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Full description
Concept of MNC¶s:
A multinational corporation is an enterprise e nterprise that carries on busine3ss operations in more t han one country. It extends its manufacturing and marketing operations through a network of branches and subsidiaries which are known as its foreign affiliates. affiliates. According to a report of international labour office ³the essential nature of multinational enterprises lies in the fact that its managerial headquarters are located in one country while the enterprise carries out operations in a number of o ther countries as well.´ Characteristics of MNC¶S:
1.
Large
size
2. Worldwide operations 3. Centralized control 4. Sophisticated technology 5. Professional management 6. International market 7. High brand equity International Corporation:
An international corporation has a domestic orientation in so far as the overseas operations are treated as appendages to the headquarters. The parent company extends the domestic product, price, promotion and other business practices to the foreign markets. The assets, processes and decisions in overseas affiliates are controlled from the headquarters. Multinational Corporation:
It operates like a domestic company of the country and responds to the specific needs of each country¶s market.
Global Corporation:
It produces in home country and markets these products globally and focuses on marketing these products domestically. Overseas operations are used to build global scale and overseas affiliates act as implementing agencies for the decisions taken by the headquarters. Transnational Corporation:
A transnational corporation invests, produces, markets and operates across the world. It seeks to achieve global competitiveness through worldwide flexibility and learning. The resources and decisions of all the units are decentralized and these units act in an interdependent but integrated manner. Reasons for the growth of MNC¶s: 1. Market Expansion:
The growth of GDP and per capita income in various countries led to increasing demand for goods and services. Companies in developed economies expand their operations overseas to exploit the expanding markets abroad. 2. Marketing Superiorities: MNC¶S
enjoy the following marketing superiorities over the domestic companies:
a. Availability of more reliable and up to date information about market conditions b. Reputation in market due to popular brands and image c.
More
effective advertising and sales pro motion techniques.
d. Wide distribution network. e. Quick transportation and warehousing facilities. 3. Financial Superiorities: MNC¶S
are financially superior to domestic companies in the following respects:
a. Huge financial resources b.
More
effective and economical utilization of funds through transfer of excess
funds from one country to another c. Easy access to foreign capital markets. d. Easy mobilization of high quality resources of different types. e. Access to international banks and financial institutions.
4. Technological Superiorities: MNC¶S
have strong R&D departments. They can invent and innovate new products
and processes more easily and frequently. This provides them an edge over national companies. Developing countries invite
MNC¶S
for advanced technology due to the
following reasons: a. Developing countries do not have the resources to develop advanced technology and the level of industrialization is low. b. They are unable to exploit their rich mineral and other natural resources due to shortage of funds and low level technology. c. They do not have adequate foreign exchange reserves to import raw materials, capital equipment and technology on their own. d. They face difficulty in marketing their products in highly competitive world markets. Advantages of MNC¶S:
1. Benefits to the host country:
a. The levels of investment, employment and income increase due o the operation of MNC.
b.
MNC
help in growth of ancillary and service industries thereby increasing
industrialization and economic development. c.
MNC
brings advanced technology to the host country.
d. Business firms in the host country get sophisticated management techniques and practices. e.
MNC
enable the host country to increase its exports and reduce the imports.
f.
Domestic industry gets the benefit of R&D systems of MNC¶S. Their capability of invention and innovation increases.
g.
MNC¶S
increase competition and break domestic monopolies.
h.
MNC¶S
help to integrate national economies both economically and cu lturally.
2. Benefits to the home country:
a. The products manufactured in home country can e easily marketed throughout the world.
b. Employment opportunities for home country people are increased both at home and abroad. c. The level of industrial activity in the ho me country increases. d. In long run, the
BOP position of the home country improves through
inflows in the form of dividend, interest etc. Disadvantages
of MNC¶S:
1. Costs and risks to the host country:
a.
MNC¶S
employ capital intensive technology which is not appropriate to the needs
of developing countries. b. Due to their immense power,
MNC¶s
can undermine economic and political
sovereignty of developing countries. c.
