BUSINESS ENVIRONMENT

ASSIGNMENT ON MULTINATIONAL CORPORATIONS

SUBMITTED TO: SUBMITTED BY:PROF. B.K. KHURANA DAMINI CHHABRA (6207) SWEETAL BAJAJ (6230) SALONI KAPOOR (6234) M.COM 1 (2ND SEMESTER) ACKNOWLEDGEMENTWe, Damini Chhabra (Roll No. 6207); Sweetal Bajaj (Roll No. 6230); and Saloni Kapoor (Roll No. 6234) are sincerely thankful to all those people who have been giving us any kind of assistance in the making of this assignment report. We express our gratitude to the authorities of S.C.D Government College and especially, Prof. B.K. Khurana (subject in charge), who has through his vast experience and knowledge been able to guide us, both ably and successfully towards the completion of the assignment. We would hereby, make most of the opportunity by expressing our sincerest thanks to all our faculties whose teachings gave us conceptual understanding and clarity of comprehension, which ultimately made our job easier. Credit also goes to our parents and all our friends whose encouragement kept us in a good stead. Their continuous support has given us the strength and confidence to complete the assignment without any difficulty.

Introduction to MNCs and Definition

The word Multinational is the combined word of Multi and national which gives meaning ofmany countries. Hence multinational companies are those business organizations which have headoffice in one country and their operation are spread over several other countries. There are two classes of companies under multinational companies. The head office is regarded as the parent company and branches as subsidiary company. The parent company manages and controls the activities of subsidiary company. The subsidiary companiesare affiliated with parent companies through investment, trade-mark, patent and technology. The multinational companies are operated with huge investment and wide range of product or services. They cover large area of market.

According to Howard Perlmutter (1969),

Multinational companies may pursue policies that arehome country-oriented orhost country-orientedorworld-oriented. Perlmutter uses such terms as ethnocentric, polycentric and geocentric. However, "ethnocentric" is misleading because it focuses on race or ethnicity, especially when the home country itself is populated by many different races, whereas "polycentric" loses its meaning when the MNCs operate only in one or two foreign countries.

According to Franklin Root (1994), an MNC is a parent company that

1. engages in foreign production through its affiliates located in several countries,2. exercises direct control over the policies of its affiliates,3. implements business strategies in production, marketing, finance and staffing that transcend national boundaries.In other words, MNCs exhibit no loyalty to the country in which they are incorporated.

According to David E. Liliental, MNCs are corporations which have their home in one country but operate and live under the laws and customs of other countries as well.According to the International Labor Organization, The essential of the MNC lies in the fact that its managerial headquarters are located in one country (home country) while the enterprise carries out operations in a number of other countries (host countries).According to Foreign Exchange Regulation Act, 1973 (FERA), A corporate in a foreign country or territory shall be deemed to be a multinational corporation if such a corporation (a) is a subsidiary or branch or has place of business in two or more countries or territories (b) carries on business on otherwise operations in two or more countries or territories.According to ILO Report, The essential nature of the multinational enterprise lies in the fact that its managerial headquarters are located in one country (referred to for convenience as home country) while the enterprise carries out operations in a number of other countries as well (host countries).According to the President, IBM Corporation, Multinational Corporation is one that (i) operates in many countries (ii) carries out research, development and manufacturing in those countries (iii) has a multinational management (iv) has a multinational stock ownership.

