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INTRODUCTION OF MNCS:

Generally, any company or group that derives a quarter of its revenue from operations
outside of its home country is considered a multinational corporation.

MNC must have substantial direct investment in foreign countries

MNC must be engaged in the active management of these overseas assets

MNC is also involved in the management integration of operations located in


different countries

It is a corporation/business or entity/enterprise that manages production


establishments or delivers services in at least two countries. MNCS is an enterprise
that manage production or delivers services more than one country can also be
referred to as international corporation. The term Multinational is widely used all
over the world to denote large companies having vast financial, managerial and
marketing resources. MNCs are like holding companies having its head office in one
country and business activities spread within the country of origin and other countries.
Multinational corporations play an important role in globalization some argue that a
new form of MNC is evolving in response to globalization the 'globally integrated
enterprise.
First MNC was Dutch East India Co (1602), granted monopoly in colonial trade.
Today, UN estimates about 62,000 MNCs with 900,000 affiliates. MNCs have
existed since 1602, in which year the first MNC, the Dutch East India Company, was
established.
Germany, Belgium and Finland that have made a strong footing in India too. They are
well flourishing and earning their share of maximum profit too.
An MNC (Multinational Corporation) is a corporation that has its management
headquarters in one country, known as the home country, and operates in several other
countries, known as host countries.
As the name implies, a multinational corporation is a business concern with
operations in more than one country. These operations outside the company's home
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country may be linked to the parent by merger, operated as subsidiaries, or have


considerable autonomy. Multinational corporations are sometimes perceived as large,
utilitarian enterprises with little or no regard for the social and economic well-being
of the countries in which they operate, but the reality of their situation is more
complicated.
When a company operates in a home nation established its subsidiary in other nation
it becomes an MNC and there starts the process of globalization where in a local
company serves the entire worlds with its products and services. India has
experienced a dramatic increase in the presence of Multinational Corporation having a
tremendous expansion in the amount of foreign direct investment inflows to the
Indian economy. Internet tools like Google, Yahoo, MSN, E-Bay, Skype, and Amazon
make it easier for the MNCs to reach their potential customers in the country
There are over 40,000 multinational corporations currently operating in the global
economy, in addition to approximately 250,000 overseas affiliates running crosscontinental businesses. In 1995, the top 200 multinational corporations had combined
sales of $7.1 trillion, which is equivalent to 28.3 per cent of the world's gross
domestic product. The top multinational corporations are headquartered in the
United States, Western Europe, and Japan; they have the capacity to shape global
trade, production, and financial transactions. Multinational corporations are viewed by
many as favouring their home operations when making difficult economic decisions,
but this tendency is declining as companies are forced to respond to increasing global
competition.
The modern multinational corporation is not necessarily headquartered in a wealthy
nation. Many countries that were recently classified as part of the developing world,
including Brazil, Taiwan, Kuwait, and Venezuela, are now home to large
multinational concerns. The days of corporate colonization seem to be nearing an end.
IBM computer and Pepsi-Cola from U.S.A., Siemens from Germany, Sony and Honda
from Japan Philips from Holland etc., are some of the MNCs operating at
international levels.

Introduction Since 1991, India has experienced a dramatic increase in the presence of
Multinational Corporation (MNCs), and with it, a tremendous expansion in the
amount of FOREIGN DIRECT INVESTMENT inflows to the Indian economy.

DEFINITION:
According to ILO report (i.e. International Labour Organisation) The essential
nature of the multinational enterprises lies in the fact that its managerial headquarters
are located in one country, while the enterprise carries out operations in number of
other countries.
According to Prof. John H. Dunning, "A multinational enterprise is one which
undertakes foreign direct investment, i.e., which owns or controls income gathering
assets in more than one country; and in so doing produces goods or services outside
its country of origin, i.e., engages in international production."
MNCS will have a demand for many services such as meals, transport, raw materials,
maintenance services that will be provided by domestic businesses, indirectly
increasing employment. Wages should increase as MNCS will want the best people
that the country has to offer.
Wages may be lower on international standards but should be higher than the local
standard, as logically the business will pay its workers more in order to motivate
them. Often MNCS are criticised for their wage policies but recent research and
statistics prove this wrong.

There are four categories of multinational corporations:


(1) A multinational, decentralized corporation with strong home country presence,
(2) A global, centralized corporation that acquires cost advantage through centralized
production wherever cheaper resources are available,
(3) AN international company that builds on the parent corporation's technology or
R&D,
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(4) A transnational enterprise that combines the previous three approaches. According
to UN data, some 35,000 companies have direct investment in foreign countries, and
the largest 100 of them control about 40 per cent of world trade.

The MNC: The Internalization Process

Foreign involvement
export via agent or distributor
export through sales rep or subsidiary
Local packaging or assembly
FDI
License
Time

CHARACTERISTICS OF MNCS
4

Following are the some of the important features/characteristics of MNCs:


1. Area of Operation: 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.

2. Origin: 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.

3. Comprehensive term: In general, the term MNC is a Comprehensive term and


includes international and transnational corporations. The term global corporation is
also included in the list of MNC.

4. 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.

5. Management: 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 organisation.

6. Manufacture and marketing activities: 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.
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7. Quality consciousness: MNCs are quality and cost conscious and managed by
professionals and experts. They have their own organisation culture and systems.
MNCs believe in the concept of total quality management.
8. Branding strategies of mncs in international markets: In todays global
marketplace, MNCs need to set up effective branding strategies in order to be
competitive. Depending on the structure of the company and the products offered,
MNCs can use different strategies.
9. Their main aim is to obtain the HIGHEST POSSIBLE PROFIT
10. They invest LARGE SUMS OF MONEY
11. THEY AID LOCAL COMPANIES &attain their benefits
12. They operate in more than one country at the same time
13. Big size
14. Huge intellectual capital
15. Operates in many countries
16. Large number of customer
17. Large number of competitors
18. Structured way of decision making
19. Single managerial authority control
20. Worldwide integration, better profitability
21. Global perspective
22. Close coordination in parents & affiliates
23. Worldwide market

OBJECTIVE of MNCS
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To expand the business beyond the boundaries of the home country.


Minimize cost of production, especially labour cost.
Capture lucrative foreign market against international competitors.
Avail of competitive advantage internationally.
Achieve greater efficiency by producing in local market and then exporting

the products.
Make best use of technological advantages by setting up production

facilities abroad.
Establish an international corporate image

MNCS STRUCTURE
1. Horizontally integrated multinational corporations: Horizontally
integrated multinational corporations manage production establishments located in
different countries to produce the same or similar products.(example:
McDonald's )
2. Vertically integrated multinational corporations: Vertically integrated
multinational

corporations

manage

production

establishment

in

certain

country/countries to produce products that serve as input to its production


establishments in other country/countries. (example: Adidas )
3. Diversified

multinational corporations: Diversified multinational

Corporations do not manage production establishments located in different


countries that are horizontally nor vertically nor straight, nor non-straight
integrated. (example: Hilton Hotels )

ADVANTAGES OF MNCS TO THE HOST COUNTRY:

Transfer

of

technology,

capital

and

entrepreneurship.

Increase in the investment level and thus, the income and employment in the
host Country.

Greater availability of products for local consumers.

Increase in exports and decrease in imports.

ADVANTAGES OF MNCS TO THE HOME COUNTRY

Acquisition of raw materials from abroad.

Technology and management expertise acquired from competing in global


markets.

Export of components and finished goods for assembly or distribution in


foreign markets.

