International Business Transnational Corporations

INTRODUCTION
Globalization has offered greater opportunity for the people to tap into more and larger markets
around the world. Globalization allows the people to have greater access to more capital flows,
technology, cheaper imports, and larger export markets. It is the gradual integration of national
economies all over the world into one single market. There has been a rapid growth in the share
of economic activity taking place between people who live in different countries. There has been
tremendous growth of world trade propelled by progressive trade liberalization and high growth
rates of output.

A multinational corporation (MNC) or transnational corporation (TNC), also called

multinational enterprise (MNE), is a corporation or an enterprise that manages production or
delivers services in more than one country. It can also be referred as an international
corporation. ILO defined MNC as a corporation which has his managerial head quarters in one
country known as the home country and operates in several other countries known as host
countries.

The first modern MNC is generally thought to be the Dutch East India Company. Nowadays
many corporations have offices, branches or manufacturing plants in different countries than
where their original and main headquarter is located.

This often results in very powerful corporations that have budgets that exceed some national
GDPs. Multinational corporations can have a powerful influence in local economies as well as
the world economy and play an important role in international relations and globalization. The
presence of such powerful players in the world economy is reason for much controversy.

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INTERNATIONAL CORPORATIONS (MNCs)

The term multinational corporation is widely used to denote the large company having vast
financial, technical, managerial and marketing resources. It is the big company conducting
business activities in many countries. Different exports have defined Multinational Corporation
as follows:-

According to International Labour Organisation “The essential nature of the multinational

enterprise 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 Devid E.Lilien, “Multinational Corporation means corporations which have their
home in one country but operate and live under the laws and customs of other countries as well”

FEATURES OF MNCs

1. Large Size:

MNCs are giant corporations which operate in many countries with multiple products on
large scale. They operate in several countries dominating the world markets.

2. Origin:

Most of the MNCs are from developed countries likeUSA, JAPAN and GERMANY.
MNCs have parent company in one country and the branches or subsidiaries in the other
countries.

3. Management:

The management of MNCs rests with the parents company which acts as a holding
company. The subsidiary companies operate under the control and guidance of parent
directions of parent company.

4. Dominate Global Economy:

The MNCs dominategobal marketing and play an important role in the expansion of
world trade. They have worldwide contacts and conduct business efficiently and
economically.

5. Quality Consciousness:

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MNCs are quality conscious. They are manage by professionals and experts. Most of the
MNCs have acquired ISO-9000 CERTIFICATION. They believe in total quality
management. They have their own organization culture.

6. Profit Motive:

MNCs are profit oriented. They do not take much interest in the social welfare activities
of the host countries. They condut their business activities efficiently. They are cost
conscious. This helps to raise their competitive capacity. They adopt global planning for
managing their activities. They have carried out rapid expansion of activities in the
developing countries.

CONTROL OVER MNC’s

Different agencies in India control the MNCs .These organization include:-

1) The Department of company affaires

2) The Reserve Bank of India.

3) The ministry of industrial Department

4) The ministry of finance

These agencies normally donate work in co-ordination. Hence, control of MNC’s may not be
efficient. In view of this, government of India imposed certain regulations to control MNC’s.
These includes:-

1) Some industries were not allowed to import technology where the products are not
essential.

2) The maximum rate of royalty was imposed on technology,

3) Impact on foreign capital was allowed but sometime they were based on administrative
decision.

4) Permissible period of agreement was reduced from 10 yrs to 5 yrs.

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MNC’s in India

Most of the MNC’s in India had originally entered the India market during the colonial
era.During post independence era, the actual number of MNC’s who entered was small. The
entry was generally made through collaboration with Indian big business for instance,

 Bajaj Tempo & joined hands with daimles Benz of west germany

 Birlas became the spokesman of Kaisers & ford

 Sarabhai Murguppa chetlair,Naidu,Thapars,Kirloskars & other houses also joined to

promote large private sectors companies in collaboration with MNC’s.

At the end of 1990,these were 469 foreign companies in India .

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In addition there are many Indian companies with foreign equity participation several Indian
outfits of MNC’s like ponds, Johnson & Johnson ,Lipton ,Brooke bond etc. are in how
technology consumer goods sectors.

This table Present the number of top 500 MNC’s operating in India and their country of origin.

This table Present the number of top 500 MNC’s operating in India and their country of origin.

