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Essay on Multinational Corporations (MNCs)
Essay Contents:
- Essay on the Introduction to Multinational Corporations
- Essay on the Reasons for Growth of MNCs
- Essay on the Domination of MNCs
- Essay on Foreign Collaboration and MNCs
- Essay on the Harmful Effects of Operations of MNCs on Indian Economy
- Essay on the Control over Multinational Corporations
Essay # 1. Introduction to Multinational Corporations:
Multinational Corporations (MNCs) are huge industrial organisations which extend their industrial and marketing operations through a network of their branches or their Majority Owned Foreign Affiliates (MOFAs). MNCs are also known as Transactional Corporations (TNCs). Instead of aiming for maximization of their profits from one or two products, the MNCs operate in a number of fields and from this point of view their business strategy extends over a number of products and over a number of countries.
At the onset of the 1990s, there were 37,000 TNCs whose tentacles straddled the international economy through 1,70,000 overseas affiliates. They possess staggering resources as would be clear form the fact that the revenue of 200 top corporations stood at $ 3,046 billion in 1982 which rose further to $ 5,862 billion in 1992.
Their share in world GPD rose from 24.2 per cent to 26.8 per cent over at the same period. Their aggregate profits stand at a mammoth $ 73.4 billion. Of this, the share of the largest 10 corporations is as much as $ 34.8 billion—a towering 47 per cent of the profits of the 200 mega corporations.
The above data show the massive control exercised by the MNCs on the world economy. In fact, because of their huge capital resources, latest technology and worldwide goodwill, MNCs are in a position to sell whatever product they choose to manufacture in different countries. The fact is that people in underdeveloped countries are ‘crazy’ for the products of these corporations and prefer their products to the products produced indigenously.
Essay # 2. Reasons for the Growth of MNCs:
Reasons for the growth of multinationals are manifold, the important ones being as follows:
1. Expansion of Market Territory:
As the operations of a large sized firm expand and as its international image builds up, it seeks more and more extension of its activities beyond the physical boundaries of the country in which it is incorporated.
2. Marketing Superiorities:
A multinational firm enjoys a number of marketing superiorities over the national firms;
(a) It possesses a more reliable and up-to-date market information system,
(b) It enjoys market reputation and faces less difficulty in selling its products;
(c) It adopts more effective advertising and sales promotion techniques, and
(d) It has efficient warehousing facilities due to lower inventory requirements.
3. Financial Superiorities:
A multinational firm enjoys the following financial superiorities over the national firm:
(a) It has huge financial resources with which it can easily turn all circumstances in its favour;
(b) It maintains a high level of funds utilization by generating funds in one country and using them in another;
(c) It has easier access to external capital markets; and
(d) Because of its international reputation it is able to raise more international resources. Even investors and banks of the host country are eager to invest in it.
4. Technological Superiorities:
The main reason why MNCs have been encouraged by the underdeveloped countries to participate in their industrial development is on account of the technological superiorities which these firms possess as compared to national companies.
The underdeveloped countries regard transfer of technology from MNCs useful on account of the following reasons:
(a) Industrialization represents the most important way out of underdevelopment and the resources of these countries are insufficient to sustain the industrial progress on their own;
(b) Local manpower, materials, local capital equipments etc. have to be optimally exploited and these countries are unable to accomplish this;
(c) Depending totally on local companies would require heavy imports of raw materials, capital equipment, machinery and technical knowledge whereas MNCs bring these on their own; and
(d) The underdeveloped countries have to face stiff competition for selling their products in international markets. Unless their goods meet international standards and quality specifications, they cannot sell. MNCs help them in producing such goods.
5. Product Innovations:
MNCs have Research and Development Departments engaged in the task of developing new products and superior designs of existing products. Therefore their production opportunities are far greater as compared to national companies.
Essay # 3. Domination of MNCs:
MNCs have a strong hold over the Indian economy. In fact, even two decades ago these corporations controlled 53.7 per cent of the assets of the giant sector in India. According to the Industrial Licensing Policy Inquiry Committee, there were 112 companies in India in 1966 with assets worth Rs. 10 crores or more. Of these, 48 were either foreign branches or Indian subsidiaries of foreign companies.
In addition, 14 Indian companies had extremely heavy- loans and equity capital and, therefore, were virtually foreign controlled. These 62 companies had Rs. 1,370 crores worth of assets which constituted 54 per cent of the total companies were also under foreign domination in one way or the other. In return for technical assistance, they had promised an assured market of machines and spares to their foreign associates. Some companies were heavily dependent on international financial institutions for economic assistance.
An interesting thing about the operations of MNCs in India is that they have raised a major part of investment resources from within the Indian economy. A study on the sources of finance of MNCs was conducted by Sudip Chaudhuri for the period 1956-75. The sample selected for study included 50 largest foreign subsidiaries.