Inflow of income from overseas profits, royalties and management contracts.

HOW IS A COMPANY CLASSIFIED AS AN A MNCS?

Subsidiary in foreign countries


Stakeholders are from different countries.
Operations in a number of countries

High proportion of assets in or/ and revenues from global operations

Multinational Companies in India (MNC)


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About Multinational Companies As the name suggests, any company is referred to as


a multinational company or corporation (M. N. C.) when that company manages its
operation or production or service delivery from more than a single country.

Such a company is even known as international company or corporation. As defined


by I. L. O. or the International Labour Organization, a M. N. C. is one, which has its
operational headquarters based in one country with several other operating branches
in different other countries. The country where the head quarter is located is called the
home country whereas; the other countries with operational branches are called the
host countries. Apart from playing an important role in globalization and international
relations, these multinational companies even have notable influence in a country's
economy as well as the world economy. The budget of some of the M. N. C.s are so
high that at times they even exceed the G. D. P. (Gross Domestic Product) of a
nation.
These are not the sole prior causes of the Nokia, Vodafone, Fiat, and Ford Motors and
as the list moves on- to flourish in India. As the basic economic data suggest that after
the liberalization in 1991, it has brought in hosts of foreign companies in India and the
share of U.S shows the highest. They account about 37% of the turnover from top 20
companies that function in India.

Why are Multinational Companies in India?

There are a number of reasons why the multinational companies are coming down to
India. India has got a huge market. It has also got one of the fastest growing
economies in the world. Besides, the policy of the government towards FDI has also
played a major role in attracting the multinational companies in India.

For quite a long time, India had a restrictive policy in terms of foreign direct
investment. As a result, there was lesser number of companies that showed interest in
investing in Indian market. However, the scenario changed during the financial
liberalization of the country, especially after 1991. Government, nowadays, makes
continuous efforts to attract foreign investments by relaxing many of its policies. As a
result, a number of multinational companies have shown interest in Indian market.

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COMPANY PROFILE:
Procter & Gamble Co. (P&G) is an American company based in Cincinnati, Ohio that
manufactures a wide range of consumer goods. In India Proctor & Gamble have two
subsidiaries: P&G Hygiene and Health Care Ltd. and P&G Home Products Ltd. P&G
Hygiene and Health Care Limited is one of India's fastest growing Fast Moving
Consumer Goods Companies with a turnover of more than Rs. 500 crores.
It has in its portfolio famous brands like Vicks & Whisper. P&G Home Products
Limited deals in Fabric Care segment and Hair Care segment. It has in its kitty global
brands such as Ariel and Tide in the Fabric Care segment, and Head & Shoulders,
Pantene, and Rejoice in the Hair Care segment.
Business Growth and Divestitures
Folgers Sale
On June 4, 2008, P&G sold its Folgers coffee unit to J.M. Smucker Co for $2.95
billion. As part of the deal, P&G shareholders will receive a 53.5 percent stake in
Smuckers and the company will assume $350 million of Folger's debt.
Gillette Acquisition
Procter & Gamble acquired Gillette in 2005 for over $50 billion in its largest
acquisition to date. In 2004, the last full year before the acquisition, Gillette generated
over $10 billion in sales, about $6 billion of which came from razors and Duracell and
Braun products and the remainder sourced from the Oral-B brand, which was moved
into the Health & Well-Being segment. A key piece of the acquisition beyond
Gillette's product lines was its distribution network and supply chain. Gillette's
distribution network and supply chain in emerging markets had been extremely
successful for Gillette and, once acquired, has worked to complement P&G's own
distribution network.
Sale of Pharmaceutical Unit
In 2009 P&G sold its pharmaceutical unit to Warner Chilcott Plc for $3.1 billion in
cash. The company expects to book a 43 cent per share earnings boost in Q2 of fiscal
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2010 as a result of the sale. The deal allows P&G to focus on its personal care, beauty,
and household product divisions. In 2006, the company started winding down its
discover-phase pharmaceutical products in favor of licensing late-stage compounds,
and announced in 2008 it would exit the drug industry entirely.
Online Sales
In January 2010, the company announced it would pursue its own online retail store to
sell its consumer products to US end-users, putting it in direct competition with major
retailers in reaching consumers. P&G CEO Bob McDonald said the company could
increase its online sales "substantially" over the next few years. In fiscal 2009, P&G's
existing online sales accounted for $500 million, or 0.6% of total revenue. The
company plans a full scale launch in spring 2010 after a pilot test with 5000
consumers.
Different product price points provide some insulation against recession
Household staples are somewhat protected from the US recession and global
economic downturn. However, in a recession consumers often turn to cheaper private
label or store brands instead of "brand name" products from P&G. To combat private
label encroachment, P&G offers at least two product forms in many product
categories. For example, the company has seen increases sales in Luvs from Pampers
diapers and an increase in Gain detergent sales from Tide. In addition, P&G offers
"Basic" versions of its Charmin toilet paper and Bounty paper towels. The company's
broad offerings, combined with the necessity of household items, provide a degree of
insulation against recession.
Retail Consolidation
The rise of a handful of powerful low-priced retailers has negatively impacted
consumer products companies. A handful of big retailers have captured a large share
of the market. For example, from 1999 to 2004, the top 10 food retailers in the US
increased their share of food retail sales from 53.4% to 58.9%. These large retailers
have shifted the balance of power within the supply chain. For example, the
company's largest customer, Wal-Mart, accounted for 15% of net sales in 2006, 2007,
and 2008. Wal-Mart has exerted its power over other suppliers to their detriment in
the past, such as forcing record companies to produce clean-label CDs and pulling
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adult magazines. A decision by Wal-Mart not to sell a particular P&G consumer


product would prevent P&G from reaching its entire target market. In addition, many
retailers have pushed their own higher margin private label brands in competition with
P&G.
Rise of Private Labels
In the past decade, P&G has faced stiff competition from private label brands or
"store brands" of large retailers such as Wal-Mart, Target, and supermarket chains.
Private label products often sell at lower price points and earn higher margins because
the retailers can control the cost of their production. For example, Wal-Mart offers
5,500 products through its "Great Value" brand, which has increasingly sold as
consumers feel the recession squeeze on their disposable income. From 2003 to 2008,
sales of Target's private label products rose an average of 15% annually.
Large retailers are close to the consumers, have the point of sale data on consumer
behavior and are in better position to understand consumer behavior. These strengths
contribute to better private label product development, which directly compete with
P&G products. Retailers also promote their own brands as they earn higher margins
on them. P&G has addressed this issue by continuously investing in Research &
Development and introducing new products as well as offering different versions of
its own products at different price points.
Developing Markets
P&G has a well-established market presence in developed countries such as the
United States and Western Europe and is looking to its presence in emerging markets.
In fiscal 2009, 32% of total net sales came from developing nations, a figure that has
increased steadily from 2002 when sales in developing nations accounted for only
about 20% of total revenue (approximately $8 billion). ] CEO Bob McDonald said in
2010 that he wants P&G to grow sales in China and India to reach 1 billion more
customers by 2014. In September 2010, PG announced it would bring its Wella hair
color products to India, leading an aggressive push for product expansion. Some
expect the company to bring its Crest or Oral-B toothpaste to the Indian market next.
In China and Russia, P&G's market share has been consistently increasing in the past
five years as Procter & Gamble has put an increased emphasis on establishing its
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products in those markets. In 2008, the company's distribution network reached 800
million people in China and 80% of the population in Russia. P&G has created
products designed specifically to target developing nations. For example, in many
countries consumers wash clothing by hand with limited amounts of water. In
response, P&G has launched Downy Single Rinse in Mexico, China, Philippines, and
9 other countries. While the average Mexican spends about $20 a year on P&G
products, Chinese per-capita spending is only about $3 and India per-capita spending
$1. Increasing sales in China and India to the levels in Mexico would add $40 billion
in sales to the company's overall revenue.
Research & Development focuses both inside and outside the company
In 2009, P&G spent approximately $2.04 billion on Research & Development, nearly
$1 billion more than its closest competitor, Unilever. The two most important factors
in P&G's innovation process are its practice of consumer demand research and its
"Connect and Develop" R&D structure. First, when entering new markets, P&G sets
up in-home visits with consumers in order to fully understand the needs and desires
consumers have for household and personal products. This way, P&G gets directly to
its customers and is able to cater to their needs. P&G also incorporates consumers'
input into the R&D process through its "Connect and Develop" initiative. Through
"Connect and Develop" P&G has an online interface set up where people can submit
product ideas and provide input on topics that P&G places on the web-portal. P&G
staff then sort through the ideas and work with the most promising ones. This process
is not responsible for all of the R&D that P&G does, but approximately 42% of new
products in the last several years were influenced by or originated from "Connect and
Develop."
Early returns on new products released in 2009 are encouraging. Tide Stain Release, a
stain-removing detergent released in July 2009, has garnered 10% market share in the
US as of November 2009. The Bounce Dryer Bar, an automatic laundry freshener
released in August 2009, has captured 7% of the North American fabric sheet market
as of November 2009.
Commodity Prices