Forms of Multinational CorporationsMultinationals operate in different countries in different forms. Their main forms are:(i) Transnational Corporations: These comprise parent enterprises and their foreign affiliates. A parent enterprise is an enterprise that controls assets of other entities in countries other than its home country, usually by owning a certain percentage of equity capital.(ii) Foreign Affiliate: A foreign affiliate is an enterprise in which an investor, who is the resident of another country, owns a stake that permits a lasting interest in the management of that enterprise.(iii) Subsidiary: A subsidiary is an enterprise in the host country in which another entity directly owns more than a half of the shareholders voting power and has the right to appoint or remove a majority of the members of the administrative management or supervisory body.(iv) Associate: An associate is an enterprise in the host country in which an investor owns a total of at least 10% but not more than a half of the shareholders voting power.(v) Branch: A branch is a wholly or jointly owned unincorporated enterprise in the host country which is one of the following: a. A permanent establishment or office of the foreign investor.b. An unincorporated partnership or joint venture between the foreign direct investor and one or more third parties.c. Land, structures and/or immovable equipment and objects directly owned by a foreign resident.d. Mobile equipment such as ships, aircraft, gas or oil drilling rigs operating within a country other than that of the foreign investor for at least one year.On the basis of the functional criterion, the MNCs are broadly grouped into:(i) Service MNCs: A service MNC is one which derives at least 50% of its revenues from services. Service MNCs are found in areas such as banking, insurance, finance, transport, tourism, etc.(ii) Manufacturing MNCs: A manufacturing MNC is one which derives at least 50% of its revenues from manufacturing activity. A large number of MNCs have entered into the manufacturing sector. They produce a variety of goods. For example, Colgate and Palmolive produce soaps and detergents, Ponds - cosmetic goods.(iii) Trading MNCs: A trading MNC is one which derives at least 50% of its revenue from the trading activity. These are the oldest form of multinationals. Trading MNCs control about 60% of the worlds export trade. Tatas, Uptons, Hindiya,etc. are the trading MNCs.

Features of MNCsThe following are the main features of MNCs:1. MNCs have managerial headquarters in home countries, while they carry out operations in a number of other (host) countries.2. A large part of capital assets of the parent company is owned by the citisens of the company's home country.3. The absolute majority of the members of the Board of Directors are citisens of the home country.4. Decisions on new investment and the local objectives are taken by the parent company.5. MNCs are predominantly large-sized and exercise a great degree of economic dominance.6. MNCs control production activity with large foreign direct investment in more than one developed and developing countries.7. MNCs are oligopolistic in character. It is sustained by modern technologies, management skill, product differentiation and enormous advertising.8. MNCs are not just participants in export trade without foreign investments.

Emergence of MNCs in a Historical PerspectiveThe genesis of MNCs lies in transnational trading in early days conducted by the Greek, Phoenician and Mesopotamian merchants. After the fall of the Roman Empire, trade between nations becomes difficult when Europe and the Middle East steeped in feudalism resulting in wars between feudal lords and church prohibited trade with Muslim States. Later on, merchants/traders of Italy established trade who were considered the fore runners of the multinational firms. The cities of Genoa, Venice, Florence and Pica became the supply depots of traders. Active transnational operations flourished with the development of banks and money lending agencies.Multinationals in the form of trading companies started in the seventeenth and eighteenth centuries. The Hudson Bay Company, the East India Company, the French Levant Company were the major transnational companies established in those days. During the nineteenth century, huge foreign investment flowed from the Western Europe to the underdeveloped countries or Asia, Africa and America. England was the leading exporter of capital, followed by France, the Netherlands and Germany. In the early twentieth century British Petroleum, Standard Oil, Ana Conda Copper and International Nickel were the major MNCs investing mainly in mining and petroleum industries.The MNCs have attained their present dominating position in the world economy through a long process of growth. S.A. Cockeril Steel Works established in Persia in 1815, followed by several others such as Bayer of Germany in 1863, Nestle of Switzerland in 1967, Michelin of France in 1853 and Lever Brothers of U.K. in 1890.There are three phases in the growth of MNCs. The first phase lasted up to the 1st World War. The field was captured mostly by the European Companies such as Imperial Tobacco, Dunlop, Siemens, Philips, etc. The Growth of MNCs halted during the post-war period between 1930-1950 on account of recessionary situation prevailing the world over in those days. During the second phase, covering the decades of fifties and sixties, American MNCs such as General Motors, Ford Motors and IBM emerged on the world scene. The third phase of the growth of MNCs began since 1970s. This new era belonged to the European, German and Japanese MNCs.In recent years, MNCs have also emerged from developing countries such as India, Malaysia, Hong Kong, Singapore, South Korea, Indonesia, etc. Based U.N. (1993) data, the number of MNCs in 1992 had exceeded 37000 and their global sales exceeded 5.5 U.S. dollar. American, European and Japanese companies are the world's largest corporations.