Country No. of Country No. of MNC’s

MNC’s
USA 157 Netherlands 7
Japan 119 India 6
UK 43 Finland 6
Germany 33 Belgium 4
France 32 South Africa 4
Sweden 14 Spain 4
South Korea 13 Norway 3
Switzerland 10 Turkey 3
Australia 9 Mexico 2
Canada 9 Britain / Netherlands 2
Italy 7 Others 13
TOTAL:- 500

ROLE OF MNC’s IN INDIA

There is no distinction between an MNC and a domestic company in India. The policy
regarding MNC is the same as for Foreign Private Capital in India. Large and dominant MNCs
along with Indian companies are covered under MRTP Act. MNCs are specifically covered
under Foreign Exchange Management Act (FEMA).

1) Profit Maximization :-

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Most of the private companies including MNCs have profit maximization as the most important
objective. However, MNCs are expected to operate fairly and behave like a Corporate Citizen.
But the MRTP commission had shown that Philips has undervalued (less than the cost of
production) its exports in order to reduce its tax liability to Indian Government.

2) International Network of Marketing:-

India expects the MNCs to increase their exports and earn foreign exchange for India. But most
of the MNCs transfer the Foreign exchange to its parent country, just in the name of imports
from their home country.

3) Diversification Policy:-

India expects the MNCs to diversify their activities into the untapped areas and the priority areas
like core industry and infrastructure industry. But majority of the MNCs diversify into the more
profitable areas. For example, ITC ventured into hotel industry.

4) Concentration in Consumer Goods:-

Most of the MNCs entered Indian consumer market like HLL due to die high profitability rather
than capital goods markets which is less profitability

5) MNC’s and process of planned Economic Development in India:-

Until the recent past, India was a planned economy. There was confusion with regard to the role
of MNC’s in Indian planned development. Most of the MNC’s operating in India during that
period had different plans which were incompatible with the Indian five years plans.

GOVERNMENT POLICY ON MNCs

The government policy on MNCs has been changed considerably in recent years. As a
result of introduction of liberal economic policies and more towards globalisation. MNCs are
permitted to expan their activities in India. At same time Indian Companies have also been
permitted in global markets.The entry of MNCs is made easy due to the amendments to different
acts such as MRTP and Foreign Exchange Regulation Acts. The government policy is favourable
for new investment by MNCs in the infrastructure sector. The expansion of the activities of

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MNCs in India is reality and it must be accepted. It is the result of global factors and economic
policies of the government. However, the government policies on MNCs need to be flexible and
cautious . Complete freedom to the MNCs may be dangerous in the long run. They should be
allowed to raise competitive capacity of Indian industries for industrial growth. They should not
be allowed to establish their industrial empires in India. Similarly , the interests of the Indian
consumers, framers, investor and society at large must be protected even in the ongoing process
of globalisation. The Government has to impose certain restriction on MNCs as regard to their
operation and activities.

BENEFITS OF MNCs TO HOST COUNTRIES.

1. MNCs help to promote foreign investment in the host countries which help to bring
rapid industrial growth accompanied by massive employment opportunities in the
different sectors of the economy.

2. MNCs facilitate transfer of technology to the developing countries and thereby help
such countries to modernize their industries.

3. MNCs help to accelerate industrial growth in host countries through joint venture,
foreign collaboration and subsidiaries and facilitate economic growth.

4. MNCs help the host countries to promote export and reduce imports by raising
domestic production.

5. MNCs facilitate efficient utilization of reduces available in host countries.

6. Multinationals help to promoter global trade and promote economic co-operation

between develop and developing countries.

7. Multinationals raise competition in host countries and help to break domestic

monopolies.

8. Multinationals use various strategies like product innovation, technology up

gradation and professional management. They also introduce a work culture of
excellence, professionalism and fairness in deals.

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PROBLEMS OF MNCs TO HOST COUNTRIES

1. Multinationals supply out-dated technology to the host countries at higher costs

which are not suitable to developing countries.

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2. Multinationals ignore the interests of host countries and therefore, activities of

MNCs are harmful to the national interests.

3. Multinationals exploits the weakness of host countries bu using political

pressures to make economic gains. MNCs take undue interest in political affaires
of the host country and use all unfair means like corruption to influence political
leadership for economic gains.

4. Multinationals are more guided for their personal interest and do not take efforts
to promote industries in host countries. They also buy raw materials at cheaper
rates and export finished products at much higher rates to the host countries.

5. Multinationals try to restrict competition and acquire monopoly power in certain

areas in the host country.

6. Multinationals so not give attention to environmental protection and ecological

balance while conducting production activities in the host countries. It is more
dangerous to the developing countries like India in the long run.