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A diversified consumer products manufacturer, P&G depends heavily on a wide


basket of global commodities for manufacturing its goods. Higher commodity costs
subtracted 0.5% from gross margin growth.Nearly half of the company's cost of goods
is directly related to commodity goods. The company has increased prices due to
higher costs of oil and other raw materials. P&G instituted broad price adjustments in
Q1 2010 to close widening price gaps in several businesses, including North
American laundry, tissue, and towel, and several Eastern European markets. Analysts
believe pricing adjustments are largely behind P&G as of Q2 2010, with an impact on
about 10% of P&G's products. Jefferies analyst report, 10 Nov 2009As the market
leader, the company does benefit from pricing power and can moderate commodity
inflation better than its competitors.

P&G Home Products Limited was incorporated as 100% subsidiary of The Procter &
Gamble Company, USA in 1993 and it launched launches Ariel Super Soaker. In the
same year Procter & Gamble India divested the Detergents business to Procter &
Gamble Home Products. In 1995, Procter & Gamble Home Products entered the Hair
care Category with the launch of Pantene Pro-V shampoo.
Procter & Gamble Home Products launches Head & Shoulders shampoo. In 2000,
Procter & Gamble Home Products introduced Tide Detergent Powder - the largest
selling detergent in the world.
Procter & Gamble Home Products Limited launched Pampers - world's number one
selling diaper brand. Today, Proctor & Gamble is the second largest FMCG Company
in India after Hindustan Lever Limited.

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MISSION AND VISION STATEMENT


VISION OF P&G
To be a leading consumer goods company and to improve the lives of world
consumers by providing valuable and innovative products. Ten years ago Procter and
gamble started the journey to improve the lives of Indian consumers by providing
them with world famous quality brands. P&G want to be an outstanding organization
with a passion for winning that would felt by everyone everyday; in the office, in the
field every where P&G vision is to lead business growth by proactively identifying
opportunities and positively contributing to volume growth.

We will provide branded products and services of superior quality and value that
improve the lives of the world's consumers. As a result, consumers will reward us
with leadership sales, profit, and value creation, allowing our people, our
shareholders, and the communities in which we live and work to prosper.

VALUES AND PRINICPLES


P&G

is

its

people

and

the

values

by

which

we

live.

We attract and recruit the finest people in the world. We build our organization from
within, promoting and rewarding people without regard to any difference unrelated to
performance. We act on the conviction that the men and women of Procter & Gamble
will always be our most important asset.

LEADERSHIP:

We are all leaders in our area of responsibility, with a deep


commitment to deliver leadership results.
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We have a clear vision of where we are going.

We focus our resources to achieve leadership objectives and strategies.

We develop the capability to deliver our strategies and eliminate


organizational barriers.

OWNERSHIP:

We accept personal accountability to meet our business needs, improve


our systems, and help others improve their effectiveness.

We all act like owners, treating the Company's assets as our own and
behaving with the Company's long-term success in mind.

INTEGRITY

We always try to do the right thing.

We are honest and straightforward with each other.

We operate within the letter and spirit of the law.

We uphold the values and principles of P&G in every action and


decision.

We are data-based and intellectually honest in advocating proposals,


including recognizing risks.

PASSION FOR WINNING

We are determined to be the best at doing what matters most.


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We have a healthy dissatisfaction with the status quo.

We have a compelling desire to improve and to win in the marketplace.

We respect our P&G colleagues, customers, and consumers, and treat

TRUST

them as we want to be treated.

We have confidence in each other's capabilities and intentions.

We believe that people work best when there is a foundation of trust.

PRINCIPLES

We Show Respect for All Individuals

We believe that all individuals can and want to contribute to their


fullest potential.

We value differences.

We inspire and enable people to achieve high expectations, standards,


and challenging goals.

We are honest with people about their performance.

The Interests of the Company and the Individual Are Inseparable

We believe that doing what is right for the business with integrity will
lead to mutual success for both the Company and the individual. Our
quest for mutual success ties us together.
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We encourage stock ownership and ownership behavior.

We Are Strategically Focused in Our Work

We operate against clearly articulated and aligned objectives and


strategies.

We only do work and only ask for work that adds value to the business.

We simplify, standardize, and streamline our current work whenever


possible.

We Value Personal Mastery

We believe it is the responsibility of all individuals to continually


develop themselves and others.

We encourage and expect outstanding technical mastery and


executional excellence.

We Seek to Be the Best

We strive to be the best in all areas of strategic importance to the


Company.

We benchmark our performance rigorously versus the very best


internally and externally.

We learn from both our successes and our failures.

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Innovation Is the Cornerstone of Our Success

We place great value on big, new consumer innovations.

We challenge convention and reinvent the way we do business to better


win in the marketplace.

Mutual Interdependency Is a Way of Life

We work together with confidence and trust across business units,


functions, categories, and geographies.

We take pride in results from reapplying others' ideas.

We build superior relationships with all the parties who contribute to


fulfilling our Corporate Purpose, including our customers, suppliers,
universities, and governments.

