Blog

What are Multinational Corporations?

A multinational corporation is a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries. like Philips, Siemens, Ford, Nestle, Hyundai, LG, Coca Cola, Citi Bank, Sony, McDonald’s, Good Year etc.

These companies are not operating only in India; you will find these companies in many countries. Such companies are called Multinational Corporations.

Multinational corporations (MNCs) have different names. They are also known as Transnational Corporations (TNCs), Super National Enterprises, Global companies, cosmocorps and so on.

In this article, we are going to study the characteristics of a multinational corporation along with the various advantages and disadvantages associated with it and other aspects associated with MNCs.

---

Definitions of Multinational Corporations

We can understand multinational corporations by going through some definitions. The followings are the two definitions of multinational corporations:

“A multinational enterprise is one which undertakes foreign direct investment, i.e., which owns or controls income gathering assets in more than one country and in doing so produces goods or services outside its country of origin, i.e., engages in international production.”

John H. Dunning

“The essential nature of the multinational enterprise 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.”

International Labour Organization (ILO)

---

Types of Multinational Corporations

Depending upon the workforce diversity, There can be different types of multinational corporations:

1. Ethnocentric
2. Polycentric
3. Geocentric

Ethnocentric

This type of multinational corporation (MNCs) has a strong orientation toward its home country. Indian multinationals like Dabur, Infosys, ONGC etc. are examples. The ethnocentric companies normally have CEOs and other top functionaries from their home countries.

Polycentric

Polycentric type of MNCs has a strong orientation toward host countries. They appoint a few people from home countries and the remaining are appointed from the host countries.

Geocentric

This type of MNCs seeks total integration of global operations by operating without ‘home country’ prejudice. They make major decisions from a global perspective. The selection for top functionaries is made from different countries.

---

Characteristics of Multinational Corporations

The followings are the Characteristics of Multinational Corporations. Which are given below:

1. Big Size
2. International Operation
3. Advanced Technology
4. High Efficiency
5. Oligopolistic Market Structure
6. Quality Conscious
7. Origin
8. Management

Big Size

The most important feature of multinational corporations is their large size. MNCs have assets and sales that run into billions of rupees. MNCs are very powerful organizations. In 1971 out of the top ninety producers of wealth, 29 of them were MNCs, and the rest were national.

The world’s top 100 non-financial MNCs, based almost exclusively in developed countries, are the principal drivers of international production.

International Operation

One of the basic features of a multi-national corporation is that its operation extends to two or more countries. They establish parent offices in one country and extend branches, subsidiaries and affiliations to other countries. For example, the Pepsi Cola Company of the U.S operates in 114 countries.

Advanced Technology

Multinational Companies invest huge amounts of money in research and development. They do research on developing the latest technology of production and developing new products. Such new technologies are transferred to developing countries through their subsidiaries and branches.

High Efficiency

Multinational companies use superior technology, which brings efficiency to the operation. They also use a huge amount for training and development of their employees to bring their efficiency to par with the changing technological environment. This also improves the overall efficiency of the organization.

Oligopolistic Market Structure

An oligopoly is a market structure where only a few firms dominate. MNCs are oligopolistic in nature. They create a separate brand name and capture a huge market. Sometimes they capture a market through trademark and patent rights.

Quality Conscious

MNCs are managed by professionals and experts. They are quality and cost-conscious. MNCs believe in total quality management. They constantly carry on research on product development and quality management.

Origin

Though the concept of MNC is very old their real growth started after the Second World War. The majority of the MNCs are formed in developed countries like the USA, UK, Japan, Germany etc. Now a day’s companies from developing countries and emerging economies like India, China, Korea etc. are also operating in the world market.

Management

The parent company works as a holding company. The subsidiary companies are to operate under the control and guidance of the parent company. A parent enterprise is deemed as an enterprise that controls assets of other entities in countries other than its home country.