His analysis revealed that for the period 1956-75 as a whole, foreign sources (in the form of foreign share capital and foreign loans) contributed only 5.4 per cent of the financial resources of these companies, 94.6 per cent being contributed by the domestic sources. Directly comparable data are not available for the period after 1975.
However, John Martinussen’s study shows that the amount of capital issues consented with foreign participation declined from 61.5 per cent of all consent to public limited companies in 1976 to a mere 29.5 per cent in 1980. John Martinussen indicates that 20 TNC affiliated companies even reduced their foreign funding. Several of these companies obtained no foreign funds at all during the period from 1974 to 1983. This fact about the financing behaviour of MNCs explodes the myth that they bring in large amounts of foreign capital with them.
Essay # 4. Foreign Collaboration and MNCs:
A common form of MNC participation in Indian industry is through entering into collaboration with Indian industrialists. Foreign collaboration agreements are made between Indian companies and foreign parties, involving sale of technology, as well as use of foreign brand names for the final products.
The enormity of foreign collaborations entered into by the Indian companies would be clear from the fact that in nearly all of the new industries in the large or medium size group, privately or publicly owned, set up after Independence, some collaboration agreement was present. Trends of liberalisation in the 1980s gave a substantial spurt to foreign collaborations.
This would be clear from the fact that of the total 12,760 foreign collaboration agreements approved in 40 years between 1948 and 1988, as many as 6,165 (i.e. 48.3 per cent) were approved during the eighty years between 1981 and 1988. As a result of liberalised foreign investment policy announced in July-August 1991, there has been a further spurt in foreign collaborations.
The value of approvals of direct investment proposals rose considerably from $ 325 million (Rs. 739 crores) in 1991 to $ 4.3 billion (Rs. 13,591 crores) in 1994. The total direct foreign investment proposals approved since 1991 till September 1995 amounts to $ 15.0 billion (Rs. 46,580. crores), against just under $ 1.0 billion (Rs. 1,274 crores) approved during the whole of the previous decade (1981-90).
A study of the foreign collaborations reveals certain interesting results. Thus, a large number of agreements were concluded for the manufacture of products which were non-essential or which could be produced with the help of local technology. These items included vacuum flasks, lipstick, toothpaste, cosmetics, brassieres, ice-cream, gin, beer, biscuits, dry batteries and readymade garments. Not only were collaborations granted for these products, they were often in multiple numbers and were renewed on expiry.
In addition to this ‘orientation’ of foreign collaborations, they also suffered from a number of other drawbacks as is clear from the following considerations:
(i) The government permitted multiple collaborations, i.e. repetitive import of the same or similar technology. This resulted in repetitive payments without adding to the stock of technical knowledge in the country;
(ii) The terms of agreements were mostly weighted in favour of the foreign collaborators and were against Indian interests. This arose on account of the lack of bargaining power in the Indian side and the government’s eagerness to acquire foreign participation in the fact of foreign exchange shortage;
(iii) The practice of multiple collaborations led to the introduction of standards of various countries (in raw materials, spare parts, deigns, specifications, and even terms of measurement) into the Indian industry even for very similar products or within the same firm. This multiplicity led to large inventory accumulation and uneconomic locking up of working capital. It also hindered standardisation and variety reduction which are so essential for raising industrial productivity;
(iv) Since the responsibility of specification and supply of equipment was entrusted to the foreign collaborators, there was close tie-up between the designers and suppliers resulting not only in price mark-up but also in over-import of equipment. Sometimes equipments were imparted even when they were available locally, sometimes they remained idle for want of spares, and often the processes were more highly mechanised and sophisticated than was desirable or necessary. At times, obsolete technology was imported;
(v) The terms of payment were also drawn up so as to squeeze out the maximum payment under one head or other. Generally 5 per cent of the annual turnover for 10 years as royalty plus 5 per cent of the imported plant cost as technical fees in the case of royalty-cum-technical fees, or 10 per cent of the issued capital as lump sum payment for technical fees alone, were the limits of official policy. However, these tended to become routine;
(vi) The most important part related to the presence of various restrictive clauses in the agreements.
Some restrictions imposed were:
(a) The technology cannot be passed on to anyone else, in some cases even after the expiry of the agreement;
(b) Manufacturing is to be carried out according to the specifications laid down by the collaborator and no local adaptations can be made;
(c) Control over overseas purchased was exercised through the provision that it had to be made directly or indirectly through the collaborator;
(d) Production was tightly controlled at times through the posing of foreign technicians;
(e) Controls over the pricing and marketing of the products were exercised by requiring that a part of the production was to be sold to the collaborator’s subsidiary in India at a fixed commission or that specified firms were to be made the sole selling agents; and
(f) Right to export was also restricted by provision that exports could be done only to specific countries or on certain preconditions; and
(vii) Foreign collaborations have helped the growth of monopolies and concentration. They joined hands with the big business houses and the latter were only too eager to enter into understanding with them since the presence of foreign links often conferred certain strategic advantages (patent, resources, foreign exchange, etc.) enabling the big business houses to diversify and expand.