HISTORY OF P & G
Procter & Gamble Co. (P&G) is an American company based in Cincinnati, Ohio that
manufactures a wide range of consumer goods. In India Proctor & Gamble has two
subsidiaries: P&G Hygiene and Health Care Ltd. and P&G Home Products Ltd.
Procter & Gamble's relationship with India started in 1951 when Vicks Product Inc.
India, a branch of Vicks Product Inc. USA entered Indian market. In 1964, a public
limited company, Richardson Hindustan Limited (RHL) was formed which obtained
an Industrial License to undertake manufacture of Menthol and de mentholated
peppermint oil and VICKS range of products such as Vicks VapoRub, Vicks Cough
Drops and Vicks Inhaler. In May 1967, RHL introduced Clearasil, then America's
number one pimple cream in Indian market. In 1979, RHL launches Vicks Action 500
and in 1984 it set up an Ayurvedic Research Laboratory to address the common
ailments of the people such as cough and cold.
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In October 1985, RHL became an affiliate of The Procter & Gamble Company, USA
and its name was changed to Procter & Gamble India. In 1989, Procter & Gamble
India launched Whisper - the breakthrough technology sanitary napkin. In 1991, P&G
India launched Ariel detergent. In 1992, The Procter & Gamble Company, US
increased its stake in Procter & Gamble India to 51% and then to 65%. In 1993,
Procter & Gamble India divested the Detergents business to Procter & Gamble Home
Products and started marketing Old Spice Brand of products. In 1999 Procter &
Gamble India Limited changed the name of the Company to Procter & Gamble
Hygiene and Health Care Limited.
In 1993, Procter & Gamble Home Products is incorporated as a 100% subsidiary of
The Procter & Gamble Company, USA. Procter & Gamble Home Products launches
Ariel Super Soaker.
In 1993, Procter & Gamble India divests the Detergents business to

Procter &

Gamble Home Products.


In 1995, Procter & Gamble Home Products enters the Haircare Category with the
launch of Pantene Pro-V.
In 1997 Procter & Gamble Home Products launches Head & Shoulders shampoo.
In 2000, Procter & Gamble Home Products introduced Tide Detergent Powder - the
largest selling detergent in the world.
In November 2000, Procter & Gamble Home Products Limited presented India in the
first International Hair Styling and Beauty Expert Contest- Hair Asia Pacific 2000 in
collaboration with Sri Lankan Association of Hairdressers and Beautician.

During this period, Procter & Gamble Home Products also re-launched the
international range of Head & Shoulders, best-ever Anti-dandruff shampoo with an
improved formula, new pack-design and logo, in three variants - Clean & Balanced,
Smooth & Silky and Refreshing Menthol, which offers the fine combination of antidandruff efficacy and hair conditioning.

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In January 2001, Procter & Gamble Home Products Limited and Whirlpool India Ltd.
launched a special 'Ariel - Whirlpool Superwash' offer, making washing machines
more affordable to the people of Hyderabad.
On purchase of either a 500gms, 1kg or 1.5kg economy pack of New Ariel Power
Compact, consumers are automatically eligible to buy a Whirlpool Washing Machine
for as low as Rs.238/- in Equal Monthly Installments for 24 months, by filling in the
application form that comes with the Ariel pack and contacting any one of the
Whirlpool dealers mentioned on the pack.
In June 2001, Procter & Gamble in partnership with the Association of Beauty
Therapy & Cosmetology (ABTC), India hosted the Pantene Artist 2001 a national
stylist competition, which included categories such as Bridal Dressing, Hair Cutting
and Body Painting. Present at the event was world-renowned hairdresser and stylist
Jun L. Encarnecion, who demonstrated the hottest international haircuts and styles in
vogue via an interesting hairhsow. Mr. Encarnecion has trained students in leading
hairdressing schools like Robert Fielding School of Hair Dressing (U.K), Pierre
Alexander International Academy (U.K), Vidal Sassoon Academy, (U.S.A) among
others and also enjoys the reputation of being the official hairdresser for the 1993
Miss Universe pageant.
In April 2002, Procter & Gamble Home Products Limited announced the launch of a
special Ariel Bar Refund Offer along with its new Advanced Ariel Compact. Under
the Ariel Bar Refund Offer, consumers could exchange their detergent bar on purchase
of Advanced Ariel Compacts 1kg and 500gms packs, and avail of a Rs.15 and Rs.7
discount respectively on MRP.

Additionally, Procter & Gamble Home Products announced the Beat The Summer
Dandruff offer on which 200ml Head & Shoulders bottle was available for Rs.99/only, thus giving a benefit of a Rs.23/- discount to consumers.
In June 2003, Procter & Gamble Home Products Limited launched Pampers - worlds
number one selling diaper brand with sales of US$ 6 billion annually. Pampers
provides superior dryness for uninterrupted overnight sleep, with just one pampers

22

diaper. In India, Pampers Fresh & Dry is available in a variety of three sizes 4s, 10s
and 25s.
In July 2003, Procter & Gamble Home Products Limited launched Pantene Long
Black, the ultimate solution for achieving the Long and Black hair look, and Head &
Shoulders Silky Black - the only shampoo in India to offer the dual benefits of 100%
dandruff-free as well as silky black hair.
In January 2004, Procter & Gamble Home Products Limited announced the launch of
Rejoice Asias No. 1 shampoo, in India. Rejoices patented Micro-Silicone
conditioning technology gives twice as smooth, and easy to comb hair versus ordinary
shampoos, at affordable prices in 100 ml bottles and 7.5 ml sachets.
In April 2006, Procter & Gamble Home Products Limited announced the launch of
Pantene Hair Fall Control, which is designed to free women of their hair fall concerns
by reducing hair fall due to breakage by up to 50% within just two months, thus
giving them stronger, thicker looking and beautiful hair. The prices of Pantene 100ml
and 200ml bottles were reduced by 16%, offering superior value to consumers.
In August 2007, Procter & Gamble Home Products Limited signed Preity Zinta
Bollywood's no.1 Actress, as Brand Ambassador for its Head & Shoulders antidandruff shampoo that gives 100% dandruff-free soft beautiful hair.
In October 2008, Procter & Gamble Home Products Limited launched New Pantene
Amino Pro-V Complex shampoos, which makes hair ten times stronger.

P & G INDIA SUBSIDIARIES

P&G India has three arms -- P&G Hygiene and Health Care, P&G HOME
PRODUCTS and GILLETTE INDIA.
P&G Hygiene and Health Care:
Procter & Gamble Hygiene and Health Care Limited is an India-based fast moving
consumer goods company. The Company is engaged in the manufacturing and
23

marketing of health and hygiene products. The Company's portfolio includes VICKS,
a healthcare brand and WHISPER, a feminine hygiene brand. Its healthcare product
portfolio includes Vicks VapoRub, Vicks Inhaler, Vicks Formula 44, Vicks Cough
Drops and Vicks Action 500+. Vicks VapoRub is available in five pack sizes of 50
grams jar, 25 grams jar, 10 grams, five grams and two grams dibbi. Under feminine
care, its brands include Whisper Maxi Regular, Whisper Maxi XL Wings, Whisper
Ultra with Wings, Whisper Ultra XL Wings and Whisper Choice. The Procter and
Gamble Company is its ultimate holding company and Procter and Gamble Asia
Holding BV is its holding company.
P&G HOME PRODUCTS:
Procter & Gamble Home Products Limited manufactures and distributes fabric care,
hair care, and baby care products. The company was incorporated in 1989 and is
based in Mumbai, India. P&G Home Products is a subsidiary of Procter & Gamble
Co.
P&G Home Products Limited is one of India's fastest growing Fast Moving Consumer
Goods Companies that has in its portfolio P&G's global brands such as Ariel and Tide
in the Fabric Care segment, and in the Hair Care segment: Head & Shoulders world's largest selling anti-dandruff shampoo; Pantene - world's No. 1 beauty
shampoo; and Rejoice - Asia's No. 1 shampoo.
P&G Home Products Limited is a 100% subsidiary of The Procter & Gamble
Company, USA, that in India, has carved a reputation for delivering superior quality,
value-added products to meet the needs of consumer.
GILLETTE INDIA:
Gillette India Limited (GIL) is one of India's well-known FMCG Companies that has
in its portfolio GILLETTE MACH 3 TURBO, ORAL-B and DURACELL - world's
leading brands and has carved a reputation for delivering high quality, value-added
products to meet the needs of consumers.
Incorporated in the year 1985 as Indian Shaving Products Limited, now Gillette India
Limited, its products speak for themselves. The company is always been known for

