Multinationals Corporations free essay sample

Multinational corporations (MNC’s) also known as International Corporation, transnational corporation, global corporation and many more. Due to the political changes that have occurred during the years, the opportunities for multinationals corporations have increased considerably. As a fact multinationals corporations are growing with rapidity. For example in Mauritius we have KFC, Mac Donald’s, Pizza hut which are all multinationals and have branches throughout the island. According to the United Nations a multinational corporation is an enterprise which owns or controls production or service facilities outside the country in which it is based. In the words of W H Moreland, Multinational Corporations or Companies are those enterprises whose management, ownership and controls are spread in more than one foreign country. Thus a multinational company carries on business operations in two or more countries. Its headquarters are located in one country (home country) but its activities are spread over in other countries (host countries). We will write a custom essay sample on Multinationals Corporations or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The transnational corporation as it is known today, however, did not really appear until the 19th century, with the advent of industrial capitalism and its consequences: the development of the factory system; larger, more capital intensive manufacturing processes; better storage techniques; and faster means of transportation. During the 19th and early 20th centuries, the search for resources including minerals, petroleum, and foodstuffs as well as pressure to protect or increase markets drove transnational expansion by companies almost exclusively from the United States and a handful of Western European nations. Sixty per cent of these corporations investments went to Latin America, Asia, Africa, and the Middle East. Fuelled by numerous mergers and acquisitions, monopolistic and oligopolistic concentration of large transnationals’ in major sectors such as petrochemicals and food also had its roots in these years. The US agribusiness giant United Fruit Company, for example, controlled 90 per cent of US banana imports by 1899, while at the start of the First World War, Royal Dutch/Shell accounted for 20 per cent of Russias total oil production. Demand for natural resources continued to provide an impetus for European and US corporate ventures between the First and Second World Wars. Although corporate investments from Europe declined somewhat, the activities of US TNCs expanded vigorously. In Japan, this period witnessed the growth of the zaibatsu (or financial clique) including Mitsui and Mitsubishi. These giant corporations, which worked in alliance with the Japanese state, had oligopolistic control of the countrys industrial, financial, and trade sectors. The characteristics and features of Multinational Corporations (MNCs). The distinctive features of multinational companies are as follows. 1. Large Size: A multinational company is generally big in size. Some of the multinational companies own and control assets worth billions of dollars. Their annual sales turnover is more than the gross national product of many small countries. 2. Worldwide operations: A multinational corporation carries on business in more than one country. The MNCs operate in many countries with multiple products on large scale. A MNC may operate both manufacturing and marketing activities in a number of countries. Some MNCs operate in several countries, whereas, others may operate in a few countries. Mostly MNCs from developed countries dominate in the world markets. Multinational corporations such as Coco cola have branches in as many as seventy countries around the world. 3. International management: The management of multinational companies are international in character. It operates on the basis of best possible alternative available anywhere in the world. Its local subsidiaries are managed generally by the nationals of the host country. For example the management of Hindustan Lever lies with Indians. The parent company Unilever is in The United States of America. The Parent company works like a holding company. The subsidiary companies are to operate under control and guidance of parent company. The subsidiaries functions as per the policies and directions of parent organization. 4. Mobility of resources The operation of multinational company involves the mobility of capital, technology, entrepreneurship and other factors of production across the territories. 5. Integrated activities A multinational company is usually a complete organisation comprising manufacturing, marketing, research and development and other facilities. MNCs undertake both Manufacturing and Marketing Activities and they are predominantly engaged in hi-tech and consumer goods industries. Majority of the MNCs are engaged in pharmaceutical, petrochemicals, engineering, consumer goods, etc. 6. Several forms A multinational company may operate in host countries in several ways i. e. , branches, subsidiaries, franchise, joint ventures. Turn key projects. 7. Origins. The development of MNCs dates back to several centuries, but their real growth started after the Second World War Majority of the MNCs are from developed countries like U. S. A, Japan, UK, Germany and European countries. In recent years MNCs from countries like Korea, Taiwan, India, China, etc. are operating in the world markets. 8. Profit Motive. MNCs are profit oriented rather than social oriented. Such corporations do not take much interest in the social welfare activities of the host country. 9. Quality Consciousness MNCs are quality and cost conscious and managed by professionals and experts. They have their own organization culture and systems. MNCs believe in the concept of total quality management. Aims of multinational corporations Multinational companies make investments in different countries with the following aims. (a) To take tax benefits in host countries; (b) To exploit the natural resources of the host country; (c) To take advantage of Government concessions in host country; (d) To mitigate the impact of regulations in the home country; (e) To reduce cost of production by making use of cheap labour and low transportation expenses in the host country. (f) To gain dominance in foreign markets; (g) To expand activities vertically. Advantages of multinationals corporations. The merits of a multinational corporation may be enumerated as follows: 1) Costs Controls. Operating overseas can take advantage of lower labor costs in the same way as outsourcing, while allowing greater supervision and control to ensure quality. A multinational corporation can also benefit from reduced transportation costs. For example, a jewelry company could save money by setting up a branch in a country with gold mines, making rings locally, then shipping them to the home country for retail, rather than shipping the gold to the home country for local manufacture. Multinational corporations carry on operations on a large-scale, which ensure economics in material, labour and overhead costs. 2) Taxations. Having operations in multiple countries may allow the company to take advantage of tax variations. The company could place its business officially in the country with the lowest tax rates, even if management is elsewhere. Running a multinational corporation can help the business benefit from the tax systems of countries that require the company to have a physical presence to benefit from low rates, rather than simply operate a shell or paper company. 3) Consumer benefits. A multinational corporation that benefits from both low production costs and low taxes should be able to make increased profits while reducing prices, which benefits consumers. The company may also have access to knowledge and skills in multiple countries that could help it produce better products. 