7. Transfer pricing has enabled multinationals to avoid taxes by manipulation prices

in the case of infra-company transaction.

8. Multinationals are exploiting the consumers and companies in the host countries.
They are financially strong and adopt aggressive marketing strategies to sell
their products.

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Transnational Corporation (TNC)

Transnational corporations are among the world's biggest economic institutions. A rough
estimate suggests that the 300 largest TNCs own or control at least one-quarter of the entire
world's productive assets, worth about US$5 trillion. TNCs' total annual sales are comparable to
or greater than the yearly gross domestic product (GDP) of most countries (GDP is the total
output of goods and services for final use by a nation's economy). Itochu Corporation's sales, for
instance, exceed the gross domestic product of Austria, while those of Royal Dutch/Shell equal
Iran's GDP. Together, the sales of Mitsui and General Motors are greater than the GDPs of
Denmark, Portugal, and Turkey combined, and US$50 billion more than all the GDPs of the
countries in sub-Saharan Africa.

Transnational Corporations exert a great deal of power in the globalized world economy. Many
corporations are richer and more powerful than the states that seek to regulate them.
Through mergers and acquisitions corporations have been growing very rapidly and
some of the largest TNCs now have annual profits exceeding the GDPs of many low
and medium income countries. This page explores how TNCs dominate the global
economy and exert their influence over global policymaking.

Technical definitions of TNCs vary, but for the purposes of this guide the term "transnational
corporation" means a for-profit enterprise marked by two basic characteristics: 1) it engages in
enough business activities -- including sales, distribution, extraction, manufacturing, and
research and development -- outside the country of origin so that it is dependent financially on
operations in two or more countries; 2) and its management decisions are made based on
regional or global alternatives.

FEATURES OF TNCs
The following are the features of TNCs

1) There is close and direct relationship between head office and member units of
TNCs

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2) TNCs operate more on confederation principle. Each member company is allocated

specific function and it has to perform some other functions for other member
companies.

3) Transnational integrate the factors of production available in different countries . It

may have production units in many countries and distribution units in different
countries where promising markets are available. Research activities may be
conducted in different plants.

4) Transnational take the benefit of availability of plenty of raw materials in one

country , cheaper financial resources from some other country. It conducts
production and distribution activities in an integrated manner.

5) Transitional are MNCs having ownership and control spread across the world.

6) The profits earned by member or group companies from different countries are
shared by all the member companies. There is pooling and redistribution of profits.

7) All the unit or member companies of TNCs are treated equally but their activities are
integrated.

8) TNCs are ahead of multinationals. They have their own productive assets and foreign
direct investment in member of countries in the world.

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Problems Arising from TNCs

Intra-Company Trade and Manipulative Price Transfers

The post-Second World War period witnessed not merely a rise in TNCs' control
of world trade, but also growth of trade within related enterprises of a given
corporation, or "intra-company" trade. While intra-company trade in natural
resource products has been a feature of TNCs since before 1914, such trade in
intermediate products and services is mainly a phenomenon of recent decades. By
the 1960s, an estimated one-third of world trade was intra-company in nature, a
proportion which has remained steady to the present day. The absolute level and
value of intra-company trade has increased considerably since that time, however.
Moreover, 80 per cent of international payments for technology royalties and fees
are made on an intra-company basis.

Problems stemming from intra-company trade concern TNCs' ability to maximise

profits by avoiding both market mechanisms and national laws with an instrument
of internal costing and accounting known as "transfer pricing." This is a
widespread technique whereby TNCs set prices for transfers of goods, services,
technology, and loans between their worldwide affiliates which differ
considerably from the prices which unrelated firms would have had to pay.

There are many benefits TNCs derive from transfer pricing. By lowering prices in
countries where tax rates are high and raising them in countries with a lower tax
rate, for example, TNCs can reduce their overall tax burden, thus boosting their
overall profits. Virtually all intra-company relations including advisory services,
insurance, and general management can be categorised as transactions and given a
price; charges can as well be made for brand names, head office overheads, and
research and development. Through their accounting systems TNCs can transfer
these prices among their affiliates, shifting funds around the world to avoid
taxation. Governments, which have no way to control TNCs' transfer pricing, are
therefore under pressure to lower taxes as a means of attracting investment or

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keeping a company's operation in their country. Tax revenue which might be used
for social programs or other domestic needs is thus lost.

