International Business Prof.

Natasha Bhamani 8 MNC & FDI

CHAPTER 8: MULTINATIONALS & FOREIGN DIRECT INVESTMENT

MULTINATIONAL CORPORATION (MNC)
INTRODUCTION & MEANING:
Multinational Corporation is an enterprise whose ownership and activities are spread in
more than one country. It is a giant firm with its headquarters located in an advanced
country but conducts a variety of business operations in several other countries. Example:
Pepsi-Cola from U.S.A. Siemens form Germany, Sony from Japan and Philips from Holland
are some the MNCs operating at international levels. MNCs are also called as global
corporations. They earn huge profits and dominate global marketing activities. Most of the
MNCs are dominated by the developed countries and generally established in the rich and
developed countries. They operate at global level.

DEFINITION:
“Multinational Corporation means corporations which have their home in one country but
operate and live under the laws and customs of other countries as well.”

FEATURES OF MULTINATIONAL CORPORATIONS:

1. Giant Size: The assets and sale of Multinational corporations are quite large. These
companies operate on large scale as they trade in more than one company. These
companies generate large wealth. Their operations are so huge that sometimes their sales
turnover exceeds the Gross National Product (GNP) of developing countries. By this we can
imagine about the powers and caliber of a multinational company.

2. International Operation: A multinational corporation operates in more than one country.

It has branches, factories, offices in several countries. It operates through a network of
branches and subsidiaries in host countries. They sell their products in different countries.
Example: Coca Cola, Apple etc.

3. Professional Management: A Multinational corporation employs professional experts,

specialized people. MNC’s try to keep their employees updated by imparting them training
from time to time. It employs professionals to handle the advance in technology effectively.

4. Sophisticated Technology: Multinational companies make use of latest and advanced

technology to supply world class products. They use capital-intensive technology and
innovative techniques of production.

5. Operate as per local laws: MNCs operate as per the laws of the countries in which they
operate. They are not given special concessions by the host countries.

ADVANTAGES OF THE MNC’S:

(A) TO THE HOST COUNTRIES: -
1. Raise the rate of investment: MNC’s raise the rate of investment in the host countries
and thereby bring rapid industrial growth accompanied by massive employment
opportunities in different sectors of the economy.

2. Facilitate transfer of technology: Multinationals act as agents for the transfer of

technology to developing countries and thereby help such countries to modernize their

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International Business Prof. Natasha Bhamani 8 MNC & FDI

industries. They remove technological gaps in developing countries by providing techno-

managerial skills.

3. Accelerate industrial growth: Multinationals accelerate industrial growth in host

countries through collaborations, joint ventures and establishment of subsidiaries and
branches. They facilitate economic growth through financial, marketing and technological
services.
4. Promote export and reduce imports: MNC’s help the host countries to reduce the
imports and promote the exports by raising domestic production. Marketing facilities at
global level are provided by MNC’s due to their global business contacts.

5. Provide services to professionals: MNC’s provide the services of the skilled professional
managers for managing the activities of the enterprises in which they are
involved/interested. This raises overall managerial efficiency or enterprises connected with
multinationals. MNC’s bring managerial revolution in host countries.

6. Facilitate efficient utilization of resources: Multinationals facilitate efficient utilization of

resources available in host countries. This leads to economic development.

7. Provide benefits of R&D activities: Multinationals has enormous resources at their

disposal. Some are utilized for R&D activities. The benefits of R&D activities are passed on to
the enterprises operating in the host countries.

8. Support enterprises in host countries: MNC’s support to enterprises in the host countries
in order to support their own operations indirectly. This is how MNC’s support enterprises in
the host countries to grow. Even consumers get new goods and services due to the
operations of MNC’s.

9. Break domestic monopolies: MNC’s raise competition in the host countries and thereby
break domestic monopolies.

(B) ADVANTAGES TO HOME COUNTRY:

1. MNC creates opportunities for marketing the products produced in home country
throughout the world.
2. MNC creates employment opportunities to the people of home country & abroad
3. It enhances industrial activities of the home country.
4. MNC’s help to maintain favorable balance of payment of the home country in the long
run.
5. Home country can also get the benefit of foreign culture bought by MNC’s

DEMERITS OF MULTINATIONAL COMPANIES:

1) Provide outdated technologies: MNC’s design the technologies, which can be used in
different countries. They don’t supply technology to poor countries for industrial
development but for profit maximization. The technologies designed for profit maximization
and not purely for meeting the needs of developing countries. The technologies supplied
may be costly and may be outdated and obsolete or may not be suitable for the needs of
developing countries.

