Multinational Corporations and

Transnational Corporations
Meaning
• A multinational corporation may be defined as a
company or an enterprise which operates in a number
of countries and which have production and service
facilities outside the country of its origin.
• These companies make decisions decision’s in global
context. It means the decisions are taken outside the
country where their operations are undertaken.
• Multinational corporations may enter other countries
by setting up fully owned companies, establishing
subsidiaries, making a joint venture with some
enterprises in the country of operations etc,
Methods of Operations
Multinational corporations operate in the following ways
1.Subsidiary companies
• MNC’s may operate by forming subsidiary companies
in the countries in which they want to enter.
• The main company holds more than half of the shares
and other shares are sold to the public.
• A multinational company controls the formation of Board
of Directors.
• The policies of the holding company are pursued by the
subsidiary.
• Multinationals start subsidiary companies in different
countries and keep their control in its own hands.
• This is an effective method of spreading business interests
all over the world,
2.Branches
• Multinational companies can spread their business
interests by opening their branches in different countries.
The branches work under the directions of the head office.
• The branch strictly follows the guidelines given by the
head office. All the policies to be pursed at branch are
decided by the head office.
• The laws of the country in which the branch is located are
to be obeyed. In India if the head office of a branch is
situated in some other country then it is known as foreign
branch.
• Operating through branches is an easiest method followed
by multinationals.
3. Joint Venture Companies
• In this method of operation multinationals form joint venture
with some company in the country in which they have to extend
their business.
• The joint venture can be for producing a product, it may be for
marketing the products of the multinationals etc.
• Generally the multinationals have joint ventures for producing
those very products in which they have already specialized.
• The technical know how and managerial experts is supplied by
the multinational and day to day operations are left to the co-
venturer company.
• Maruthi udyog is a best example of a joint venture set up by
the automobiles. Both the co-venturers participate in equity and
share profits of the project.
• Before liberalization on India, foreign companies could enter
Indian markets through joint venture only.
• At present foreign companies have more freedom to operate in
India.
4. Franchise Holders
• Under this system a multinational company gives a
license for allowing the manufacture of some product to
an enterprise in other country.
• The concern getting the license will have to work under
the provisions of the franchise agreement.
• The company giving the franchise right is compensated
by paying a periodical amount of royalty or paying in
some other mutually acceptable form.
• The franchise holder cannot violate the terms of the
agreement otherwise this facility may be terminated.
• Such agreements are generally done for those products
which are popular in other markets and a demand exists
in the country of the franchise holder.
5.Turn Key Projects
• In some cases multinationals are assigned to complete
important projects from the very beginning. Such projects are
in the area in which these corporations have technical
expertise.
• These projects are undertaken by the personnel of the
corporations.
• The developing countries do not have technical expertise in
many areas.
• Since development of those areas is important such projects are
given to multinational companies
Benefits of Multinational Corporations
Multinational corporations have helped the development of
host countries by bringing capital and technology which was
badly needed there. These corporations have helped both
trade and industry. Some of the benefits of these
corporations are discussed as follows:
1.Supplementing Capital
•The developing and under developed countries are unable
to raise sufficient capital required for their economic
development .
•Their slow growth is mainly due to the inadequate capital
formation.
•Multinationals have vast resources at their command. These
corporations set up subsidiary companies or enter into joint
ventures in host countries.
•The capital resources of host countries are supplemented by
multinationals
2.Transfer of Technology
• Developing countries have not been able to spend much resources on development.
• They have not been able to cope with the technological and marketing
improvements experienced by developed nations.
• They use outdated methods of production. The products of these countries are not
able to stand in the world market.
• The multinationals on the other hand employ latest technology and marketing
techniques.
• They spend regularly on research and development programmes.
• It is with the help of multinational corporations that developing countries are able to
employ latest methods of production.
• The multinationals transfer technology through joint venture projects.
• Multinationals get vast markets and cheap labour in developing countries.
• The corporations not only capture the markets in host countries but also export
goods to other countries. The host country gets better technology of other countries.
• The corporation not only capture the markets in host countries but also export goods
to other countries. The host country gets better technology of other countries. The
host country gets better technology and multinational corporations increase their
profits by entering developing countries.
3.Benefit to Domestic Industries
• The domestic industries in host countries are benefited
by the collaboration of multinational corporations.
• The domestic industries are able to use the resources,
technology and managerial skill of the multinationals.
• The quality of their products improves and with the help
of collobarators these enterprises are able to enter even
the foreign markets.
• The foreign exchange problems are also solved with the
help of multinationals.
• The domestic industries expand their activities
profitability and also improve with the co-operation of
multinationals domestic industries are able to improve
their overall performance.
4.Lower Cost of Production
• The cost of production is linked with a number of
factors including scale of operations .
• Multinationals run units on large scale and it brings
economics in labour, materials , production etc. Such
units are able to control costs and produce goods at
cheap rates.
• The lower cost of production has benefited the
enterprises as well as consumers.
• The sophisticated production techniques and
innovative markets have helped developing countries
in lowering cost of production.
5.Creating Employment Opportunities
• The employment opportunities are created under
production and marketing activities.
• Increase in scale of operations increases more job
opportunities even though sophisticated technology is
employed by multinationals.
• There are new opportunities in market field also.
• More and more persons are engaged in handling goods.
• Besides direct employment, there are indirect
employment opportunities also.
• The entry of multinationals helps in creating employment
opportunities in developing countries.
• The acceptability of products in both national and international
markets helps in increasing the scale of operations.