Moreover, in countries where there are government controls preventing

companies from setting product retail prices above a certain percentage of prices
of imported goods or the cost of production, the firms can inflate import costs
from their subsidiaries and then impose higher retail prices. Additionally, TNCs
can use overpriced imports or underpriced exports to circumvent governmental
ceilings on profit repatriation, causing nation-states to suffer large foreign
exchange losses. For instance, if a parent company has a profitable subsidiary in a
country where the parent does not wish to re-invest the profits, it can remit them
by overpricing imports into that country.

Influence in Nations' Political Affairs

TNCs' influence over countries, particularly those in the less-industrialised world,

has not been manifest solely in sheer economic power or manipulative price
transfers. Such influence has also been reflected in corporations' willingness and
ability to exert leverage directly by employing government officials, participating
on important national economic policy making committees, making financial
contributions to political parties, and bribery. Furthermore, TNCs actively enlist
the help of Northern governments to further or protect their interests in less-
industrialised nations, assistance which has sometimes has involved military
force. In 1954, for instance, the US launched an invasion of Guatemala to prevent
the Guatemalan government from taking (with compensation plus interest) unused
land of United Fruit Company for redistribution to peasants.

Perhaps the most notorious example of TNCs' meddling in the political affairs of
a sovereign state, however, occurred in the early 1970s, when International
Telephone and Telegraph (ITT) offered the US Central Intelligence Agency US$1
million to finance a campaign to defeat the candidacy of Salvador Allende in
Chilean national elections. Though this offer was refused, and Allende
democratically elected, ITT continued to lobby the US government and other US
corporations to promote opposition to Allende through economic pressure
including the cutoff of credit and aid and support of Allende's political rivals.
After copper mines in Chile owned by the firms Kennecott and Anaconda were
nationalised, the US government took a series of steps based largely on the
recommendations of ITT to subvert Allende.

Disclosure of ITT's efforts to overthrow Allende helped prompt initiatives in the

United Nations to draft a TNC Code of Conduct to establish some guidelines for
corporate behaviour. This move was part of more general concern about the
extent of corporations' economic and political influence which emerged in the
1960s and 1970s, and which led some less-industrialised countries to demand that
TNCs divest from certain sectors or to require changes in the terms of a
company's investment.

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TNCs and International Politics

Especially since the 1980s, TNCs' involvement at international political

negotiations and fora has accompanied and encouraged the rise of global
corporate economic power. In an effort to reduce barriers to trade and investment
capital flows in the last decade, TNCs have lobbied vigorously to shape to their
liking Europe's Single Market agreement, the North American Free Trade
Agreement (NAFTA), and the Uruguay Round of the General Agreement on
Tariffs and Trade (GATT). For TNCs, so-called free trade lessens governmental
restrictions on their movement and ability to maximise returns. "The deregulation
of trade aims to erase national boundaries insofar as these affect economic life,"
economists Herman Daly and Robert Goodland have noted. "The policy-making
strength of the nation is thereby weakened, and the relative power of TNCs is
increased."

For example, rules established in the GATT's recently concluded Uruguay Round
regarding trade-related intellectual property rights (TRIPs) and trade-related
investment measures (TRIMs) will be of particular benefit to TNCs. The first
gives corporations greater capacity to privatise and patent life forms, including
plant and other genetic resources of less-industrialised nations and peoples.
TRIMs render illegal certain measures which countries_ notably Southern
nations_have employed to encourage TNCs to establish linkages with domestic
firms. TRIPs, TRIMs, and other GATT rules fall under the authority of the World
Trade Organisation (WTO), a new supranational body which works with the
World Bank and other financial institutions to manage global economic policy to
serve transnational corporate interests.

In another demonstration of transnationals' growing political might, and perhaps

the most striking example to date of organised corporate lobbying on the world
stage, TNCs' efforts at the 1992 United Nations Conference on Environment and
Development (UNCED) in Rio de Janeiro undermined sections of the Summit's
key documents. And well before the Summit took place, TNC pressure had led to
the removal from UNCED materials proposals to regulate the practices of global
corporations.

This success in Rio underscores a broader issue: although TNCs are collectively
the world's most powerful economic force, no intergovernmental organisation is
charged with regulating their behaviour. United Nations efforts to monitor and to

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some extent address TNCs' impacts, notably through the UN's Centre on
Transnational Corporations (CTC), have recently been decimated. Under a 1992
restructuring, the CTC lost its independent status, and in 1993 it was
dismantled and a 17-year attempt to negotiate the aforementioned Code of
Conduct on TNCs was abandoned. A new Division on Transnational
Corporations and Investment emerged_with the aim of promoting foreign direct
investment.