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2) Harm the national interests: The activities of MNC’s in the host countries may be harmful
to the national interests as MNC’s are solely guided by the profit maximization. They ignore
the interests of host countries. MNC’s even make profits at the cost of developing countries.

3) Charge heavy fees: MNC’s charge heavy fees and service charges from the enterprises in
the host countries. They repatriate profits of their subsidiaries to their home countries. This
leads the outflow of countries.

4) Develop monopolies: MNC’s restrict competition and acquire monopoly power in certain
areas in the host countries.

5) Use resources recklessly: MNC’s use the resources in the host countries in a very reckless
manner, which leads to fast reduction of non-renewable natural resources.

6) Dominate domestic policies: MNC’s use their money power for political purposes. They
take undue interest in political matters in the host countries. MNC’s are being openly
termed as an extension of the imperialistic forces.

7) Adverse effects on lifestyle/culture in the host countries: MNC’s create demand for
goods and services in developing countries through advertising and sales promotion
techniques. As a result, people purchase costly/ luxury goods which are not really useful nor
within their capacity to purchase. MNC’s create adverse effects on the cultural background
of many developing countries.

8) Interfere in economic and political systems: MNC’s put indirectly pressures for the
formulation of policies that are favorable to them. They even topple the government in the
host countries if its policies are against the MNC’s and their operations.

9) Avoid tax liabilities: Transfer pricing enables multinational corporations to avoid taxes by
manipulating prices in the case of intra company transactions.

10) Lead to brain drain in developing countries: Multinationals are now entering in
countries like India in a bigger way. They hire qualified technocrats and managerial experts.
These people work for a few years in India, acquire experience and relocated as experts in
Singapore, Korea or the United States for managing the activities of MNC’s. This leads to
brain drain in developing countries.

FOREIGN DIRECT INVESTMENT (FDI)

INTRODUCTION & MEANING:
FDI refers to investment in a foreign country where investor keeps control over the
investment. It typically takes forms in 3 ways: (i) Starting a subsidiary (ii) Acquiring a stake in
an existing firm (iii) Joint Venture. In short, it means acquiring ownership in an overseas
business entity. It is an investment in foreign country that involves some degree of control &
participation in the management.

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DEFINITION:
FDI is an investment that is made to acquire a lasting interest in an enterprise operating in
an economy other than that of investor. The investor’s purpose being to have an effective
stake in the management of an enterprise.

GOVERNMENT POLICY ON FDI:

The government policy on FDI is favorable since the introduction of New Industrial Policy in
1991. The government has accepted the fact that foreign investment is essential for
modernization, technological upgradation & industrial growth. Following decisions of
government are worth noting:
1. FDI limits for different sectors: The government has set limits for different sectors.
Example: 49% in DTH, 26% in insurance, etc
2. FDI is not allowed in certain sectors such as atomic energy, gambling & betting, lottery,
etc
3. Government has set up the Foreign Investment Promotion Board (FIPB) to process
applications in cases not covered by automatic approval.
4. The government policy is liberal & favorable to massive inflow of FDI in India.

ADVANTAGES OF FDI:
1. Facilitates Industrial & Economic development: FDI is useful for modernization of Indian
industries & for the growth of industrial/production activities in India. This will lead to
growth in national income & exports. FDI is useful in the infrastructure sector for creating
proper base for rapid economic growth.

2. Employment generation: FDI will lead to industrial growth & promotion of economic
activities in India. This will lead to massive employment opportunities in the country. Direct
employment is possible in the sectors/companies where FDI is utilized. In addition, indirect
employment generation will take place in the supporting sectors. Unemployed people will
get the benefit of massive employment generation. In addition, economic growth will be
promoted.

3. Inflow of foreign capital: Foreign capital is urgently needed in India for economic growth.
Liberalization of FDI will lead to increase in the inflow of the foreign capital to India. The
foreign funds available can be used for different purposes.

4. Import of foreign technology & professional skills: Along with FDI, there will be inflow of
updated technology & new professional skills from developed countries to India. Indian
industries will become globally competitive due to updating of technology. Quality of Indian
products will improve & cost will be reduced. This will improve our export performance &
balance of trade position will improve.

5. Promotion of Exports: FDI is likely to make favorable contribution in promoting India’s

exports. This is through the development of exported-oriented business industries & also
foreign technology upgradation of such industries. Indian industries will capture foreign
markets due to their global competitiveness. FDI will lead to growth & diversification of
exports. Large scale exports will offer more benefits to Indian economy.

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