24

the strength of its brands, and always continues to penetrate deeper into the hearts of
Indian Consumers.
In the year 1990-91, the company launched two products, first was 7 0'Clock EJTEK
PII Shaving System and second was shaving cream with three variants. This was the
First time that a shaving cream was introduced in Indian markets with special
features.
Company successfully relaunched Gillette Foam in 4 Variants .Duracell also launched
its Ultra M 3 AA batteries, which was well received by consumers. Oral Care
launched Power Oral Care brushes, which were well received in the market. Towards
the End of 2003, Company launched Gillette Vector Plus.
The Company launched Storm Force, a revolutionary after shave splash and New
Ultra Comfort Shaving Gel .In the fourth Quarter, Company launched two new
Gillette Series Tube Shave Gel variants, namely for Sensitive skin and Moisturizing,
to suit different skin types.
Company launched ?New Improved Gillette Vector Plus featuring all new
contemporary look. The Gillette Company, USA was acquired worldwide through
merger in October, 2005 by Procter& Gamble Company, USA creating the largest
Consumer products Company in the World.
In the year 2006-2007, Company launched Gillette Presto Plus for more discerning
consumers. Oral B brand launched Oral B Vision and Kid in Premium Market
Segment.
In the year 2007-2008, Company launched The Gillette Winners program that had
sports legends Roger Federer, Thierry Henry and Tiger Woods and Rahul Dravid. An
innovative program "Free Dental Check up" was organized to enable consumers to
benefit from expertise of professional dentists at no cost. Oral-B brand launched a
new variant "Shiny Clean" targeted at the value segment.

PRODUCTS LINE
Fabric Care:
25

Procter & Gamble has two of its world-leading detergents Tide and Ariel, in India to
cater to the main concerns of the Indian households, namely, outstanding whiteness
and stain-removal.
Ariel Front-O-Mat
Ariel 2 Fragrances
Tide Detergent
Tide Bar
Hair Care:
P&Gs Beauty Business is over US$ 10 Billion in Global Sales, making it one of the
worlds largest beauty companies. The P&G beauty business sells more than 50
different beauty brands including Pantene, Olay, SK-II, Max Factor, Cover
Girl, Joy, Hugo Boss, Herbal Essences and Clairol Nice n Easy. In India,
P&Gs beauty care business comprises of Pantene, the worlds largest selling
shampoo, Head & Shoulders, the worlds No. 1 Anti-dandruff shampoo and Rejoice
Asias No. 1 Shampoo.
Procter & Gamble is committed to making every day in the lives of its consumers
better through the superior quality of its products and services.
Panteen Pro V
Head & Shoulders
Rejoice
Baby Care:
Pampers

CORPORATE STRUCTURE
P&Gs corporate structure has contain four pillars which are as follows:

26

Four pillars Global Business Units, Market Development Organizations, Global


Business Services and Corporate Functions form the heart of P&G's organizational
structure.

Global Business Units (GBU) build major global brands with robust business
strategies.

Market Development Organizations (MDO) build local understanding as a


foundation for marketing campaigns.

Global Business Services (GBS) provide business technology and services that
drive business success.

Corporate Functions (CF) work to maintain our place as a leader of our


industries.

P&G approaches business knowing that we need to Think Globally (GBU) and Act
Locally (MDO). This approach is supported by our commitment to operate efficiently
(GBS) and our constant striving to be the best at what we do (CF). This streamlined
structure allows us to get to market faster.

P &G ACQUISITION AND MERGERS


Procter & Gamble (P&G), the number one US consumer goods company, and
Gillette, the world's largest manufacturer of shaving products, announced the merger
of their operations in January 2005. The $57 billion merger was the ninth largest in
the US corporate history. Post-merger, the new company would dethrone Unilever as
the world's largest producer of consumer goods and is expected to have bargaining
power rivaling that of global retailers like Wal-Mart and Carrefour. The merger,
scheduled to be completed in late 2005, is expected to reap cost synergies of up to $22
billion for the new company. But the problems encountered by Daimler-Chrysler and
Hewlett Packard-Compaq's mergers showed that size could be a potential hindrance to
the success of a merger.

27

In the 1940s and 1950s, P&G embarked on a series of acquisitions. It acquired Spic
and Span (1945), Duncan Hines (1956), Chairman Paper Mills (1957), Clorox (1957;
sold in 1968) and Folgers Coffee (1963)...
The AcquisitionAs per the P&G and Gillette merger deal, P&G would exchange 0.975
shares of P&G common stock for each share of Gillette. It represented an 18%
premium to Gillette shareholders based on the closing share prices on January 27,
2005. However, the merger was subject to approval by the shareholders of both
Gillette and P&G. The merger was expected to get regulatory clearance by 2005.
P&G planned to buy back $18-22 billion of its common stock immediately after the
merger. The buy back process could take around 18 months to complete. This would
make the deal structure a 60% stock and 40% cash deal, although on paper it was a
pure stock-swap.
According to marketing guru, Al Ries, "The extra 18% premium paid by
P&G for Gillette's stock is going to make it 18% more difficult for the deal
to pay dividends to stock holders."P&G would have to borrow funds to
finance the planned repurchase of its stock. In light of this move, credit
rating agencies put both companies under a review for a possible
downgrade. S&P placed all ratings for P&G on Credit Watch with negative
implications based on the likelihood that P&G's leverage would increase
significantly due to the merger. As of September 30, 2004, P&G had debts
of $21.4 billion and Gillette of $3.1 billion.

CORPORATE SOCIAL RESPONSIBILITY

At P&G, Social Responsibility stems from our Corporate PVP (Purpose, Values and
Principles). Social Projects are in keeping with P&Gs credo of Business with a
Purpose. P&G has always demonstrated its commitment to the community not just
through the quality of its products and services, but also through socially responsible
initiatives for the community. We believe in building the community in which we live
and operate by supporting its ongoing development.

Project Shiksha II: Educating Underprivileged Children(2007)


Project Shiksha: Secure Your Childs Future (2003)
Rebuilding Lives In Earthquake Hit Bhuj (2001/2002)
28

Project Poshan: Fighting Malnutrition in India (2000)


Project Open Minds: Educating Indias Working Youth (1999)
Project Future Focus: The First-Ever Round Write-In Career Guidance Service

(1998)
Project Peace: Environment Education Programme (1996)

SWOT ANALYSIS

STRENGTH:

New Management

Gross Margin 15 Times the Industry Average

One of the best marketers in the world

Diversified brand portfolio: more than 300 brands with more than 79 billion in
Revenue

Tightly integrated with the largest retailers in the US and around the world

Product innovation

Talented management

29

Distribute to 80 Countries

Distribution channels all over the world

New Billion Dollar brands

WEAKNESS:

Top Brands Losing Market Share

Health and Beauty Women Only

Lagging behind in online media presence & leadership

Missing opportunity: Refuses to manufacture private label products for its


retail customers

Slow Process Heavy Culture

Views Product Performance only

Expansion for brands is limited

THREATS:

Substitute brands that have a cheaper price

Private label growth

30

Slowdown in consumer spending in the US & globally

Key competitors expanding their product portfolios through acquisitions

Increase in raw material price.

