Indian Multinational Corporations

Indian Multinational Corporations

What is an MNC?

• Multinational Corporations (MNCs) operate in more than one country, with a central head office in the home country and secondary offices, facilities, factories, and industries in other countries (host countries).

• They operate worldwide and are also known as global enterprises.

• Activities are controlled and operated by the parent company worldwide, requiring global management for products and services sold across various countries.

• Features include high turnover and many assets, and aggressive marketing strategies.

• Examples in India: TCS, Tech Mahindra, Deloitte, Capgemini.

Features of a Multinational Company

1. High Turnover and Many Assets

   • MNCs operate on a global scale with huge assets in almost all countries in which they operate.

   • Turnovers can be incomprehensibly large; for example, Apple has a market capitalization of $1 trillion dollars$, which is bigger than the entire economy of Saudi Arabia.

2. Control

   • MNCs have unity of control, with the main control remaining with the head office in its country of origin.

   • Business operations in the host country have their own management and offices, but the ultimate control remains at the head office.

3. Technological Advantages

   • MNCs have huge amounts of wealth and investments at their disposal, allowing them to use the best technology available.

   • Most companies also invest huge money in their Research & Development Department to invent and discover new technological marvels.

4. Management by Professionals

   • MNCs are run by very competent and capable individuals.

   • They have suitable managers to take care of their business operations, technology, finances, expansion, etc.

   • They are also able to attract the top talent to their corporations due to their resources and their reputations.

5. Aggressive Marketing

   • MNCs can spend a lot of their money on marketing, advertising, and promotional activities.

   • They target an international audience, so effective marketing becomes necessary.

   • Aggressive marketing allows them to capture the market and sell their products globally.

Merits of Multinational Companies

In a Host Country

• Economic Growth: MNCs boost economic growth by bringing huge investments and capital, promoting rapid industrial growth through subsidiaries, joint ventures, branches, and factories.

• Technological Growth: They help in the technological growth of the country by bringing new innovations and technological advancements to the host country and help modernize the industry in developing countries.

• Reduce Dependence on Imports: MNCs reduce the host countries dependence on imports while exports from the country see a rise.

• Investment in R&D: A good portion of such resources is invested in R&D, which can be very beneficial to the host countries where they set up their R&D facilities.

• Maximum Utilization of Resources: Multinational corporations also promote maximum utilization of the country’s resources, which leads to economic development.

In the Home Country

• Revenues: MNCs make their home countries very rich by their revenues by collecting fees, royalties, profits, charges from all their host countries and bring them back to the home country.

• Co-operation: MNCs provide a means of co-operation between developed countries and developing or underdeveloped countries, which allows both to benefit from the partnership.

• Trade Relations: These multinational corporations also help promote bilateral trade relations between countries, which is beneficial to both the countries and the global market and economy.

Characteristics of a Multinational Corporation

Types of Multinational Corporations

• Decentralized corporation: Maintains a presence in its home country and has autonomous offices and other facilities globally. Each office manages the local business itself, making its own decisions.

• Centralized global corporation: A central headquarters is located in the home country. Executive officers and management manage the overseas offices and operations, as well as domestic operations. The subsidiaries must get approval from headquarters for significant activities.

• International division of a corporation: This is the part of an MNC responsible for all global operations. They can function independently of domestic operations, which can pose problems when overall corporate consensus and action are required.

• Transnational corporation: A parent-subsidiary structure in which the parent company oversees the operations of subsidiaries in foreign countries and the home country. Subsidiaries can use the parent's assets, such as research and development data. Subsidiaries may be different brands. Though differentiated in the past, the term is now virtually synonymous with MNCs.

• Multidomestic Company: A company with international operations that allows operations in one country to be relatively independent of those in another.