Benefits and Drawbacks of MNCsMultinational Corporations no doubt, carries out business with the ultimate object of profit making like any other domestic company. According to ILO report "for some, the multinational companies are an invaluable dynamic force and instrument for wider distribution of capital, technology and employment; for others they are monsters which our present institutions, national or international, cannot adequately control, a law to themselves with no reasonable concept, the public interest or social policy can accept. MNC's directly and indirectly help both the home country and the host country.

Advantages of MNC's for the host countryMNC's help the host country in the following ways1. The investment level, employment level, and income level of the host country increases due to the operation of MNC's.2. The industries of host country get latest technology from foreign countries through MNC's.3. The host country's business also gets management expertise from MNC's.4. The domestic traders and market intermediaries of the host country gets increased business from the operation of MNC's.5. MNC's break protectionalism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness.6. Domestic industries can make use of R and D outcomes of MNC's.7. The host country can reduce imports and increase exports due to goods produced by MNC's in the host country. This helps to improve balance of payment.8. Level of industrial and economic development increases due to the growth of MNC's in the host country.

Advantages of MNC's for the home countryMNC's home country has the following advantages.1. MNC's create opportunities for marketing the products produced 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. 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 brought by MNC's.

Disadvantages of MNC's for the host country1. MNC's may transfer technology which has become outdated in the home country.2. As MNC's do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries.3. MNC's may kill the domestic industry by monopolizing the host country's market.4. In order to make profit, MNC's may use natural resources of the home country indiscriminately and cause depletion of the resources.5. A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty.

Disadvantages of MNC's for the home country1. MNC's transfer the capital from the home country to various host countries causing unfavorable balance of payment.2. MNC's may not create employment opportunities to the people of home country if it adopts geocentric approach.3. As investments in foreign countries is more profitable, MNC's may neglect the home countries industrial and economic development.

Recent TrendsThe recent growth pattern of MNCs also shows an increasing concentration of their investment activities in developing countries. However, the MNCs are not interested in all the developing countries. The inflow of foreign funds through MNCs in India is showing an upward trend in recent years.1991 onwards, the Government of India has taken several steps to attract foreign investments and entry of the MNCs, such as:1. Abolition of industrial licensing.2. Removal of restriction on investment under the MRTP Act.3. Liberalization of policy and procedure for transfer of technology, import of capital goods, etc.4. Existing companies are allowed to raise foreign equity up to 51 per cent.5. Provisions of the FERA have been relaxed. As a result, companies with more than 40 per cent foreign equity can operate like any other Indian company.6. Foreign companies are permitted to use their trade marks in domestic markets.During the nineties, there has been increasing trends of foreign investments in India. The Government approved 666 foreign collaborations in 1990.This number has become more than double to 1520 by 1992. Presently, the USA is the largest investor in India, followed by Switzerland, Japan and the UK. Foreign investment has largely been concentrated in sectors such as fuel and oil refineries, power, chemicals and electrical equipments and electronics.

The Role of MNCs in Developing Countries like IndiaMNCs have contributed significantly to the development of world economy at large. They have also served as an engine of growth in many host countries. Their importance in a developing country may be traced as follows:1. MNCs help a developing host country by increasing investment, income and employment in its economy.2. They contribute to the rapid process of development of the country through transfer of technology, finance and Trodden management.3. MNCs promote professionalization management in the companies of the host countries.4. MNCs help in promoting exports of the host country.5. MNCs by producing certain required goods in the host country help in reducing its dependence on imports.6. MNCs due to their wide network of productive activity equalize the cost of production in the global market.7. Entry of MNCs in the host country makes its market more competitive and breaks the domestic monopolies.8. MNCs accelerate the growth process in the host country through rapid industrialization and allied activities.9. The growth of MNCs creates a positive impact on the business environment in the host country.10. MNCs are regarded as agents of modernization and rapid growth.11. MNCs are the vehicles for peace in the world. They help in developing cordial political relations among the countries of the world.12. MNCs bring ideas and help in exchange of cultural values.13. MNCs through their positive attitude and efforts work for the establishment of social welfare institutions and improvement of health facilities in the host countries.14. Growth of MNCs helps in improving the balance of payment status of the host country.15. The MNCs integrate national and international markets. Their growth in these days has remarkably influenced economic, industrial, social environment and business conditions.In short, through basically seeking maximization of profits by using all types of resources and strategies of the global economy, eventually globalization has become the main focus of their business. In this way, it has become a main propelling force behind the expansion of world economy at large.Following are the reasons why MNCs consider India as a preferred destination for business: Huge market potential of the country FDI attractiveness Labor competitiveness Macro economic stability