4) Research and development activities. Developing countries lack in research and development areas. Expenditure on research and development is essential for the promotion of technology. Multinational corporations have greater capability for research and development activities in comparison to national companies. Multinationals survive in the international market through their advanced research and development activities. 5) Far-reaching effects on the economic, social and political conditions of the host country. Multinational corporations provide a number of benefits to the host country in the form of (a) Economic growth; (b) increased profits; (c) Developing of new products; (d) Reduced operational costs; (e) Reduced labour costs; (f) Changing social and political structure, etc. Thus, it helps in the exploitation of resources of host countries for their own economic advancement. ) Product innovation Multinational corporations have research and development departments engaged in the task of developing new products, diversification in the product line, etc. Their production opportunities are far greater as compared to national companies. 7) Marketing superiority Multinational corporations enjoy market reputations and face less difficulties in selling their products by adopting effective adv ertising and sales-promotion techniques. 8) Financial superiority Multinational corporations generate funds in one country and use such funds in another country. They have huge financial resources at their disposal as compared to national companies. Moreover, multinational corporations have easier access to external capital markets 9) Technological superiority Multinational corporations can participate in the industrial development programmes of underdeveloped countries because of their technological superiority. They can produce goods having international standards and quality specifications by adopting the latest technology. Generally, multinationals transfers technology through joint venture projects. 0) Potential source of capital and advanced technology Economically backward countries invite multinational corporations as a potential source of capital and advanced technology to generate economic growth and to create employment opportunities. 11) Expansion of market territory Multinational corporations enjoy extension of activities beyond the geographical boundaries of their countries. Multinational corporations can enhance their internati onal image by expanding their operations activities. 12) Creating employment opportunities Increase in the scale of operations results in more job opportunities. The entry of multinational corporations helps in creating employment opportunities in production and marketing activities. Disadvantages of multinational corporations. The possible disadvantages of a multinational investing in a country may include: 1) High Profit Low Risk Investment The multinational company prefers to invest in areas of low risk and high profitability. Issue like social welfare, national priority etc. have less priority on their agenda. Mostly they invest in consumer goods industry. 2) Interference in Political Matters. The multinational company from developed countries interferes in the political affairs of developing nations. There are many cases where multinational company has bribed political leadership for their own economic gains. Multinational investment can be very important to a country and this will often give them a disproportionate influence over government and other organizations in the host country. Given their economic importance, governments will often agree to changes that may not be beneficial for the long-term welfare of their people. 3) Create Artificial Demand. These companies create artificial and unwarranted demand by making extensive use of advertising and ales and promotion techniques. 4) Exploitation. These companies are financially very strong and adopt aggressive marketing strategies to sale their products, adopt all means to eliminate competition and create monopoly. 5) Technological Problem Technology they use is capital intensive so sometimes that technology does not fully fit in the needs of developing countries. Also, multinational company is criticized for transferring outdated technology to developing countries. 6) Foreign Exchange go outside the Country The working of multinational company is a burden on the limited resources of developing countries. They charge high price in the form of commission and royalty paid by local business subsidiary to its parent company. This leads to outflow of foreign exchange. 7) National Threat. Sometimes outdated technology is used by domestic industries which hamper the quality and price of their products so they cannot compete with those multinational company. Hence, there is a threat of nationwide opposition to multinational company. Arrival of these companies creates an atmosphere of uncertainly to the domestic industries. 8) Cultural and social impact Multinational company imposes their culture on developing countries. Along with the products they also indirectly impose the culture of developed nations. These companies have imposed the culture of fast food and soft drinks onto the developing nations. For examples: burger and coke. Large numbers of foreign businesses can dilute local customs and traditional cultures. For example, the sociologist George Ritzer coined the term McDonaldization to describe the process by which more and more sectors of American society as well as of the rest of the world take on the characteristics of a fast-food restaurant, such as increasing tandardization and the movement away from traditional business approaches. 9) Environmental impact Multinationals will want to produce in ways that are as efficient and as cheap as possible and this may not always be the best environmental practice. They will often lobby governments hard to try to ensure that they can benefit from regulations being as lax as possi ble and given their economic importance to the host country, this lobbying will often be quite effective. 10) Transfer pricing. Multinationals will always aim to reduce their tax liability to a minimum. One way of doing this is through transfer pricing. The aim of this is to reduce their tax liability in countries with high tax rates and increase them in the countries with low tax rates. They can do this by transferring components and part-finished goods between their operations in different countries at differing prices. Where the tax liability is high, they transfer the goods at a relatively high price to make the costs appear higher. This is then recouped in the lower tax country by transferring the goods at a relatively lower price. This will reduce their overall tax bill. 11) Access to natural resources. Multinationals will sometimes invest in countries just to get access to a plentiful supply of raw materials and host nations are often more concerned about the short-term economic benefits than the long-term costs to their country in terms of the depletion of natural resources. 12) Export of Profits Large multinational are likely to repatriate profits back to their home country, leaving little financial benefits for the host country. Conclusion. A multinational corporation/company is an organisation doing business in more than one country. In other words it is an organisation or enterprise carrying on business in not only the country where it is registered but also in several other countries. It may also be termed as International Corporation, global giant and transnational corporation. Like every concept multinational corporations (MNCs) also have certain advantages as well as some disadvantages both to the host country and the home country.