Countries With the Most MNCs Based There

• U.S. $1,700$

• China $1,272$

• Japan $615$

• UK $313$

• Australia $189$

• Canada $170$

• India $169$

• Taiwan $136$

• South Korea $112$

• France $108$

• Switzerland $98$

• Sweden $95$

• Germany $93$

• Hong Kong $81$

• Brazil $75$

What is an Indian MNC?

• Multinational companies have a long tradition of doing business across the world and are considered empire builders that extend a company’s reach globally.

• One of the first multinational companies (MNC) in India and the world was the East India Company, established in 1600.

• As of 2020, India has more than forty thousand MNCs, with approximately a quarter-million affiliates overseas.

• MNCs are popular as India has one of the fastest-growing economies and a significant market population.

• The Government has also recently eased its Foreign Direct Investment (FDI) regulations by allowing 100% foreign equity.

• MNCs generate enormous revenue, employ hundreds of thousands, and contribute significantly to the economy.

• They originate from one country (the ‘home’ country) and set up businesses globally (the ‘host’ countries).

• An absolute majority of the Board of Directors and more than half the capital assets are from the home country.

• Operations are usually set up in host countries that are still developing, where resources such as labor and materials are generally cheaper than in the home country.

• Developing countries will also have more flexible rules and regulations.

• In return, MNCs introduce modernization, contribute to infrastructure growth, stimulate the economy, provide employment, and reduce the technological gap.

• MNCs are usually categorized based on where more than half their revenue is generated from:

  • Manufacturing: based on economies of scale and involved in producing goods such as Nestlé, Coca-Cola, etc.

  • Service: based on economies of scope and usually found in IT, finance, transport such as Google, CITI Group, DHL, etc.

  • Trading: involved in trading activities such as TATA Group, etc.

• MNCs can have a strong presence in their home countries or form a global, centralized corporation.

• Local laws, environmental factors, and governance usually dictate the type of MNC entities:

  • Subsidiaries: host country enterprise where another entity owns more than half the interest. If less than half, then it is known as an Associate.

  • Foreign Affiliates: foreign investors own interests in an enterprise and its management

  • Branches: an unincorporated entity that is wholly or jointly owned. It can be a Joint Venture (JV), an office, a piece of land, or even a ship or oil rig.

  • Transnational Corporations: parent enterprise controls assets and a percentage of equity capital in companies located in host countries.

• Some of the prominent MNCs with business entities in India include Microsoft, IBM, Apple Inc., Amazon, Reebok, Sony Corp., etc.

• Indian MNCs with foreign affiliates include Aditya Birla Group, Bajaj, Wipro, Ranbaxy Laboratories, Infosys, etc.

Political Factors Affecting Functioning of MNCs

• Host and home country interventions: Host governments can restrict the freedom of MNCs to deploy resources and formulate strategies. MNCs can call on their home country government for assistance.

• Government instability: Political instability in a host country can lead to instability in investment returns. Right-wing populist governments can target MNCs as "outsiders" and intervene in their operations.

• Political uncertainty

• Political turmoil: Political turmoil in a host country can include local corruption, which can impact an MNC's operations.

• Adverse political actions: Adverse political actions can include widespread destruction due to revolution or the creation of laws that prevent the movement of capital.

Protection for MNCs

• More democracy and better private property protection can help MNCs find allies in the host country.

• Host governments may offer support for R&D efforts in exchange for MNCs developing equipment that meets local needs.

• Political decisions that impose sanctions on certain countries or industries can disrupt trade and limit market access.

• The rise of environmental politics and climate regulations can impact industries, particularly those reliant on fossil fuels.

The Economic and Legal Scenario

• In the realm of international trade, the economic and legal scenario revolves around facilitating cross-border commerce through agreements like the General Agreement on Tariffs and Trade (GATT).

• GATT governs foreign trade by promoting non-discriminatory practices and reducing trade barriers.

• FDI policy dictates the rules and regulations surrounding foreign direct investment (FDI), all of which need to be adhered to by countries to ensure compliance with international pacts and acts, ultimately impacting economic activity and market access.