MNC¶S
may kill the domestic industry and acquire monopoly over the host
country¶s market. d. Employment growth in the host country may be retarded because
MNC¶S
may
employ foreign staff. e.
MNC¶S
may cause fast depletion of host country¶s natural resources through their
indiscriminate use. f.
The host country¶s BOP may be under pressure when
MNC¶S
repatriate huge
amount in the form of profits, dividends and royalty. g.
MNC¶S
may undermine local culture, distort consumption patterns and promote
conspicuous consumption in the host country. 2.
Dangers
to home country:
a. Pressure on BOP due to transfer of capital to host countries. b.
Loss
of employment for home country people due to location of manufacturing
and marketing facilities abroad. c. Investment in more profitable countries may retard industrial and economic development in the home country. d. Cultures of foreign countries may distort home country¶s culture.
GLOBALISATION:
Globalisation may be defined as the integration of countries into world economy or one global market. It involves removal of all trade barriers between countries. Globalisation is the shift towards a more integrated and interdependent world economy ± Charles Hill. Features of Globalisation:
1. It involves expansion of business operations throughout the wo rld. 2. It leads to integration of individual countries of the world into one global market thereby erasing difference between domestic market and foreign market. 3. Buying and selling of goods and services takes place from / to any country in the world. 4. It creates interdependency between nations. 5.
Manufacturing
and marketing facilities are set up any where in the world on the basis of
their feasibility and viability rather than on national co nsiderations. 6. Products are planned and developed for the world market. 7. Factors of production like raw materials, labour, finance, technology and managerial skills are sourced from the entire globe. 8. Corporate strategies, organizational structures, managerial practices have a global orientation. Essential con ditions of Globalisation:
1. Removal of quotas and tariffs. 2.
Liberalization
of government rules and regulations.
3. Freedom to business and industry. 4. Removal of bureaucratic formalities and procedur es. 5. Adequate infrastructure. 6. Competition on the basis of quality, price, delivery and customer service. 7. Autonomy to public sector undertakings. 8. Incentives for R&D. 9. Development of money and capital markets.
10. Administrative and government support to industry. Indicators of Globalisation:
1. Share of foreign trade in national income 2. Foreign investment as a proportion of total investment in the country. 3. International investment income flows as a proportion of total investment income in the economy. 4. International tourism traffic as a proportion of total population of the co untry. 5. Share of foreign remittances. 6. Value of credits and debits to BOP as a proportion of national income. Strategies for Globalisation:
1. Exporting: It is an appropriate strategy under the following conditions: a. Cost of production in the foreign market is high b. The volume of exports is not large enough to justify production in the foreign market. c. There are production bottlenecks in the foreign market. d. Investment in the foreign country involves po litical and other risks. e. There is no guarantee of long term availability of the foreign market. f.
The company does not have permanent interest in the foreign market.
g. The foreign country concerned does not favour foreign investment. h. The company has underut ilized production capacity. i.
Domestic government provides incentives for export p roduction.
j.
It is easier and less costly to export than to set up production facilities abroad.
2.
Licensing
and franchising:
Franchising is a form of licensing in which a parent company grants another company through a written contract the right to offer, sell or distribute goods or services through a business system created by the franchiser. Its advantages are as follows:
a. It requires neither capital investment nor marketing strength in foreign markets. b. It reduces risk of exposure to government intervention and host country regulations. c. It provides a means to test foreign markets without involving major capital or management time. d. It can be used as a pre emptive strategy against competitors by combing the foreign markets before competitors could enter. e. It can be used to harvest obsolete products in poor countries. f.
The licensor can earn royalty income.
g. The licensee gets a proven product. 3. Contract manufacturing: Under this strategy the company enters into a contract with a firm in the foreign market to manufacture or assemble the product. The company retains the responsibility of marketing the product. This is common practice in book publishing industry. Advantages: a. The company has not to invest resources in setting up production facilities. b. The company is free from the r isk of investing in foreign markets. c. The company can start immediately when idle production capacity is available in the foreign country. d. Contract manufacturing may enable the company to obtain host country¶s support. Disadvantages: a. Potential profits from manufacturing are not available. b. The company has less control over manufacturing. c. There is risk of developing a potential competitor. d. Contract manufacturing is not suitable in cases involving technical secrets and in high tech products.
