Multinational Corporations

Multinational Corporations: Meaning, Causes of Development and Contribution to India’s Economic Development  

Meaning: 

Multinational corporations are giant firms with their headquarters located in one country and with a variety of business operations in several other countries.

They are also referred to as transnational corporations which implies that their operations extend beyond the boundaries of the nation in which they were originally started.

As an ILO report observes: "The essential nature of the multinational enterprise lies in the fact that its managerial headquarters are located in one country (referred to for convenience as the "home country"), while the enterprise carries out operations in a number of other countries as well (host countries)."

Obviously, "What is meant is a corporation that controls production facilities in more than one country, such facilities having been acquired through the process of foreign direct investment. Firms that participate in international business, however large they may be, solely by exporting or by licensing technology are not multinational enterprises."

Contribution of MNCs in India (1973-74 ΤΟ 1978-79)

Trends and Performance of Branches:

1) Domination by UK-US Based MNCs:

Following Table reveals that out of 540 branches in the country, 319 (59 per cent) were UK-based.

US-based were second largest in number (88). Together UK and US-based companies accounted for as many as 407 branches or 75 per cent of the total in 1973-74. in numerical strength, there was a decline to 253 of UK and US-based companies in 1978-79 (or 71 per cent of total).

However, the assets of UK and US-based companies aggregated to Rs. 1,620 crores in 1973-74 but their asset position improved to Rs. 2,194 crores in 1978-79.

In relative terms, it was over 90 per cent of total assets.

Table: branches of Mincs in India-Industry-Wise

1973-74            1978-79            1973-74            1978-79                                                                                   Number                           Asset (Rs. Crores)
1. Agriculture and allied activities	155	85	223	227
2. Mining & Quarrying	7	7	37	35
3. Processing & Manufacture	80	47	220	151
4. Construction & utilities	32	21	46	102
5. Commerce, Trade & Finance	154	68	1231	1838
6. Transport, Communication & Storage	39	35	4	6
7. Service	113	95	29	42
Total	540	358	1790	2401

Industry                                                                                             

 2) No interest in Developing Technology:

The branches of multinational companies are hardly interested in developing technology in terms of improving processing and manufacturing industries,

Table reveals the industry-wide distribution of branches of MNCs in India, it reveals that assets of branches in commerce, trade and Finance aggregated to Rs. 1,231 crores in 1973-74 (i.e., 69 per cent of total). The share of this group in assets was Rs. 1,838 crores in 1978-79 and had improved to 79 per cent in total, in the agricultural sector, all the branches dealt with tea only. Obviously, the claims of branches of MNCs in terms of transfer of technology do not bear the test of scrutiny since a large majority of them are engaged in commerce, trade and finance or export of tea. The share of processing and manufacture in total assets was 12 per cent in 1973-74 which has declined further to 6 per cent in 1978-79.

Profit Ratios of MNCs: 

An important indicator of profitability is the ratio of profits before tax (PBT) to turnover. This ratio was 5.1 per cent in 1973-74 but declined to 3.7 per cent in 1978-79. An industry wise analysis of profits earned revealed that the profit ratios-PBT to assets and PBT to turnover-in tea plantations were much higher than the overall ratios for all branches. For instance, during 1978-79, PBT to assets for branches of MNCs engaged in tea was 10.7 per cent and PBT to turnover was 12 per cent. In drug industry also, the profit ratios were exceedingly high. In 1978-79, profits before tax as a ratio of assets and turnover of branches in medical and pharmaceutical preparations worked out at 55 per cent and 30 per cent respectively. This indicates the extent of exploitation by MNCs in the Drug industry and the facile manner in which resources were drained out by the MNCs. However, the profitability ratios were generally lower, in the manufacture of metals, chemical products, commerce, trade and finance etc.

Trend and performance of subsidiaries: 

Subsidiaries of MNCs are companies incorporated in India in which a single foreign body corporate

i.e., a multi-national corporation holds more than 50 per cent of the paid-up equity capital.

subsidiaries had increased their assets from Rs. 1.011 crores in 1973-74 to unaltered and they accounted for about 75 per cent of total assets. Besides Rs. 1.278 crores in 1978-79. In relative terms, the position remained this, the subsidiaries of five countries, viz, Switzerland, Sweden, West the Netherlands accounted for Rs. 318 crores in 1973-74. The assets of the subsidiaries of these countries improved to Rs. 386 crores in 1978-79. However, in relative terms, ties position remained more or less the same i.e., 23.3 per cent of total assets in 1973-74 and 22.6 per cent in 1978-79.

 

	1973-74	1973-79
1. over 50% but less than 70%	83 (44.1)	57 (45.5)
2. over 70 but less than 100%	33 (17.6)	27 (21.6)
3. 100%	72 (38.3) 188	41 (32.8) 125

Table: 

Subsidiaries of MNCs-distribution by Percentage of Equity Capital Held by Foreign Companies

Note: Figures in Brackets are Percentage of Total in the Respective Column.

Source: 

Company News and Notes, June 1980: Of the 188 subsidiary companies, 72 were wholly owned. In another, 83 subsidiaries of MNCs, the foreign holdings ranged between 50 to 70 per cent, and for the remaining 33 subsidiaries, the holdings were between 70 to 100 per cent. However, the position underwent a change by 1978-79. The number of wholly-owned subsidiaries declined from 72 to 41 i.e., from 38 per cent to about 33 per cent.

To conclude, the trends and performance of branches and subsidiaries during the period 1973-74 to 1978-79 reveal the following:

1) The effects in terms of foreign exchange earnings are too little to merit attention.

2) To camouflage their activities, the MNCs are rapidly converting their branches into subsidiaries.

3) Majority of branches of MNCs are engaged in commerce, trade and finance and export of tea, there is hardly any evidence of transfer of technology.

Benefits of MNCS:

1) They help increase the investment level and thereby the income and employment in the host country.

2) The transnational corporations have become vehicles for the transfer of technology, especially to developing countries.

3) They kindle a managerial revolution in the host countries by professional management and the employment of highly sophisticated management techniques.

4) they enable the host countries to increase their exports and decrease their important requirements.

5) they work to equalize the cost of the factors of production around the world.

6) they provide and efficient means of integrating national economies.

7) they help increase competition and break domestic monopolies.

8) the enormous resource of multinational enterprises enable them to have every efficient research and development system. Thus, they make a commendable contribution in invention and innovations.

Drawbacks of MNCs:

1) As Leonard Gomes Points out, the MNCs technology is designed for world-wide profits maximization, not the development needs of poor countries, in particular employments needs and relative factor scarcities in these countries.

In general, important technologies are not adopted to :

i) Stage of development of many LDCs.

ii) the consumption needs:

iii) the size of domestic markets and.

iv) Resource availabilities.

2) Thought their power and flexibility, they can evade or undermine national economic autonomy and control, and their activities may be inimical to the national interests of particular countries.

3) The tremendous power of global corporation poses the risk that they may threaten the sovereignty of the nations in which they do business.

4) They can have an unfavorable effect on the balance of payments of a country. By repatriating profits, they may deplete the foreign exchange resources of a country. For instance, Coca cola, until 1978, had remitted abroad nearly Rs. 6 crores on an initial investment of Rs. 6.6 crore in India..

5) They may destroy competition and acquire monopoly power.

6) Transfer pricing enables them to avoid taxes by manipulating prices on intra-company transaction.

7. they retarded the growth of employment in the home country .

8) Transnational corporations cause a rapid depletion of some of the non-renewable natural resources in the home country.

Recent Favorable Trend:

Recently there has been a change in the attitude to multinationals. They are not subject to as severe criticism as they were in the past. Even communist country have developed some favorable attitude to them. Countries as diverse as Cuba, China and Portugal have loosened the reins on them. Paul streeted points out that there are five recent trends that suggest that the role of multinational corporation in development has to be reassessed.

i) there has been a shift in bargaining power between multinationals and their host countries. Greater restrictions on the inflow of packaged technology, a change in emphasis, from production to research and development and marketing among other factor, have increased the uncertainties of direct foreign investment. It has become the policy of multinational companies to shift from equity investment, ownership of capital, and managerial control of overseas facilities to the sale of technology, management services, and marketing as a means of earning returns of corporate assets, at least in those countries that have policies against inflows of packaged technology.

2) not only do host countries deal with a greater variety of foreign companies, comparing their political and economic attractions, weighing them against their costs, and playing them off against one another but the large multinationals are being replaced by smaller and more flexible firms.

3) many more nations are now competing with the us multinationals in setting up foreign activities. Which means that the controversy is no longer dominated by nationalistic considerations, Japanese and European firms figure prominently among the new multinationals.

4) Developing countries themselves are now establishing multinationals, in addition to companies from the Organization of petroleum exporting countries, the leading countries where multinational are heaven countries, the leading countries where multinationals are being established are Argentina, Brazil, Columbia, Hong Kong, India, the Republic of Korea, Peru, The Philippines, Singapore, and Taiwan.

5) Some multinational from developed countries have accommodated themselves th the needs of the developing countries.

Harmful Effects on India Economy:

1) Outflow of Money as Payment Of Dividends and Royalty:

A large sum of money flows out of the country in terms of payment of dividends, profits, royalties, technical fees and interest to the foreign investors. For instance, remittance made abroad by private sector companies stood at Rs. 72.26 crores on 1969-70. This rose to rs. 398.9 crores on 1981-82 and further to Rs. 813.5 crores in 198-87. A study by N.K. Chandra shows that over three-fifths of private corporation or about two-fifth of factors sector dividends were paid out b the foreign firms in the mid-1980s.

2) Political Interference:

Because of their immense financial and technical power, the MNCs influence the decision-making processes in under developed countries. Their models and patterns of industries development and technologies transferred are not in harmony with the interest of the host countries.

The government of underdeveloped countries have been threatened by the direct and indirect interference of MNCs in their internal affairs. The autonomy and sovereignty of the host countries is in danger.

Therefore, the governments, of various countries have sought to restrict the activity of MNCs through administrative controls and legal provision.

3) Distortion of Economic Structure:

This may inflict heavy damage on the host country in various forms such as suppression of domestic entrepreneurship, extension of oligopolistic practices (such as suppression of domestic product differentiation, heavy advertising or excessive profit taking). Supplying the economy with unsuitable technology and unsuitable products, worsening of income elites etc.

Modern Marxist economists (Paul Baran, for example argue that foreign investment (especially through multinational corporations) opens up the doors of ‘neo imperialism’ and ‘exploitation.

4) Technology Transfer not Necessarily conductive to Development:

MNCs do not engage in R and D activities within the underdeveloped countries, but only in laboratories in the home country or in the other industrial countries. While R and D activities countries to be centralized in the parent country, the host countries have to bear the bulk of their costs as the affiliated of the MNCs in these countries remit payment of the account in relation to their sales volume.

Such payments are over and above those remitted in the form of royalties and transfer is also misconceived due to the fact that MNCs commanding a semi-monopolistic position in their product lines do not transfer their first-line or most advanced technology until foreign firms compel them to do so. Often the technology transferred is of a capital-intensive nature which is not useful from the point of view of a Laboure surplus economy.

Continued insistence on the import of such technology can have serious consequence for the economy of the host country. It will increase unemployment. The market will fail to grow. This constraint would suffice to restrain the rate of growth.