates problem as reported
earnings can rise or fall against local currency of the MNC.
Transaction Exposure is the uncertain value to the firm of its open position in cross currency commitments. It arises
when a firm has receivables and payables denominated in foreign currencies. It is a cash flow exposure as it can result in
real gain or loss.

Economic Exposure - Economic exposure arises because the present value of a stream of the expected future operating
cash flows denominated in the home currency or in a foreign currency may vary due to changed exchange rate. Economic
exposure arises from the pricing of products, the sourcing and cost of inputs, and the location of investments.

Q6. Write short notes on:


a)International technology transfer
b)Licensing
(Benefits/drawback of technology transfer-5 marks, meaning and benefits/limitations of licensing-5 marks) 10
marks
Answer.
a) International Technology Transfer
Technology transfer is the transfer of innovations by a firm or country to others. These innovations may relate to products,
process or use of specialized know how. Technology transfer includes transfer of rights to use potential knowledge, secret
knowledge, trade mark or even brand name. There are different levels of technology transfer. The first level is when a
laboratory or a scientific institute transfers technical knowledge to students of technology. It is called transfer of
knowledge. There is no cost-price relationship under this transfer. The transfer of knowledge can be done through
teachings, seminars, workshops or publications. Second level of transfer may relate to general knowledge of production of
a product. Here, too, there is no cost-price relationship. The third level of transfer of technology can be when a new
product is either introduced in the market or imported. The fourth level of technology transfer is that when a firm having
necessary property protection of its technology transfers it to some organization through selling. Technology transfer
among two firms located in two different countries is becoming quite common. It is called international transfer of
technology.

Benefits/drawback
MNCs engage in technology transfers because of a number of reasons. Important among them are discussed below from
the sellers point of view:
i) Sale of technology may increase its overall profitability.
ii) Seller may gain a competitive edge in the foreign markets.
iii) He may obtain grants and subsidies from the foreign governments.
iv) It may help the transferor to overcome capacity limitations in the home country.
v) It may be resorted to enhance the competence and potentials of foreign subsidiaries, affiliates and joint venture
partners.
Key Issues and Controversies in Technology Transfer

Presently many countries all over the world realize the importance and utility of technology transfer by MNCs. There are
still a number of issues and controversies that need to be addressed. These are:

Interest of MNCs and that of host countries conflict with each other. Host countries accuse MNCs of depletion of

their scarce resources.


MNCs are criticized for adversely affecting the balance of payment of host countries specially developing
countries. It is alleged that they resort to large scale import of inputs from their home countries and repatriation of

huge dividends, fees, royalty etc.


MNCs are blamed for not creating more employment for local people. Local nationals are not given top positions

in the management.
MNCs at times resort to restrictive trade practices in order to protect their interest.
MNCs are accused for non transfer of technology or for transfer of old technology at very high price.
Home countries are also critical of MNCs on the grounds of diverting resources from home country and reducing

employment opportunities by setting up production centers in other countries.


MNCs are frequently criticized for their interference in internal affairs of host countries.

b) Licensing
Licensing is an arrangement whereby a licensor grants the rights to use intangible property, to another firm for a specified
period and in return receives royalty or lump sum. The intangible property may be trade mark, patents, designs,
copyrights, etc. Licensing can take several forms. In case of licensing by way of assignment, a firm hands over all the
intellectual property rights to the licensee. Under sole licensing, no further licenses are issued to anyone other than a
single licensee during the period of agreement.
Licensing has following advantages:
i) Does not require capital investment on the part of licensor.
ii) The licensor retains the legal control over the intellectual property right.
iii) It helps in building up quick international alliances.
iv) Manufacturing facilities can be started in foreign countries and global entry can be gained by the licensor.
Licensing, however, has following disadvantages:
i) The fear of acquisition by the licensee of the licensors technical knowhow.
ii) Possible disputes on account of ambiguities and interpretation difficulties in the agreement.
iii) Possible failure of the licensee to fully exploit the local market.

CONTACT ME TO GET FULLY SOLVED SMU ASSIGNMENTS/PROJECT/SYNOPSIS/EXAM


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Email Id: mrinal833@gmail.com
Contact no- 9706665251/9706665232/
www.smuassignmentandproject.com

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