Forms of MNCs

1. International companies: Importers and exporters, they have no investment outside of their home country.

2. Multinational companies: Have investment in other countries, but do not have coordinated product offerings in each country. More focused on adapting their products and service to each individual local market.

3. Global companies: Have invested and are present in many countries. They market their products through the use of the same coordinated image/brand in all markets. Generally one corporate office that is responsible for global strategy. Emphasis on volume, cost management and efficiency.

4. Transnational companies: These are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market.

5. Multidomestic Company: A company with international operations that allows operations in one country to be relatively independent of those in another.

Transnational Company

• A transnational corporation is an enterprise that is involved with the international production of goods or services, foreign investments, or income and asset management in more than one country.

• It sets up factories in developing countries as land and labor are cheaper there.

• They operate (produce and sell) in more than one country.

• They aim to maximize profits and lower costs.

• They are responsible for 75 percent of global trade.

• 69 of the richest 100 entities in the world are TNCs, rather than countries.

• They are large and have centralized control based in their home countries.

• They also employ sophisticated technology to optimize their production

• They function and usually base their production in developing nations to take advantage of cheaper labour costs.

• TNCs contribute to better international relationships by spreading resources globally.

Sectors of Transnational Organizations

Intergovernmental Sector

• The main actors are intergovernmental bureaucracies, which are created by formal agreements among states.

• These bureaucracies or agencies are designed to implement international agreements and are instructed by intergovernmental decision-making bodies and allotted resources to carry out their tasks.

• The interests of these actors, combined with their formal authority and access to governments, create important strategic possibilities for transnational social movements.

Economic Sector

• The most visible and influential actor is the transnational corporation (TNC), which is a profit-oriented business operating in more than one country.

• Transnational corporations are perhaps most clearly interested in and able to influence major (economic-related) policy decisions of state actors.

• They command vast amounts of resources and can therefore use considerable incentives and threats against states that challenge their interests.

• The gross revenues of a number of the largest corporations exceed the gross domestic products of states like New Zealand, the Philippines, and Indonesia.

The Transnational Non profit or Voluntary Sector

• Until fairly recently the transnational non profit or voluntary sector has been the most neglected by scholars of international relations.

• Young defines a non profit organization as a “body of individuals who associate for any of three purposes: (1) to perform public tasks that have been delegated to them by the state; (2) to perform public tasks for which there is a demand that neither the state nor for-profit organizations are willing to fulfil; or (3) to influence the direction of policy in the state, the for-profit sector, or other non-profit organizations.”

Impact of multinationals on developing economies

• Some of the major examples of MNCs today are Nokia, McDonalds, Microsoft, Exon Mobile and BP.

• One of the initial MNCs was the East India Company (1600 – 1874), which is an excellent examples of both the benefits and drawbacks of such ventures.

• MNCs have come a long way since then and have seen a sharp increase in the past few decades. The numbers of active MNCs went from being roughly $7,000$ in the 1970’s to $78,000$ in 2006, being responsible for over half the global industrial output.

• Multinational corporations usually bring with them foreign direct investment, which is direct investment in a country by the company for expanding their existing business base or for buying of raw goods and inputs from them.

• Multinational corporations were the vital factor in globalization, where local and national governments competed against each other in order to incentives and attract more MNCs and ultimately, investment in their countries.

• An example of such incentive is the Free Trade Zones, where goods may be manufactured, handled, landed or even exported without any intervention of the local custom authorities.

• Most of these free trade zones exist in developing countries such as Pakistan, Mexico, Sri Lanka, Madagascar, Brazil and India, as they are eager to attract more foreign investors.
  Some MNCs have a budget which is greater than some small sized countries GDP’s

Microsoft's worth compared to countries' GDPs

Microsoft's current market value: $1,966,600,000,000$

• $1.2 x$ Canada

• $1.8 x$ Mexico

• $2.6 x$ Switzerland

• $3.7 x$ Sweden

• $2.2 x$ Netherlands

• $1 x$ Italy

• $1.5 x$ Spain

• $1.3 x$ Russia

• $1.9 x$ Indonesia

• $1.4 x$ Brazil

• $1.2 x$ Korea Rep.