OPPORTUNITIES:

Health and Beauty for Men

Doubling Environmental Goals for 2012

Adding Value for the Conspiracy

Utilizing online social networks

Going Green/Eco Friendly

Capitalizing on online media

Continue to divest brands that don't align with the company's long-term goals
(i.e., Folgers)

Emerging markets

New acquisition opportunities

Selling directly to consumers

Design for better product experience

31

Role of Multinational Corporations in the Indian Economy:


Prior to 1991 Multinational companies did not play much role in the Indian economy.
In the pre-reform period the Indian economy was dominated by public enterprises. To
prevent concentration of economic power industrial policy 1956 did not allow the
private firms to grow in size beyond a point. By definition multinational companies
were quite big and operate in several countries.
While multinational companies played a significant role in the promotion of growth
and trade in South-East Asian countries they did not play much role in the Indian
economy where import-substitution development strategy was followed. Since 1991
with the adoption of industrial policy of liberalisation and privatisation rote of private
foreign capital has been recognised as important for rapid growth of the Indian
economy.
Since source of bulk of foreign capital and investment are Multinational Corporation,
they have been allowed to operate in the Indian economy subject to some regulations.
The following are the important reasons for this change in policy towards
multinational companies in the post-reform period.

1. Promotion of Foreign Investment:


In the recent years, external assistance to developing countries has been declining.
This is because the donor developed countries have not been willing to part with a
larger proportion of their GDP as assistance to developing countries. MNCs can
bridge the gap between the requirements of foreign capital for increasing foreign
investment in India.
The liberalised foreign investment pursued since 1991, allows MNCs to make
investment in India subject to different ceilings fixed for different industries or
32

projects. However, in some industries 100 per cent export-oriented units (EOUs) can
be set up. It may be noted, like domestic investment, foreign investment has also a
multiplier effect on income and employment in a country.

2. Non-Debt Creating Capital inflows:


In pre-reform period in India when foreign direct investment by MNCs was
discouraged, we relied heavily on external commercial borrowing (ECB) which was
of debt-creating capital inflows. This raised the burden of external debt and debt
service payments reached the alarming figure of 35 per cent of our current account
receipts.
This created doubts about our ability to fulfil our debt obligations and there was a
flight of capital from India and this resulted in balance of payments crisis in 1991. As
direct foreign investment by multinational corporations represents non-debt creating
capital inflows we can avoid the liability of debt-servicing payments.
Moreover, the advantage of investment by MNCs lies in the fact that servicing of nondebt capital begins only when the MNC firm reaches the stage of making profits to
repatriate Thus, MNCs can play an important role in reducing stress strains and on
Indias balance of payments (BOP).

3. Technology Transfer:
Another important role of multinational corporations is that they transfer high
sophisticated technology to developing countries which are essential for raising
productivity of working class and enable us to start new productive ventures requiring
high technology.
Whenever, multinational firms set up their subsidiary production units or jointventure units, they not only import new equipment and machinery embodying new
technology but also skills and technical know-how to use the new equipment and
machinery.
As a result, the Indian workers and engineers come to know of new superior
technology and the way to use it. In India, the corporate sector spends only few
resources on Research and Development (R&D). It is the giant multinational
33

corporate firms (MNCs) which spend a lot on the development of new technologies
can greatly benefit the developing countries by transferring the new technology
developed by them. Therefore, MNCs can play an important role in the technological
up-gradation of the Indian economy.

4. Promotion of Exports:
With extensive links all over the world and producing products efficiently and
therefore with lower costs multinationals can play a significant role in promoting
exports of a country in which they invest. For example, the rapid expansion in Chinas
exports in recent years is due to the large investment made by multinationals in
various fields of Chinese industry.
Historically in India, multinationals made large investment in plantations whose
products they exported.

5. Investment in Infrastructure:
With a large command over financial resources and their superior ability to raise
resources both globally and inside India it is said that multinational corporations could
invest in infrastructure such as power projects, modernisation of airports and posts,
telecommunication.
The investment in infrastructure will give a boost to industrial growth and help in
creating income and employment in the India economy. The external economies
generated by investment in infrastructure by MNCs will therefore crowd in
investment by the indigenous private sector and will therefore stimulate economic
growth.
In view of above, even Common Minimum Programme of the present UPA
government provides that foreign direct investment (FDI) will be encouraged and
actively sought, especially in areas of
(a) infrastructure,
(b) high technology
(c) exports, and
34

(d) where domestic assets and employment are created on a significant scale.

FDI POLICY AND ITS IMPACT ON MNCS

FOREIGN DIRECT INVESTMENT POLICY

MNCs are source of FDI, the movement of capital across national borders that grants
the investor control over an acquired asset.
FDI may comprise > 20% of global GDP.
In its recent foreign direct investment (FDI) policy, the Government of India had
announced additional methods for issue of shares for consideration other than cash,
such as: (a) import of capital goods/ machinery/ equipment (including second-hand
machinery); (b) pre-operative/ pre-incorporation expenses (including payments of
rent, etc.). The RBI has now implemented these schemes by prescribing the detailed
conditions on which this share issuance facility will be available to Indian
companies.)
Foreign direct investment (FDI) has become a key battleground for emerging markets
and some developed countries. Government-level policies are needed to enable FDI
inflows and maximize their returns for both investors and recipient countries.
Foreign direct investment (FDI) has become a key battleground for emerging markets
and some developed countries. Government-level policies are needed to enable FDI
inflows and maximize their returns for both investors and recipient countries.
Foreign direct investment (FDI) policies play a major role in the economic growth of
developing countries around the world. Attracting FDI inflows with conductive
policies has therefore become a key battleground in the emerging markets.
Developed countries also seek to bring in more FDI and use various policies and
incentives to attract overseas investors, particularly for capital-intensive industries and
advanced technology.
35

The primary aim of these policies is to create a friendly business environment where
foreign investors feel comfortable with the legal and financial framework of the
country, and have the potential to reap profits from economically viable businesses.
The prospect of new growth opportunities and outsized profits encourages large
capital inflows across a range of industry and opportunity types.
Investors tend to look for predictable environments where they understand how
decision-making processes work. Governments therefore are incentivized to build up
a track record of rational decision making. The business environment often requires
work to remove onerous regulations, reduce corruption and encourage transparency.
Governments often also seek to improve their domestic infrastructure to meet the
operational needs of investors.
Providing fiscal incentives for attracting FDI is a subject of controversy analysts
have argued both in favour and against the idea. A general consensus is developing in
favour of certain incentives which have been proven historically to grow profits and
therefore foreign investments.
When policies are effective, significant FDI investments are injected into countries
that help the domestic economy to grow. Different countries and regions offer various
kinds of fiscal incentives, with a related variance in the level of FDI investments
attracted.
Governments are increasingly setting up promotional agencies to foster foreign direct
investment. These agencies promote FDI-friendly policies, identify prospective
sectors and investors, and structure specific deals and incentives for major foreign
investors such as multi-national corporations (MNCs).
Global trade associations also play a major role in some of these investment activities.
These associations are tasked with creating a positive environment for foreign direct
investors and ensuring that both investors and recipient countries enjoy a favourable
environment.
The formation of human capital is vital for the continued growth of FDI inflows. To
enable the most beneficial, technology and IP-driven FDI, highly skilled personnel are
necessary. Governments must therefore enact policies to provide training and skills

36

upgrading to develop their workforce and meet the employment needs of foreign
investors.
The advantages of FDI are as follows.
1. It supplements the meagre domestic capital available for investment and helps set
up productive enterprises.
2. It creates employment opportunities in diverse industries.
3. It boosts domestic production as it generally comes in a package - money,
technology etc.
4. It paves the way for internationalisation of markets with global standards and
quality assurance and performance based budgeting.
5. It pools resources productively - money, manpower, technology.
6. It creates more and new infrastructure.
7. For the home country it a good way to take advantage in a favourable foreign
investment climate (e.g. low tax regime).
8. For the host country FDI is a good way of improving the BoP position.