Essay # 5. Harmful Effects of the Operations of MNCs on Indian Economy:
The operations of MNCs open up the possibilities of interference in the industrial (and other) activities of the recipient country and are thus resented by the ‘nationalist’ thinkers.
Their arguments against the operations of MNCs can be summed up as follow:
1. Payment of Dividends and Royalty:
A large sum of money flows out of the country in terms of payment of dividends, profits, royalties, technical fees and interest to the foreign investors. For instance, remittance made abroad by private sector companies stood at Rs. 72.26 crores in 1969-70. This rose to Rs. 398.9 crores in 1981-82 and further to 813.5 crores in 1989. A study by N.K. Chandra shows that over three fifths of private corporate, or about two fifths of factory sector dividends were paid out by the foreign firms in the mid-1980s.
2. Distortion of Economic Structure:
MNCs can inflict heavy damage on the host country in various forms such as suppression of domestic entrepreneurship, extension of oligopolistic practices (such as unnecessary product differentiation, heavy advertising, or excessive profit taking), supplying the economy with unsuitable technology and unsuitable products, worsening of income distribution by distorting the production structure to meet the requirements of high-income elites, etc.
Modern Marxist economists (Paul Baran, for example) argue that foreign investment (especially through multinational corporations) opens up the doors of ‘neo-imperialism’ and ‘exploitation’.
3. Technology Transfer not Necessarily Conducive to Development:
As far as transfer of technology to underdeveloped countries is concerned, the behaviour pattern of MNCs reveals that they do not engage in R & D activities within the underdeveloped countries. Their R&D efforts are concentrated in laboratories in the home county or in other industrialised countries.
Though R&D activities continue to be centralized in the parent country, the host countries have to bear the bulk of their costs since the affiliates of the MNCs in these countries remit payments on this account generally in relation to their sales volume. Such payments by the affiliates are generally over and above those remitted in the form of royalties and technical fees to the parent firm.
The satisfaction expressed on technology transfer is partly misconceived also on account of the fact that MNCs which generally command a semi-monopolistic position in their product lines do not transfer their first-line or most advanced technology until foreign firms compel them to do so in many cases, the technology transferred is of a capital intensive nature which is not useful from the point of view of a labour surplus economy. In fact, continued insistence on the import of such technology can have serious consequences for the economy of the host country since unemployment will increase.
4. Political Interference:
Because of their immense financial and technical power, the MNCs have gained the necessary strength to influence the decision making processes in underdeveloped countries. Though they do help in transferring technology to underdeveloped countries. It has been often found that models and patterns of industrial development and technologies transferred are not in harmony with the interests of the host countries.
The governments of underdeveloped countries have also felt threatened by the direct and indirect interference of MNCs in their internal affairs. The autonomy and sovereignty of the host countries is in danger. Because of these reasons, the governments of various countries have sought to restrict the activities of MNCs in their economies through a battery of administrative controls and legal provisions.
Essay # 6. Control over Multinational Corporations:
The responsibility of controlling the activities of Multinational Corporations in India rests on different government agencies.
These agencies are:
(i) The Ministry of Company Affairs,
(ii) The Reserve Bank of India,
(iii) The Ministry of Industrial Development, and
(iv) The Ministry of Finance.
However, these agencies do not work in close cooperation with each other. As a result, there is no coordination in their functioning. Each case is discussed on its own merits by the authorities.
As a result of a study of Michael Kidron entitled Foreign Investment in India published in 1965 (and the follow up discussions in which many economists participated) and the appearance of the Industrial Licensing Policy Inquiry Committee Report in 1968, the belief got strengthened that imports of foreign technology were overpriced and were designed to perpetrate dependence.
As a consequence, the government policy was progressively tightened in the following directions:
(1) Some industries were not allowed to import technology at all, the underlying principles of the policy being that,
(a) No ‘inessential’ article should be produced with fresh imports of technology (this gave the existing domestic and foreign producers automatic protection against fresh imports of technology) and
(b) Where domestic capacity was ‘adequate’ no technology should be imported;
(2) Among industries where technology imports were allowed, the maximum rate of royalty was laid down;
(3) In some designated industries, foreign investment was allowed in principle, but sanction in individual cases was a matter of administrative decision;
(4) The normal permissible period of agreements was reduced form ten years to five, and renewals were generally frowned upon;
(5) Exports and other marketing restrictions were generally not allowed, and often an obligation to export a certain proportion of the output was insisted upon;
(6) A clause was often inserted in the agreements granting permission to the importer to sub-licence the technology;
(7) The CSIR 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.