• $1.5 x$ Australia

• $2.7 x$ Turkey

• $3.8 x$ Belgium

• $2.8 x$ Saudi Arabia

• $3.9 x$ Thailand

• $3.3 x$ Poland

• $4.5 x$ Nigeria

• $4.6 x$ Austria

• $4.7 x$ United Arab Emirates

Saudi Arabian Oil Company's (Saudi Aramco) worth compared to countries' GDP

Saudi Arabian Oil Company (Saudi Aramco) current market value: $1,897,200,000,000$

• $1.2 x$ Canada

• $1.8 x$ Mexico

• $2.1 x$ Netherlands

• $1.3 x$ Russia

• $1 x$ Italy

• $1.5 x$ Spain

• $1.8 x$ Indonesia

• $1.3 x$ Brazil

• $2.5 x$ Switzerland

• $3.5 x$ Sweden

• $2.6 x$ Turkey

• $3.7 x$ Belgium

• $4.4 x$ Austria

• $1.2 x$ Korea Rep.

• $1.4 x$ Australia

• $2.7 x$ Saudi Arabia

• $3.2 x$ Poland

• $3.8 x$ Thailand

• $4.5 x$ United Arab Emirates

• $4.4 x$ Nigeria

Roles of International Economic Institutions

International Trade is usually referred to the exchange of goods or services along international borders. It allows us to expand our markets for both goods and services. The growth of international trade can be increased, if the countries follow a common set of rules, regulations, and standards related to import and export.
The Common rules and regulations are set by various international economic institutions. These institutions aim to provide a level playing field for all the countries and develop economic cooperation.

General Agreement on Tariffs and Trade (GATT)

• The GATT was a trade agreement that was implemented to boost the economic recovery.

• The primary purpose of GATT was to increase international trade by eliminating or reducing various tariffs, quotas and subsidies while maintaining meaningful regulations.

• The General Agreement on Tariffs and Trade (GATT) was formed early after the World War II ended. GATT was signed in Geneva on October 30, 1947 by 23 nations. It was officially established on January 1, 1948. It was lasted after the signature of 123 nations in Marrakesh on April 14, 1994 of the Uruguay Round Agreements. That was established the World Trade Organization (WTO) on January 1, 1995.

• Major GATT Negotiating Rounds:

  • First Round, Geneva, 1947

  • Kennedy (6th) Round, Geneva, 1964-67,

  • Tokyo (7th) Round, Geneva, 1974-79,

  • Uruguay (8th) Round, Geneva, 1986-93,

• Lastly it created WTO as successor to GATT which is beginning in 1995.

World Trade Organization (WTO)

• The World Trade Organization (WTO) is a global international organization dealing with the rules of trade between nations.

• The goal of WTO is to provide a fair platform for its member countries to help in services like exports, imports and conduct their business in a peaceful way. Officially established at 1 January 1995 under the Marrakesh Agreement by replacing the General Agreement on Tariffs and Trade (GATT), which established at 1947.

• The WTO has 164 members and 22 observer governments.

• Role of WTO in International Trade WTO facilitates implementation, administration and smooth operations of trade agreements between the countries. It provides a forum for the trade negotiations between its member countries. It settles arguments between the member countries through the established rules and regulations. It cooperates with the IMF (International Monitory Fund) and World Bank in terms of making cohesiveness in making global economic policies.

The International Monetary Fund (IMF)

• The International Monetary Fund (IMF) is an international organization.

• It is an international financial institution organized in 1945 to promote international trade by increasing the exchange stability of the major currencies.

• The IMF promotes international monetary cooperation and provides policy advice and technical assistance to help countries build and maintain strong economies.

