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A multinational corporation is an enterprise that carries on busine3ss operations in more than one
country. It extends its manufacturing and marketing operations through a network of branches
and subsidiaries which are known as its foreign affiliates.
According to a report of international labour office the essential nature of multinational
enterprises lies in the fact that its managerial headquarters are located in one country while the
enterprise carries out operations in a number of other countries as well.
Characteristics of MNCS:
1.
2.
3.
4.
5.
6.
7.
Large size
Worldwide operations
Centralized control
Sophisticated technology
Professional management
International market
High brand equity
International Corporation:
An international corporation has a domestic orientation in so far as the overseas operations are
treated as appendages to the headquarters. The parent company extends the domestic product,
price, promotion and other business practices to the foreign markets. The assets, processes and
decisions in overseas affiliates are controlled from the headquarters.
Multinational Corporation:
It operates like a domestic company of the country and responds to the specific needs of each
countrys market.
Global Corporation:
It produces in home country and markets these products globally and focuses on marketing these
products domestically. Overseas operations are used to build global scale and overseas affiliates
act as implementing agencies for the decisions taken by the headquarters.
Transnational Corporation:
A transnational corporation invests, produces, markets and operates across the world. It seeks to
achieve global competitiveness through worldwide flexibility and learning. The resources and
decisions of all the units are decentralized and these units act in an interdependent but integrated
manner.
Reasons for the growth of MNCs:
1. Market Expansion:
The growth of GDP and per capita income in various countries led to increasing
demand for goods and services. Companies in developed economies expand their
operations overseas to exploit the expanding markets abroad.
2. Marketing Superiorities:
MNCS enjoy the following marketing superiorities over the domestic companies:
a. Availability of more reliable and up to date information about market conditions
b. Reputation in market due to popular brands and image
c. More effective advertising and sales promotion techniques.
d. Wide distribution network.
e. Quick transportation and warehousing facilities.
3. Financial Superiorities:
MNCS are financially superior to domestic companies in the following respects:
a. Huge financial resources
b. More effective and economical utilization of funds through transfer of excess
funds from one country to another
c. Easy access to foreign capital markets.
d. Easy mobilization of high quality resources of different types.
e. Access to international banks and financial institutions.
4. Technological Superiorities:
MNCS have strong R&D departments. They can invent and innovate new products
and processes more easily and frequently. This provides them an edge over national
companies. Developing countries invite MNCS for advanced technology due to the
following reasons:
a. Developing countries do not have the resources to develop advanced
technology and the level of industrialization is low.
b. They are unable to exploit their rich mineral and other natural resources due to
shortage of funds and low level technology.
c. They do not have adequate foreign exchange reserves to import raw materials,
capital equipment and technology on their own.
d. They face difficulty in marketing their products in highly competitive world
markets.
Advantages of MNCS:
1. Benefits to the host country:
a. The levels of investment, employment and income increase due o the operation of
MNC.
b. MNC help in growth of ancillary and service industries thereby increasing
industrialization and economic development.
c. MNC brings advanced technology to the host country.
d. Business firms in the host country get sophisticated management techniques and
practices.
e. MNC enable the host country to increase its exports and reduce the imports.
f. Domestic industry gets the benefit of R&D systems of MNCS. Their capability
of invention and innovation increases.
g. MNCS increase competition and break domestic monopolies.
h. MNCS help to integrate national economies both economically and culturally.
2. Benefits to the home country:
a. The products manufactured in home country can e easily marketed throughout the
world.
b. Employment opportunities for home country people are increased both at home
and abroad.
c. The level of industrial activity in the home country increases.
d. In long run, the
BOP position of the home country improves through
inflows in the form of dividend, interest etc.
Disadvantages of MNCS:
1. Costs and risks to the host country:
a. MNCS employ capital intensive technology which is not appropriate to the needs
of developing countries.
b. Due to their immense power, MNCs can undermine economic and political
sovereignty of developing countries.
c. MNCS may kill the domestic industry and acquire monopoly over the host
countrys market.
d. Employment growth in the host country may be retarded because MNCS may
employ foreign staff.
e. MNCS may cause fast depletion of host countrys natural resources through their
indiscriminate use.
f. The host countrys BOP may be under pressure when MNCS repatriate huge
amount in the form of profits, dividends and royalty.
g. MNCS may undermine local culture, distort consumption patterns and promote
conspicuous consumption in the host country.
2. Dangers to home country:
a. Pressure on BOP due to transfer of capital to host countries.
b. Loss of employment for home country people due to location of manufacturing
and marketing facilities abroad.
c. Investment in more profitable countries may retard industrial and economic
development in the home country.
d. Cultures of foreign countries may distort home countrys culture.
GLOBALISATION:
Globalisation may be defined as the integration of countries into world economy or one global
market. It involves removal of all trade barriers between countries.
Globalisation is the shift towards a more integrated and interdependent world economy Charles
Hill.