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TNCs, Human Health, and the Environment

The unwillingness or inability of national governments to control TNCs in a

period of deregulated global trade and investment does not bode well for people's
health or the environment. TNC operations routinely expose workers and
communities to an array of health and safety and ecological dangers. All too often
these operations erupt into disasters such as the gas release at the Indian
subsidiary of the US-based corporation Union Carbide in Bhopal.

To regard such tragedies only as "accidents," however, distracts attention from the
larger, inherent harm to the planet and its inhabitants TNCs' industrial
development strategies cause. For example, TNC activities generate more than
half of the greenhouse gases emitted by the industrial sectors with the greatest
impact on global warming. TNCs control 50 percent of all oil extraction and
refining, and a similar proportion of the extraction, refining, and marketing of gas
and coal. Additionally, TNCs have virtually exclusive control of the production
and use of ozone-destroying chlorofluorocarbons (CFCs) and related compounds.

In destructive minerals extraction, TNCs still dominate key industries. In

aluminum, for example, just six companies account for 63 per cent of the mine
capacity, 66 per cent of the refining capacity, and 54 per cent of the smelting
capacity. Four TNCs account for half the world's tin smelting capacity. With
respect to their influence on global agriculture, TNCs control 80 per cent of land
worldwide which is cultivated for export-oriented crops, often displacing local
food crop production. Twenty TNCs account for about 90 per cent of the sales of
hazardous pesticides. Additionally, because TNCs control much of the world's
genetic seed stocks as well as finance the bulk of biotechnology research
worldwide, they are poised to reap large financial rewards from patenting life
forms.

TNCs also manufacture most of the world's chlorine _ the basis for some of the
most toxic, persistent, and bioaccumulative synthetic chemicals known such as
PCBs, DDT, dioxins and furans, chlorinated solvents, and thousands of other
organochlorine compounds. These chemicals' impacts on health include: immune
suppression; birth defects; cancer; reproductive, developmental, and neurological
harm; and damage to the liver and other organs. As a group, TNCs lead in the
export and import of products and technologies that have been controlled or
banned in some countries for health and safety reasons. For instance, 25 per cent
of total pesticide exports by TNCs from the US in the late l980s were chemicals
that were banned, unregistered, canceled, or withdrawn in the US itself. And a
handful of Northern companies are responsible for the nuclear technology now
found at plants in South America and Asia.

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TNCs and their business associations claim that deregulated trade and investment
will produce enough growth to end poverty and generate resources for
environmental protection. The unrestricted free trade and investment-based
growth beloved by TNCs, however, is the same kind of development which has
led to overexploitation of land and natural resources, air, water, and soil pollution,
ozone depletion, global warming, and toxic waste generation. As economists
Herman Daly and Robert Goodland observe: "The dream that growth will raise
world wages to the current rich country level, and that all can consume resources
at the U.S. per capita rate, is in total conflict with ecological limits that are already
stressed beyond sustainability."

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TNCs and Occupational Safety

Corporations employment in 1989 was lower than it had been in 1980. US-based
TNCs have eliminated jobs especially vigorously. Between 1982 and 1993, for
example, US TNCs cut over three-quarters of a million jobs at home but added
345,000 jobs outside the United States. For workers in the US and other
industrialised countries, TNCs' increased willingness to move operations to lower
wage areas along with their greater use of automation, subcontractors, and part-
time labour have rendered the strike relatively ineffective and undermined trade
unions' collective bargaining power. In the US, there were one-tenth the number
of strikes in 1993 as in 1970, and only 12 per cent of the US workforce is
currently unionized, a lower proportion than in 1936.

In less-industrialized regions, the lure for TNCs of fewer costs and regulations
offers little promise to workers of decent working conditions, sufficient pay, or
job security. Tax breaks and subsidies governments use as incentives are no
guarantee that the TNCs will not move on after the benefits have expired, and as
cost advantages now found in Singapore appear in, say, Bangladesh, the countries
currently experiencing an influx of investment may eventually find themselves in
the same position as that of the US and other industrialized nations today.

More fundamentally, as Richard Barnet has emphasized, the transnational

corporate order cannot begin to solve the chronically severe unemployment
problems in Asia, Latin America, and Africa, where an estimated 38 million new
job seekers enter the labor market annually. A comparison of the growth in TNCs'
outward foreign investment stock worldwide and their estimated global direct
employment in recent decades lays this fact bare. Between 1975 and 1992,
outward FDI stock increased almost seven times, whereas TNCs' employment did
not even double. In less-industrialized countries, TNCs added only five million
employees between 1985 and 1992.

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Conclusion

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