• So job opportunities are created even in those countries where
these products are sent.
6.Improving Balance of Trade
• Developing countries suffer from the adverse balance of trade
because they import more goods then they export.
• The import from these countries are not acceptable due to high
prices and low quality of products.
• Since multinationals bring same technology of production
which is used by developed countries so the products become
competitive in internationals markets.
• The products which were earlier important will now be
produced in the country and on the other hand exports increase
due to favourable prices and proper quality. Under these
conditions the balance of trade will certainly improve.
7.Research and Development Activity
• Developing countries lack investment in research and
development areas.
• Multinationals can survive in the international markets
only if the they spend some of their resources in these
activities.
• Even though these companies would like to confine most
of their research activities to the country of their origin
but still business partners are benefitted directly as well as
indirectly.
• These companies spend some part of their research budget
in developing countries.
• Secondly the new improvements in their methods of work
will help host countries also.
Benefits in Indian context or Growth Factors in
India
• Multinationals are entering India in a big way in the
last some years.
• The liberalized economic environment has helped the
entry of many multinationals into the country in one
form or the other.
• Some companies have started their subsidiaries, some
have made joint ventures while some are taking
important projects.
India business is helped by the MNC’s in the following
ways
1. Multinationals are bringing more and more capital
into the country. It is supplementing the efforts of
Indian business.
2. These corporations are bringing better technology
by entering into joint ventures. Multinationals have
entered both capital and consumer goods industries.
3. Indian industry is facing a lot of competition from
multinationals. The domestic industry has started
improving the quality of their products so that
consumer is not reluctant to buy their products. This
is a blessing in disguise. Industry has not been
caring for the liking of the consumer. But now it will
have to compete with multinationals and either there
is an improvements or face closure.
4.Foreign companies are taking up many projects in
India in the infrastructural area which have earlier been
neglected . Many power projects are being set up by
multinationals. An improvement in infrastructure will
help growth in the country.
5.The inputs in India are very cheap. The
agricultural output forming raw materials content
and abundance of labour have attracted
multinationals to meet their international
commitments while producing in India. This will
increase exports from India and a favourable balance
of trade will emerge in due course of time.
6. The foreign exchange needs of Indian industry are met
by multinationals. It helps in importing better technology
and also enables expansion and diversification of production
activities.
Disadvantages of Multinationals
Multinationals have plus and minus points. These
corporations have adverse impact on some area of the host
country. Some of these disadvantages are discussed as such.
1.Harmful for Producers
The entry of multinationals is harmful to producers of host
countries. These corporations are in a position to sell goods
at cheaper rates. The small units are eliminated because they
cannot withstand the competition of bigger companies.
Multinationals try to take over the business of competitors
too.
2. Harmful to consumers
• The consumers suffer at the hands of multinationals. These
companies try to create monopoly situation by eliminating
other producers in the market.
• On the basis of financial strength, excessive advertising,
aggressive marketing these companies attract consumers
towards their products.
• The aim of these companies is to increase profits and they try
to achieve it by any means.
• Multinationals enter in those products where scope of profits is
more.
• They produce goods for higher income group people because
margin of profit is more in these products.
• These companies do not have the interest of consumers in
mind but are worried to increase their profits.
• They use all such measures which help them to increase their
profitability.
3.Bad Business Ethics
• Multinationals indulge in bad business ethics too. In the beginning
they send manufactured goods from the countries of their origin and
market them in host countries by just pecking them there.
• They try to delay the transfer of technology so that their own
products are dumped there.
• These companies also try to manipulate the laws of the land to suit
their objectives.
4.Currency Manipulations
• Multinationals try to use their foreign currency reserves in such a
way that they increase their profits.
• These companies being internationals try to build reserves in
countries with strong currencies and raise loans where currencies are
weak.
• Instead of helping host countries in lasting their currency problems,
these companies rather accentuate this problem by accumulating
large currencies.
5. Political Dominance
• Multinationals concentrate economic power in their
hands. Through this power they try to dominate the
political decisions of host countries.
• The countries which are dependent for economic
help on big countries cannot take political decisions
without the wishes of their masters.
• East India Company entered India as a trading
company and then ruled this country for centuries
such tactics are tried even at present.
Transnational Corporation
A commercial enterprise that operates with substantial
facilities, does business in more than one country and has its
head office in one country and does not consider any
country as its national home and it will change its head
office. ( Borderless Corporation)
Basic Characteristics of TNC’s
Transnational corporation means a for profit enterprise
marked by following characteristic
1.It engages in various business activities- including sales
distribution, extraction , manufacturing and research and
development outside the country of origin so that it is
dependent financially on operations in two or more
countries.
It management decisions are made based on regional or
global alternative.
Advantages of Transnational corporations
Advantages of TNC’s to Host country
1. The investment level, employment level and income level
of the host country increases sue to the operation of TNC’s.
2.The industries of host country get latest technology from
foreign countries through TNC’s. The domestic traders and
market intermediaries of the host country gets increased
business from the operations of TNC”S.
3.Domestic industries can make use of research and
development outcomes of TNC’s.
4.The host country can reduce imports and increase exports
due to goods produced by TNC’s in the host country. This
helps to improve balance of payment.
Advantages of TNC’s to Home Country
1. TNC’s create opportunities for marketing the
products in the home country throughout the world.
2. They create employment opportunities to the people
of home country both at home and abroad.
3. It gives a boost to the industrial activities of home
country.
4. TNC ‘s help to maintain favourable balance of
payment of the home country in the long run.
5. 5.Home country can also get the benefit of foreign
culture.