FDI is prohibited in only the following activities:


1. Retail Trading (except single brand product
2. retailing);
3. Atomic Energy;
4. Lottery Business;
5. Gambling and Betting;
6. Business of chit fund;
7. Vi.Nidhi Company;
8. Trading in Transferable Development Rights
9. (TDRs); and
10. Activities/sectors not open to private sector
11. Investment.

37

GROWTH IN FDI
FDI equity inflows into India:

Thirteen-fold growth between 2003-04 and 2009-10

FDI inflows into India:

In terms of international practices of calculating FDI (i.e. by taking into


account re-invested earnings and other capital), FDI inflows were nearly US $
37.18 billion during 2009-10

Stable pace of inflows:

FDI inflows have somewhat flattened out over the course of the last three
years However, the pace of inflows has been stable This is including during

2009-10, at the height of the global economic slowdown


This is despite a significant fall in global FDI inflows

EFFECTS OF MNCS:
The case against MNCs has been spearheaded by radical-structuralists. At the most
general level, they argue that MNCs integrate poor nations into an unequally
structured world system, with poor countries languishing on the periphery, heavily
dependent for their development on the decisions and actions of capitalists ensconced
in MNC headquarters in rich core nations. The policy implications of the most radical
of the dependency school arguments is for poor countries to cut their dependence by
closing their doors to MNCs.
We examine at a lower level of analysis, some of the possible specific negative effects
of MNC investment on, first, the host, and then the home countries.
HOST COUNTRY EFFECT

38

In several caces, MNCs may borrow the Money for foreign investment in the local
host market rather than transfer it from its home base. MNCs may squeeze out young,
potentially viable local firms from the local market and retard the independent
development of indigenous businessess.
Doubts have also been raised about the benefits of the transferred technology,
especially for poorer developing countires. First the vast bulk of the research and
development capability of MNCs remains at home in the parent company. Very little
is carried out in developing countires. Therefore, MNCs, it is argued, do not help
develop an independent capacity to generate new technology in the host countries.
Since locals receive little training and experience developing new products and
processess, when the MNCs leave, little that was of lasting benefit remains. This
would be particularly true for MNCs producing for export in low labor-cost locations,
fort hey are likely to be short-term residents in these countires.
Second, there is the question of the appropriateness or suitability of the transferred
technology fort he host nation. MNCs that set up subsidiaries in host countries
primarily to service the local market, as is often the case with FDI in developed
nations, are likely to develop contractual linkages with local firms. Those primarily
interested in outsourcing-that is, producing in overseas locations for export, usually
back to the home market then not to develop extensive lingages with local firms.
Critics charge that MNCs tend to exploit workers in developing countries by paying
them low wages and by providing them with inadequate benefits and unsafe working
conditions. Some MNCs have also been accused of transferring enviromentally unsafe
production processes to poorer countries to escape strict U.S. or European
environmental regulations.
Finally, we need to consider briefly the effects of MNCs on the political conditions in
host countries. What is certainly the case is that MNCs are not in the business of
promoting democracy or any other human rights. MNCs have operated quite happily
in countires ruled by left-wing and right-wing authoritarian regimes.
Sometimes, when their interest were threatened, some MNCs have pressed their home
governments to intervene in the internal political affiars of other nations. It is only fair
to point out that MNCs are also subject to political pressures.
39

HOME COUNTRY EFFECTS


Foreign direct investment means a loss of jobs in the home country and the gradual
deindustrialization of the nations economy.
Governments of both home and host countires are also interested in the tax revenues
MNCs generate. An MNC operating in several countries typically should pay taces to
each government on the profits it earns doing business in that country.
Given that many countires have different tax rates, one can see why MNCs might be
tempted to manipulate transfer prices so as to minimize their total tax burden.

Profit of MNCs in India

It is too specify that the companies come and settle in India to earn profit. A company
enlarges its jurisdiction of work beyond its native place when they get a wide scope to
earn a profit and such is the case of the MNCs that have flourished here. More over
India has wide market for different and new goods and services due to the ever
increasing population and the varying consumer taste. The government FDI policies
have somehow benefited them and drawn their attention too. The restrictive policies
that stopped the company's inflow are however withdrawn and the country has shown
much interest to bring in foreign investment here.

Besides the foreign directive policies the labour competitive market, market
competition and the macro-economic stability are some of the key factors that
magnetize the foreign MNCs here.

Following are the reasons why multinational companies consider India as a preferred
destination for business:

Huge market potential of the country


FDI attractiveness
Labour competitiveness
Macro-economic stability
40

Advantages of the growing MNCs to India


There are certain advantages that the underdeveloped countries like and the
developing countries like India derive from the foreign MNCs that establishes. They
are as under:

Initiating a higher level of investment.


Reducing the technological gap
The natural resources are utilized in true sense.
The foreign exchange gap is reduced
Boosts up the basic economic structure.

Disadvantages of having MNCs in a developing country like India are


as under

Competition to SMSI
Pollution and Environmental hazards
Some MNCs come only for tax benefits only
Exploitation of natural resources
Lack of employment opportunities
Diffusion of profits and Forex Imbalance
Working environment and conditions
Slows down decision making
Economical distress

A Critique of Multinational Corporations:


In recent years foreign direct investment through multinational corporations has vastly
increased in India and other developing countries. This vast increase in investment by
multinational corporations in recent years is prompted by factors (1) the liberalisation
of industrial policy giving greater role to the private sector, (2) opening up of the
economy and liberalisation of foreign trade and capital inflows. In this economic
environment multinational corporations which are in search for global profits are
induced to make investment in developing countries.
As explained above, foreign direct investment by multinational firms bring many
benefits to the recipient countries but there are many potential dangers and
disadvantages from the viewpoint of economic growth and employment generation.
41

Therefore, role of multinational corporations in India and other developing countries


have been criticised on several grounds. We discuss below some of the criticisms
levelled against multinational corporations.

1. Capturing Markets:
First, it is alleged that multinational corporations invest their capital and locate their
manufacturing units on their own or in collaboration with local firms in order to sell
their products and capture the domestic markets of the countries where they invest
and operate. With their vast resources and competitive strength, they can weed out
their competitive firms.
For example, in India if corporate multinational firms are allowed to sell or produce
the products presently produced by small and medium enterprises, the latter would not
be able to compete and therefore would be thrown out of business. This will lead to
reduction in employment opportunities in the country.

2. Use of Capital-intensive Techniques:


It has been seen that increasing capital intensity in modern manufacturing sector is
responsible for slow growth of employment opportunities in Indias industrial sector.
These capital-intensive techniques may be imported by large domestic firms but
presently they are being increasingly used by multinational corporations which bring
their technology when they invest in India.
Emphasising this factor, Thirwall rightly writes, In this case the technology may be
inappropriate not because there is not a spectrum of technology or inappropriate
selection is made but because the technology available is circumscribed by the global
profit maximising motives of multinational companies investing in the less-developed
country concerned

3. Encouragement to Inessential Consumption:

42

The investment by multinational companies leads to overall increase in investment in


India but it is alleged that they encourage conspicuous consumption in the economy.
These companies cater to the wants of the already well-to-do people. For example, in
India very expensive cars (such as City Honda, Hyundais Accent, Mercedes, Opal
Astra, etc.) the air conditioners, costly laptops, washing machines, expensive fridges,
29 and Plasma TVs are being produced/sold by multinational companies.
Such goods are quite inappropriate for a poor country like India. Besides, their
consumption has a demonstration effect on the consumption of others. This tends to
raise the propensity to consume and adversely affects the increase in savings of the
country.