• Objectives of IMF

  • To promote international monetary cooperation through a permanent institution.

  • To facilitate the expansion and balanced growth of international trade

  • To contribute to the promotion and maintenance of high levels of employment and real income

  • To contribute to the development of the productive resources of all members as primary objective of economic policy.

  • To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

  • To facilitate the cooperation of countries on monetary policy,

  • To provide the necessary resources for both consultation and the establishment of monetary policy in order to minimize the effects of international financial crises.

  • To assist the liberalization of international trade by helping countries increase their real incomes while lowering unemployment.

  • To help stabilize exchange rates between countries especially after the global depression of the 1930s.

  • To maintain a multilateral system of payments that eliminates foreign exchange restrictions.

  • The IMF helps assure that global trade and financial relationships can continue at a steady rate without the risks of global depressions like that of the 1930s.

World Bank

• The World Bank is an international financial institution that provides loans to countries of the world for capital programs.

• It comprises two institutions: the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA).

• The origins of the World Bank (WB) are conventionally dated back to the Bretton Woods conference in 1944.

• Role of World Bank in international trade The Bank's stated purpose is to "bridge the economic divide between poor and rich countries. It does this by turning "rich country resources into poor country growth. It has a long-term vision to "achieve sustainable poverty reduction."

• The World Bank Group helps its client countries improve their access to developed country markets and enhance their participation in the world economy. It works to make the global trading system more rules-based, predictable, and supportive of development.

• It also works with developing countries to improve their access to international markets and strengthen the competitiveness of their firms.

• The World Bank Group (WBG) is the main multilateral provider of Aid for Trade, development assistance designed to help developing countries more effectively engage in international trade.

• The WB group has specific trade programs which include the following:

  • Promotion of multilateral trading system that is supportive of economic development.

  • Making the trade competitiveness the center piece of the development strategies of countries.

  • Supporting trade and the facilitation of related reforms by way of the Bank’s “Aid for Trade” programs.

  • The World Bank is a vital source of financial and technical assistance to developing countries around the world.

• Today, the World Bank Group is one of the world's largest sources of development assistance.

South Asian Free Trade Area (SAFTA)

• SAFTA is a regional co-operation agreement signed between the member countries of SAARC Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan.

• It is a trade agreement to promote trade and economic growth in South Asia by reducing tariffs for intra-regional exports.

• SAFTA ensure eventual duty-free access for a vast range of manufactured goods and commodities traded between the signatories.

• Roles of SAFTA

  • Promoting and enhancing mutual trade and economic cooperation by eliminating barriers in trade.

  • Promoting conditions of fair competition in the free trade.

  • Ensuring equitable benefits to all.

  • Establishing a framework for further regional cooperation to expand the mutual benefits of the agreement.

  • Creating effective mechanism for the implementation and application of this agreement, for its joint administration and for the resolution of disputes.

Trade-Related Aspects of Intellectual Property Rights (TRIPS)

• The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an international legal agreement between all the member nations of the World Trade Organization (WTO).

• The Agreement on Trade related Aspects of Intellectual Property Rights of the WTO is commonly known as the TRIPS Agreement or simply TRIPS.

• Features/Roles of TRIPS

  • the agreement sets out minimum standards of protection to be provided by each member.

  • the agreement sets out minimum standards of protection to be provided by each member.

  • Enforcement: The second main set of provisions deals with domestic procedures and remedies for the enforcement of intellectual property rights.

  • The Agreement lays down certain general principles applicable to all IPR enforcement procedures.

  • Dispute settlement: The Agreement makes disputes between WTO Members about the respect of the TRIPS obligations subject to the WTO's dispute settlement procedures.

Conclusion

International economic organizations are helping to set the international agenda, mediating political bargaining, providing place for political initiatives. International organizations also define the salient issues and decide which issues can be grouped together, thus help governmental priority determination or other governmental arrangements.