List of MNCs in IndiaThe list of MNCs in India is ever-growing as number of MNCs is coming down to this country now and then. Following are some of the major multinational companies operating their businesses in India: British Petroleum Vodafone Ford Motors LG Samsung Hyundai Accenture Reebok Skoda Motors ABN Amro BankControl over MNCsConsidering the harmful effects of MNCs on a developing country like India, various government agencies have been entrusted with the responsibility of controlling the activities of MNCs in India. These agencies include(a) The Reserve Bank of India(b) The Ministry of Company Affairs(c) The ministry of Industrial Development and(d) The Ministry of Finance.As a result of the study by MICHAEL KIDRON entitled Foreign Investment in India published in 1965 and the Industrial Licensing Policy Enquiry Committee Report, 1968, the belief got strengthened that imports of foreign technology were overpriced and were designed to perpetrate dependence. As a result the governments policy was progressively tightened in the following directions:(a) Some industries were not allowed to import technology at all.(b) Among industries where import of technology was allowed, the maximum rate of royalty was laid down.(c) In some designated industries, foreign investment was allowed in principle, but sanction in individual cases was a matter of administrative decision.(d) The normal permissible period of agreements was reduced from ten years to five and renewals were generally frowned upon.(e) Exports and other marketing restrictions were generally not allowed and often an obligation to export a certain proportion of the output was insisted upon.(f) A clause was often inserted in the agreement granting permission to the importer to sub-license the technology.(g) The CSR was allowed to look at applications for approval of technology imports and if it expressed willingness to supply the technology, approval was withheld or at least delayed.

The most effective curb on the activities of foreign companies especially MNCs were supposed to come with the passing to Foreign Exchange Regulation Act in 1973. Now even FERA has become out of tune with the changing times and the government has replaced it with FEMA (Foreign Management Act) in 1999.

Indian MNCs in Other Countries

Top Indian MNCs

NAME OF THE COMPANYAREAS OF OPERATION

Tata GroupSteel, Automobiles, IT, Communication, Power, Tea, Hotels

Infosys TechnologiesSoftware applications managing and computer networks

WIPROSoftware & IT Consultancy

Dr. REDDYS LaboratoriesPharma

AirtelWireless Operator

Challenges of Going Global from India1. To develop a global corporate mindset.2. To make our people understand and respect local habit, culture.3. To establish brand equity overseas.4. To develop pool of managerial talent.5. To make ones globalised character successful and sustainable.

Current Scenario1. M&A by Indian MNCs at foreign turf valued at US$ 11.37 billion in 2008-08.2. Tata, Essar, Reliance and Infosys were among the biggest acquirers in the US.3. Tata Group remained at the forefront with their total deal values worth $2.13 billion in steel, hospitability and automotives sector.4. Aditya Birla took over Utkal Alumina International.5. Among the Asian countries, Vietnam was the largest receiver of the deal money as Tata Steel entered into a Joint Venture with Vietnam steel with 65 shares for $3.5 billion.6. South American and African region remained low on the acquisition radar.7. North America and Asia are the favorite hunting grounds of Indian Inc. on global acquisition as the take over deals touched $7 billion and $4.2 billion.8. The Indian companies have made their presence felt in Italy and Spain, also with their takeover deals of $97 billion and $19 million.