4.
Management
control:
Under this system a company contracts with a firm or government in a foreign country to manage the ent ire product or undertaking for a specified period. Advantages: a. The risk involved is low. b. It starts yielding income right from the beginning. c. The arrangement is specially attractive if the contracting firm is given an option to purchase some shares in the managed company within a stated period. d.
Management
contract can provide organisational skills, expertise and
support services that are not available locally. e. It enables the firm to commercialize existing knowhow and the impact of fluctuations in business volumes can be reduced by making use of experienced personnel. f.
The managing company may obtain the business of exporting or selling otherwise the products of the managed company or supplying the inputs to it.
5. Turnkey contract: In this the company contracts with a foreign firm to design and built an entire operation. On completion the operation is turned over to the local personnel who have been trained by the company. 6. Third country location: When commercial transactions between two countries are not possible due to political reasons, a company may have to enter the foreign market from a third country. 7. Joint ventures: A company may enter a foreign market by entering into a joint venture with a foreign firm. The local firm and the foreign firm share ownership and management in a joint venture. 8. Direct investment:
A company which wants to have substantial and long term interest in the foreign market has to establish fully owned manufacturing facilities abroad. This strategy provides the company complete control over production and quality. There is no risk of developing potential competitor as in the case of licensing and contract manufacturing. Advantages of Globalisation:
1. Wider markets: Globalization offers larger markets to domestic producers. Domestic firms can export their surplus output. They realize higher prices from foreign markets. Global operations help to improve public image which is helpful in attracting better talent. 2. Rapid industrialization: Globalization helps in free flow of capital and technology between countries this help the developing countries to boost up their industralisation. 3. Greater specialization: Globalization enables the domestic firms to specialize in areas where they enjoy competitive advantage. 4. Competitive gains: 5. Higher production: 6. Price stabilization: 7. Increase in employment and income: 8. Higher standards of living: 9. International economic cooperation: 10. World peace: Disadvantages
of Globalisation:
1. Interdependence: 2. Threat to domestic industry: 3. Unemployment: 4. Drain of basic resources:
5. Technological dependence: 6. Alien culture: Obstacles to Globalisation:
1. Bureaucracy: 2. High cost: 3. Poor quality: 4. Poor infrastructure: 5. Obsolete technology: 6. Resistance to change: 7.
6. Economic liberalization: 7. Global competition: Policy
options before India:
1. Appropriate macroeconomic po licies: 2. Fair institutional framework: 3. Partnership with MNC¶S: 4. International coordination: 5. Debt relief: WOR LD
TR ADE OR GANISATION (WTO):
WTO was established on January 1, 1995. It is the embodiment of the Uruguay Round and the successor to GATT. WTO has 146 members. The head office is located in Geneva (Switzerland). Objectives:
1. Raise standards of living 2. Ensure full employment 3. Expand production 4. Expand trade in goods and services 5. Optimize use of world¶s resources 6. Achieve sustainable development Functions:
1. Administering and implementing the multilateral and plurilateral trade agreements. 2. Providing a forum for multilateral trade negotiations among the members. 3. Facilitating settlement of trade disputes among members. 4. Overseeing national trade policies. 5. Cooperating with other international institutions involved in global po licy making.
Benefits of WTO:
1. Boost to exports: 2. Security and predictability: 3. Policy assistance: 4. Trade links: 5. Settlement of disputes: 6. Special concessions: 7. Promotion of competition: 8. Technical assistance: 9. Sustainable development: 10. Policy review mechanisms:
Disadvantages
1.
No
of WTO:
export push:
2. Prominence to developed nations: 3. Price rise: 4. Danger to service sector: 5.
Not
really free trade:
6. Erosion of autonomy: Regional Trade Blocks or Organisations:
