Multinational corporations

international economics

1. MULTINATIONAL CORPORATION

2. CONTENTS DEFINITION CHARACTERISTICS MERITS AND DEMERITS MERITS AND DEMERITS FOR HOST COUNTRY MERITS AND DEMERITS FOR HOME COUNTRY

3. DEFINITION An  enterprise   operating  in several  countries  but managed from one (home) country. Generally, any company or  group  that derives a quarter of its  revenue  from  operations  outside of its home country is considered a multinational corporation A decentralized corporation with strong home country presence. A global centralized corporation that acquires through centralized production wherever cheaper resources are available. An international company that builds on the parent corporation’s technology/R$D. A transnational approach that combines these three

4. CHARACTERISTICS G IANT SIZE. C ENTRALIZED CONTROL. O LIGOPOLISTIC POWER. I NTERNATIONAL OPERATIONS. S OPHISTICATED TECHNOLOGY. M ULTINATIONAL CENTRAL MANGEMENT. L OCAL SUBSIDIARIES ARE MANAGED BY NATIONALS. D IRECT INVESTMENT BASE IN SEVERAL COUNTRIES. D ERIVES LARGE PART OF THEIR PROFIT FROM FOREIGN OPERATIONS.

5. MERITS AND DEMERITS OF MULTINATIONAL CORPORATIONS

6. MERITS OF MULTINATIONAL CORPORATIONS ON HOST COUNTRY

7. Research and development activities :  Developing countries lack in research and development areas. Multinational corporations have greater capability for research and development activities in comparison to national companies. Far-reaching effects on the economic, social and political conditions of the host country : Multinational corporations provide a number of benefits to the host country in the form of (a) Economic growth; (b) increased profits ; (c) Developing of new products;

8. d) Reduced operational costs; (e) Reduced labor costs; (f) Changing social and political structure, etc. Thus, it helps in the exploitation of resources of host countries for their own economic advancement. Product innovation : Multinational corporations have research and development departments engaged in the task of developing new products, diversification in the product line, etc

9. Marketing superiority : Multinational corporations enjoy market reputations and face less difficulties in selling their products by adopting effective advertising and sales-promotion techniques. Financial superiority : Multinational corporations generate funds in one country and use such funds in another country. They have huge financial resources at their disposal as compared to national companies. Moreover, multinational corporations have easier access to external capital markets. Technological superiority : Multinational corporations can produce goods having international standards and quality specifications by adopting the latest technology

10. Expansion of market territory : Multinational corporations enjoy extension of activities beyond the geographical boundaries of their countries. Creating employment opportunities : Increase in the scale of operations results in more job opportunities. The entry of multinational corporations helps in creating employment opportunities in production and marketing activities Lower cost of production  : Multinational corporations carry on operations on a large-scale, which ensure economics in material, labor and overhead costs.

11. DEMERITS OF MULTINATIONAL CORPORATIONS ON HOST COUNTRY

12. Provide outdated technologies :  MNC’s design the technologies, which can be used in different countries. They supply technology to poor countries for profit maximization. The technologies designed for profit maximization and not purely for meeting the needs of developing countries. The technologies supplied may be costly and may be outdated and obsolete or may not be suitable for the needs of developing countries. Harm the national interests : The activities of MNC’s in the host countries may be harmful to the national interests as MNC’s are solely guided by the profit maximization. They ignore the interests of host countries. MNC’s even make profits at the cost of developing countries.

13. Charge heavy fees : MNC’s charge heavy fees and service charges from the enterprises in the host countries. They repatriate profits of their subsidiaries to their home countries. This leads the outflow of countries. Develop monopolies:  MNC’s restrict competition and acquire monopoly power in certain areas in the host countries. Use resources recklessly : MNC’s use the resources in the host countries in a very reckless manner, which leads to fast reduction of non-renewable natural resources

14. Dominate domestic policies : -MNC’s use their money power for political purposes. They take undue interest in political matters in the host countries. MNC’s are being openly termed as an extension of the imperialistic forces. Adverse effects on life style/culture in the host countries : - MNC’s create demand for goods and services in developing countries through advertising and sales promotion techniques. As a result, people purchase costly/ luxury goods which are not really useful nor within their capacity to purchase. MNC’s create adverse effects on the cultural background of many developing countries.

15. Interfere in economic and political systems : They put indirectly pressures for the formulation of policies that are favorable to them. Avoid tax liabilities : Transfer pricing enables multinational corporations to avoid taxes by manipulating prices in the case of intra company transactions. Lead to brain drain in developing countries : Multinationals hire   qualified technocrats and managerial experts. This leads to brain drain in developing countries.  

16. MERITS OF MULTINATIONAL CORPORATIONS ON HOME COUNTRY

17.   MNC's create opportunities for marketing the products produced in the home country throughout the world. They create employment opportunities to the people of home country both at home and abroad. It gives a boost to the industrial activities of home country. MNC's help to maintain favorable balance of payment of the home country in the long run. Home country can also get the benefit of foreign culture brought by MNC's.

18. DEMERITS OF MULTINATIONAL CORPORATIONS ON HOME COUNTRY

19. MNC's transfer the capital from the home country to various host countries causing unfavorable balance of payment. MNC's may not create employment opportunities to the people of home country if it adopts geocentric approach. As investments in foreign countries is more profitable, MNC's may neglect the home countries industrial and economic development.

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