---

Reasons for Growth of Multinational Corporations

Following are the reasons for the growth of multinational corporations:

1. MNC is Expanding due to Rapid Economic
2. MNCs are Experienced in Their Worldwide Network
3. MNCs can Make Better Use of Latest Developments in Technology
4. MNCs are Engaged in Constant Research on Product Innovation
5. MNCs have Huge Financial Resources

MNC is Expanding due to Rapid Economic

The market for the products of MNC is expanding due to the rapid economic growth of the developing and under-developed economies. Due to the expansion of the market the size and spread of MNCs are expanding.

MNCs are Experienced in Their Worldwide Network

Marketing superiorities arise because of experiences in global marketing. MNCs are experienced in their worldwide network, product innovation, and effective marketing including brand building measures, sales promotional strategies and logistical arrangements.

MNCs can Make Better Use of Latest Developments in Technology

MNCs are in a better position to make use of the latest developments in Technology. This results in the production of superior quality products. The MNCs invest in technology development.

MNCs are Engaged in Constant Research on Product Innovation

MNCs are engaged in constant research on product innovation to meet the requirements of all categories of customers. The pharmaceutical companies are engaged in hardcore research to develop new formulations of drugs which the small producers of a country cannot do.

MNCs have Huge Financial Resources

MNCs have huge financial resources which makes every big task possible for the MNCs. The availability of huge financial resources to the MNCs helps them to capitalise on the opportunities provided by the business environment. They can convert the circumstances in their favour.

---

Importance of Multinational Corporations

These are the importance of multinational corporations. Which are given below:

1. Increased Level of Investment
2. Transfer of Advanced Technology
3. High Efficiency
4. Superior Products
5. Huge Quantity
6. Ownership and Control

Increased Level of Investment

MNCs increase the level of investment in the host country. This leads to an increase in employment and income in the host country. People can join these multinational companies according to their skills or capabilities. Manpower can be well employed in these multinational companies.

Transfer of Advanced Technology

MNCs act as a vehicle for transfer of technology from developed nations to developing nations. Multinational companies devote a huge amount of money to technological development and invent new technology according to their requirements. Due to this reason multinational corporations are very much updated in their operations.

High Efficiency

Due to the use of the latest technology, constant research and development and skilled manpower efficiency of the MNCs are very high compared to other organizations.

Superior Products

MNCs generally do not compromise the quality of the products. Due to this reason their products are widely accepted by the consumers.

Huge Quantity

A multinational company produces varieties of goods and services in huge quantities. Multinational companies use their own trademark, patent right, copyright and technology for the production and distribution of such goods in the international market.

Ownership and Control

The ownership of a multinational corporation is shared by both the parent companies and subsidiary companies according to their arrangement for capital investment. However, parent companies manage and control the operation of their branches and subsidiaries through trademark, technology, and patent right.

---

Advantages of Multinational Corporations

We are going to discuss the advantages of multinational corporations on the basis of:

1. For the Host Country
2. For the Home Country

For the Host Country

• The investment level, employment level, and income level of the host country rise due to the operation of MNCs.
  
  
• MNCs bring with them the most sophisticated technology in the production process while transferring modern machinery and equipment to developing countries. Such transfer of technology is assumed to be desirable and productive for the host country.
  
  
• The MNCs bring entrepreneurial abilities, management experience, skills and techniques to the host country especially to the developing countries and make the human capital of the host country skilful and efficient.
  
  
• The business volume of domestic traders and market intermediaries of the host country increased due to the operation of MNCs.
  
  
• MNCs create competition among domestic companies and thus increase their competitiveness and quality.
  
  
• The host country can lessen imports and increase exports due to goods produced by MNCs in the host country. This led to increasing in the foreign exchange reserve of the host country.
  
  
• Level of industrial and economic development increases due to the growth of MNCs in the host country.
  
  
• By paying duties and taxes MNCs contribute to the national exchequer of the host country and fill the gap between targeted government tax revenues and locally raised taxes.
  
  
• MNCs help to improve the standard of living in their host countries.
  
  
• MNCs pay high dividends, motivating resource mobilization among investors in the host countries.

For the Home Country

• MNCs create opportunities for marketing the products produced in the home country throughout the world.
  
  
• They create employment opportunities for the people of their home country both at home and abroad.
  
  
• It facilitates the industrial development of the home country.
  
  
• MNCs help to maintain a favourable balance of payment of the home country by transferring income in the forms of profit, royalty and management contracts from host countries.
  