4. Import of Obsolete Technology:


Another criticism of MNCs is based on the ground that they import obsolete machines
and technology. As mentioned above, some of the imported technologies are
inappropriate to the conditions of Indian economy. It is alleged that India has been
made a dumping ground for obsolete technology.
Moreover, the multinational corporations do not undertake Research and
Development (R&D) in India to promote local technologies suited to the Indian
factor-endowment conditions. Instead, they concentrate R&D activity at their head
quarters.

5. Setting up Environment-Polluting Industries:


It has been found that investment by multinational corporations in developing
countries such as India is usually made for capturing domestic markets rather than for
export promotion. Moreover, in order to evade strict environment control measures in
their home countries they set up polluting industrial units in India.
A classic example of this is a highly polluting chemical plant set up in Bhopal
resulting in gas tragedy when thousands of people were either killed or made
handicapped due to severe ailments. With the tightening of environmental measures
43

in the such countries, there is a tendency among the MNCs to locate the polluting
industries in the poor countries, where environmental legislation is non-existent or is
not properly implemented, as exemplified in the Bhopal gas tragedy.

6. Volatility in Exchange Rate:


Another major consequence of liberalised foreign investment by multinational
corporations is its impact on the foreign exchange rate of the host country. Foreign
capital inflows affect the foreign exchange rate of the Indian rupee.
A large capital inflow through foreign investment brings about increase in the supply
of foreign exchange say of US dollars. With demand for foreign exchange being
given, increase in supply of foreign exchange will lead to the appreciation of
exchange rate of rupee.
This appreciation of the Indian rupee will discourage exports and encourage imports
causing deficit in balance of trade. For example, in India in the fiscal years 2004-05
and 2005-06, there were large capital inflows by FII (giant financial multinationals) in
the Indian economy to take advantage of higher interest rates here and also booming
of the Indian capital market.
On the other hand, when interest rates rise in the parent countries of these
multinationals or rates of return from capital markets go up or when there is loss of
confidence in the host country about its capacity to make payments of its debt as
happened in case of South-East Asia in the late nineties there is large outflow of
capital by multinational companies resulting in the crisis and huge depreciation of
their exchange rate. Thus, capital inflows and outflows by multinationals have been
responsible for large volatility of exchange rate.
Then there is the question of repatriation of profits by the multinationals. Though a
part of profit is reinvested by the multinational companies in the host country, a large
amount of profits are remitted to their own parent countries.
This has a potential disadvantage for the developing countries, especially when they
are facing foreign exchange problem. Commenting on this Thirwall writes FDI has

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the potential disadvantage even when compared with loan finance, that there may be
outflow of profits that lasts much longer.

7. Transfer Pricing and Evasion of Local Taxes:


Multinational corporations are usually vertically integrated. The production of a
commodity by multinational firm comprises various phases in its production the
components used in the production of a final commodity may be produced in its
parent country or in its affiliates in other countries.
Transfer pricing refers to the prices a vertically integrated multinational firm charges
for its components or parts used for the production of the final commodity, say in
India. These prices of components or parts are not real prices as determined by
demand for and supply of them.
They are arbitrarily fixed by the companies so that they have to pay less taxes in
India. They artificially inflate the transfer prices for intermediate products (i.e.,
components) produced in their parent country or their overseas affiliates so as to show
lower profits earned in India. As a result, they succeed in evading corporate income
tax.

MNC IN INDIA ARE ATTRACTED TOWARDS:

Indias large market potential


India presents a remarkable business opportunity by virtue of its sheer size

and growth
Labour competiveness
FDI attractiveness

GOVERNMENT SUPPORT:

Both revenue and capital expenditure on R&D are 100% deductible from
taxable income under the Income Tax Act.

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A weighted tax deduction of 125% is allowed for sponsored research in


approved national laboratories and institutions of higher technical education.

A weighted tax deduction of 150% is allowed on R&D expenditure by


companies in government-approved in- house R&D centres in selected
industries.

A company whose principal objective is research and development is exempt


from income tax for ten years from its inception. Accelerated depreciation is
allowed for investment in plant and machinery made on the basis of
indigenous technology.

Customs and excise duty exemptions for capital equipments and consumables
required for R&D.

Excise duty exemption for three years on goods designed and developed by a
wholly owned Indian company and patented in any two countries out of: India,
the United States, Japan and any country of the European Union.

POLICIES THAT HELPED MNCs GROW IN INDIA

FDI Policy: Most sectors including manufacturing activities permitted 100%


FDI under automatic route (No prior approval required)

Industrial Licensing: Licensing limited to only5 sectors (security, public


health & safety considerations)

Exchange Control: All investments are on repatriation basis.

Taxation: Companies incorporated in India treated as Indian companies for


taxation

Original investment, profits and dividend can be freely repatriated

Convention on Avoidance of Double Taxation with 71 countries including


Korea.

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WHAT IS THE FUTURE OF MNCS IN INDIA?


Current trends in the international marketplace favour the continued development of
multinational corporations. Countries worldwide are privatizing government-run
industries, and the development of regional trading partnerships such as the North
American Free Trade Agreement (a 1993 agreement between Canada, Mexico, and
United States) and the European Union have the overall effect of removing barriers to
international trade. Privatization efforts result in the availability of existing
infrastructure for use by multinationals seeking to enter a new market, while removal
of international trade barriers is obviously a boon to multinational operations.
Perhaps the greatest potential threat posed by multinational corporations would be
their continued success in a still underdeveloped world market. As the productive
capacity of multinationals increases, the buying power of people in much of the world
remains relatively unchanged; this could lead to the production of a worldwide glut of
goods and services. Such a glut, which has occurred periodically throughout the
history of industrialized economies, can in turn lead to wage and price deflation,
contraction of corporate activities, and a rapid slowdown in all phases of economic
life. Such a possibility is purely hypothetical, however, and for the foreseeable future
the operations of multinational corporations worldwide are likely to continue to
expand.

CONCLUSION:
We have seen above foreign investment by multinational companies have both
advantages and disadvantages. Therefore, they need regulation and should be
permitted in selected sectors and also subject to a cap on their investment in particular
fields. If objective of economic growth with stability and social justice is to be
achieved, there should not be complete open door policy for them.
It is true that multinational corporations take risk in making investment in India, they
bring capital and foreign exchange which are non-debt creating, they generally

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promote technology and can help in raising exports. But they must be regulated so
that they serve these goals.
They should be allowed to invest in infrastructure, high-technology areas, and in
industries whose products they can export and if they help in generating net
employment opportunities. We agree with Colman and Nixon who write:
Transnational corporations cannot be directly blamed for lack of development (or the
direction development is taking) within less developed countries. Their prime
objective is global profit maximisation and their actions are aimed at achieving that
objective, not developing the host less developed country. If the technology and
products that they introduce are inappropriate, if their actions exacerbate regional and
social inequalities, if they weaken the balance of payments position, in the last resort
it is up to the government of less developed country to pursue policies which will
eliminate the causes of these problems.

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