Features of Globalisation:
1. It involves expansion of business operations throughout the world.
2. It leads to integration of individual countries of the world into one global market thereby
erasing difference between domestic market and foreign market.
3. Buying and selling of goods and services takes place from / to any country in the world.
4. It creates interdependency between nations.
5. Manufacturing and marketing facilities are set up any where in the world on the basis of
their feasibility and viability rather than on national considerations.
6. Products are planned and developed for the world market.
7. Factors of production like raw materials, labour, finance, technology and managerial
skills are sourced from the entire globe.
8. Corporate strategies, organizational structures, managerial practices have a global
orientation.
Essential conditions of Globalisation:
1. Removal of quotas and tariffs.
2. Liberalization of government rules and regulations.
3. Freedom to business and industry.
4. Removal of bureaucratic formalities and procedures.
5. Adequate infrastructure.
6. Competition on the basis of quality, price, delivery and customer service.
7. Autonomy to public sector undertakings.
8. Incentives for R&D.
9. Development of money and capital markets.
10. Administrative and government support to industry.
Indicators of Globalisation:
1. Share of foreign trade in national income
2. Foreign investment as a proportion of total investment in the country.
3. International investment income flows as a proportion of total investment income in the
economy.
4. International tourism traffic as a proportion of total population of the country.
5. Share of foreign remittances.
6. Value of credits and debits to BOP as a proportion of national income.
Strategies for Globalisation:
1. Exporting:
It is an appropriate strategy under the following conditions:
a. Cost of production in the foreign market is high
b. The volume of exports is not large enough to justify production in the
c.
d.
e.
f.
g.
h.
i.
foreign market.
There are production bottlenecks in the foreign market.
Investment in the foreign country involves political and other risks.
There is no guarantee of long term availability of the foreign market.
The company does not have permanent interest in the foreign market.
The foreign country concerned does not favour foreign investment.
The company has underutilized production capacity.
Domestic government provides incentives for export production.
4. Management control:
1. Wider markets:
Globalization offers larger markets to domestic producers. Domestic firms can
export their surplus output. They realize higher prices from foreign markets.
Global operations help to improve public image which is helpful in attracting
better talent.
2. Rapid industrialization:
Globalization helps in free flow of capital and technology between countries this
help the developing countries to boost up their industralisation.
3. Greater specialization:
Globalization enables the domestic firms to specialize in areas where they enjoy
competitive advantage.
4. Competitive gains:
Globalisation increases competition for domestic firms through imports and
multinational corporations. Domestic firms learn about new products, new
technologies and new management systems.
5. Higher production:
Globalisation leads to spread up of manufacturing facilities in different countries.
Firms with world wide contacts can outsource funds, technology, distribution and
other functions from any where in the world which helps to improve operational
efficiency and to reduce costs.
6. Price stabilization:
It reduces price differences between countries. Free trade and international
competition help to equalize price levels in international markets. Countries with
a high degree of globalisation can attract greater foreign investment which
supplements domestic funds, brings in foreign exchange and improves BOP.
7. Increase in employment and income:
Globalisation creates job opportunities in developing countries and the incomes of
people increase due to increased industrialization.
8. Higher standards of living:
Lower prices, better quality and higher incomes help to enhance consumption and
standards of living of people in developing countries. Increased economic
development enables governments to provide better facilities like education,
health, sanitation etc.
9. International economic cooperation:
Globalisation improves economic cooperation between nations in the form of
trade agreements, investment treaties, standardization of commercial procedures,
avoidance of double taxation, intellectual property protection etc.
on
areas
of
comparative
advantage
create
unemployment
and
Functions:
1.
2.
3.
4.
5.
India has the advantage of having trade links with all other member countries. It is
saved from the trouble of entering into multiple bilateral trade agreements with so
many countries.
5. Settlement of disputes:
WTO provides a forum for trade negotiations and settlement of disputes among
member countries. Elaborate rules and procedures have been laid down for this
purpose.
6. Special concessions:
There are several concessions and exemptions for he developing countries
especially the least developed nations.
7. Promotion of competition:
members.
Formulation of common policy in the area of agriculture and transport.
Establishment of a system which would ensure competition among member
countries.
Application of programs in order to coordinate the economic policies of the member
countries.
Application of the procedures and programs to control the disequilibrium in the
EEC has been able to create a single largest market by removing the obstacles for the
free movement of goods, services, persons and capital among the member countries. The
formation and successful functioning of EEC created a trade block for the emergence of
frontier free global trade.
North American Free Trade Agreement (NAFTA):
USA, Canada and Mexico set up NAFTA on January 1, 1994 to achieve the
following objectives:
burden.
To improve and consolidate political relationship among member countries.
Measures:
To improve the quality of life and welfare of the people in member countries.
To develop the region economically, socially and culturally.
To provide opportunity to the people in the region to live in dignity and to exploit
their potential.
To enhance jointly the self reliance of the member countries.
To provide conducive climate for creating and enhancing mutual trust,
international forums.
To extend cooperation to other trading blocks.