  
• Home country can also assimilate to foreign culture brought by MNCs.

---

Disadvantages of Multinational Corporations

Disadvantages of multinational corporations on the following basis:

1. For the Host Country
2. For the Home Country

For the Host Country

• MNCs may relocate the technology which has become obsolete in the home country.
  
  
• MNCs harm employment in those countries where the supply of labour is excessive by using capital intensive technology and making the employment problem more serious.
  
  
• The tremendous power of MNCs may pose threat to the sovereignty of the host country. An example in this regard is the East India Company, which came to India to do business and later on ruled India for more than 200 years.
  
  
• MNCs may destroy the domestic industry by monopolizing the host country’s market and reducing competition.
  
  
• The main objectives of MNCs are profit maximization and not the development of the host country.
  
  
• MNCs may interfere directly or indirectly in the political and administrative system of the host country.
  
  
• In order to gain more money, MNCs may use non-renewable natural resources of the host country to a large extent.
  
  
• A big amount of money moves to foreign countries in terms of payments towards profits, dividends and royalty which creates an unfavourable balance of payment position.

For the Home Country

• MNCs may shift huge capital from the home country to various host countries causing an undesirable balance of payment.
  
  
• MNCs may not create employment opportunities for the people of their home country if it takes the geocentric approach.
  
  
• When investments in foreign countries become more attractive and rewarding, MNCs may avoid investment in the home countries; thus hampering industrial or economic development.
  
  
• They may prefer to participate in the production of mass consumption and non-essential items elsewhere rather than making investments in the prioritised sector of the home country.

---

Reasons for the Growth of Multinational Corporations (MNCs) in India

There are many reasons for the growth of MNCs in India. Some of them are discussed below:

1. Large Market Potentiality
2. High Growth and Increasing Purchasing Power
3. Competitive Human Resources
4. Competitive Human Resources

Large Market Potentiality

With its 1.2 billion-plus people, India’s population is second only to China. But till now a huge section of the Indian population is deprived of basic needs of life like electricity, education, health care, housing, nutrition etc. So, there is a huge market potentiality in every sector of the Indian economy.

High Growth and Increasing Purchasing Power

India is a fast developing nation and ranked second among the developing nations of the world. India’s growth rate is more than 7% per annum. The income level of the Indian middle class is increasing and at the same time, the percentage of the middle-income group population in India is also increasing.

It is estimated that India’s middle-class population will increase to 90% of its total population by 2040. This will create a lot of demand for essential / luxury goods and services in India and that is why all major companies of the world are eying India.

Competitive Human Resources

About 50% of the Indian population are below the age of 28 years which is a major workforce in the world. Many of this workforce will be English-speaking, educated and skilled. Besides these factors in India labour is cheap compared to developed nations. This will be a big advantage to the MNCs and there is huge scope for India to become a production hub of the world.

Government Support

Realizing the need for foreign investment in India Government of India has taken many supportive policy decisions to attract all kinds of foreign investment including the investment from the MNCs. Some of those policies are

• Both revenue and capital expenditure on R&D are 100% deductible from taxable income under the Income Tax Act.
  
  
• A company whose principal goal is research or development is exempt from income tax for ten years from its inception. Accelerated depreciation is allowed for investment in plants or machinery made on the basis of indigenous technology.
  
  
• Customs and excise duty exemptions are there for capital equipment and consumables required for R&D.
  
  
• Most of the sectors including manufacturing activities permitted 100% FDI under the automatic route. This plays a major role in attracting MNCs in India.

---

Objectives of Multinational Corporations

Following are the objectives of multinational corporations which are discussed below:

1. Exploring profit potential by expanding the business beyond the boundaries of the home country. Profit potential in home countries may be limited.
   
   
2. Producing goods in those countries where the cost of production is low. The cost of production is not the same in all the countries.
   
   
3. Achieving greater efficiency in production in local markets and then exporting the products.
   
   
4. Creating an international corporate image.
   
   
5. Capturing lucrative international market.
   
   
6. Making best use of technological advancement. All countries are not equally developed in technological aspects.

---

FAQ