Mnc and Their Roles

What is a MNC? Discuss the impact of Foreign Direct Investments in at least two sectors of the Indian economy with examples. 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’).

It means a corporation that controls production facilities in more than one country such facilities having been acquired through the process of foreign direct investment Multinational activity falls into the category of foreign direct investment (FDI). It entails buying or selling firms abroad, or the establishment of entirely new production facilities abroad. Thus, when we say the German electronics manufacturer Siemens buys an American electronics firm or sets up a new electronics plant in the USA it is engaging in FDI.

Impact of FDI in India’s Retail sector 1) Employment opportunity – If many companies comes to India for their business they definitely need labor to perform their task. So they can hire our people in a large way so this give the advantage who still waiting for the job opportunity. 2) Enhance lifestyle – FDI will help to Indian people in order to enhance their lifestyle. There are many renown companies if they come to India it will make a huge impact on the people of India. ) GDP growth – It will also help in increasing the GDP growth of the India. 4) Quality products – The major advantage of FDI is these companies will sell their standard or quality in cheaper price compare to Indian price. So people of India will definitely go for those products where they can afford to buy. 5. Farmers can directly access the market policies that will help him to selling their product. 6. By giving less cost for the products, the small scale industries will affected. IT means it will fully abolished by the way of those offers. . If we may think “by this action how will we affected”. But true is after FDI gets all field or abolished all small scale industries we must fully depends for those (like WALMART). 8. The main theme is we will push to stage to accept all those things what has given by FDI. The products like delayed vegs, fruits. 9Retailers will affect by this method. 10. And also by this way they got strong base on USA. 11. If we accept for the benefits like infrastructure, lifestyle, good economy. We will ready to face effects of this.

The government has recently notified the rules approving Foreign Direct Investment (FDI) in the aviation sector by foreign airlines. These new rules allow foreign airlines to buy up to 49 per cent stake in local Indian carriers through government route, a move which will help distressed airline companies like Kingfisher to receive much needed cash flow. Till now, India had only allowed foreign investors not related to airline business to buy up to 49 per cent stake in domestic airlines. But now with the announcement of this new policy, foreign carriers are allowed to invest.

Currently, the airline industry in India is plagued by issues owing to, amongst others, high cost of fuel, the sudden and exorbitant increase in airport fee, complicated legal regime, inconsistent tax structure especially amongst states, and un-coordinated government policy framework. To compound matters further, international airlines themselves are facing financial challenges due to global recession, and thus, capital infusion might not be the topmost item on such international airlines’ agenda at this point in time. 2. The technologies transferred by the MNC to their production units in the underdeveloped countries are appropriate for the latter’s social and economic development needed”. Do you agree or disagree with this statement. Support your answer with relevant examples. It is observed thatthe technologytransferredbytheMNCstothe underdeveloped conditions is quite inappropriate. This is because conditions in the developed countries are vastly different from those of the developing countries. The first important difference is with regard to the relative factor prices.

The wage levels in the developing economies are considerably lower than in the developed countries primarily because of their general poverty but also due to the relative abundance of labour and scarcity of capital. The conditions in the developed countries are quite opposite. This raises the question of the ‘appropriateness’ of the technology transferred in the context of the available factor endowments of the developing countries. The technology that is generally made available by the eveloped to the developing countries is capital intensive in nature and hence not suitable to the factor endowments of the developing countries. Not only is the technology transferred by the MNCs to the developing countries is inappropriate, the operations of the MNCs retard the development of an indigenous capital-goods industry. The technology transferred by MNCs is inappropriate also in the sense that it produces commodities which are necessary or over-sophisticated in relation to the need of the developing countries.

Moreover, MNCs encourage forms of consumption among the broad mass of the people, particularly in the urban areas, which are inappropriate to the stage of development and often nutritionally damaging. Important examples here are powered baby-milk and Coca Cola. These tendencies distort economic structure of the developing countries. They are wasteful in nature, reduce domestic saving and can even worsen balance of payments by encouraging expensive tastes. It is observed that because of the capital-intensive nature of their technology, the employment effect of the operations of the multinationals in the host countries is negligible.

Moreover, such technology transfer is likely to increase income inequalities. For a instance, when a MNC sets up a unit in a developing country, it concentrates on employing a small, elite, semi-skilled and highly skilled labour force of that country. These people are offered wages which are substantially higher than the income of the unskilled domestic labour force. Thus technology transfer through direct participation by MNCs fails to increase employment opportunities in the developing countries on the one hand, and promotes in equalities in income and wealth.

Supporters of multinationals have argued that the impact of technology transfer by MNCs on employment position in the developing countries is positive. However, they take only a partial view of the reality. For instance, by referring to the figures of nationals employed by the U. S. multinational firms in less developed countries, Gilbert H. Clee argues that this being an “added employment” is a clear gain to the host country. This in fact diminishes many more jobs than it creates and thereby makes the unemployment problem more acute leading to still more pauperisation of the poorest. ependence confers on the multinationals to dictate terms to the recipient country.. To sum up, the following are the criticisms against the transfer of technology by the MNCs to the developing countries: • Using technologies that are inappropriate for the needs of the recipient country. • Charging license fees that are quite expensive. • Not engaging in research and development in host countries. • Encouraging a ‘brain drain’ from poorer countries. • Making host countries technologically depend on the West. Not allowing local employees access to or information about key technologies. • Not training local nationals in the operation of imported technologies. 3. Briefly discuss the advantages and disadvantages of MNCs. Advantages of MNCs: a. MultinationalCorporationsareinternationalizationofproductionby transforming the raw materials produced in one group of countries with the labour and plant facilities in other to manufacture goods and sell these goods in good markets. The fruits of science in the form of instant communication, quick transport, modern managerial techniques etc. ave been helping them in reshuffling resources and altering the pattern on almost a month to month basis, in response to shifting costs, prices and availabilities. b. MNCs are representing the best hope for the future not because growth by and of itself is desirable, but because many of its products are like creations of new jobs, new wealth and higher standard of living, which in turn result in closing the various gaps, viz. Economic, educational and technical that have always fueled human jealousy, hatred and conflicts. c.

The economic, technological, cultural and political impact of MNCs on developing countries are most striking. They have made a strong impact on development in these countries d. The realization of benefit in poor countries through MNCs depends on the development of stable government and their actions to encourage private investments. Private business investment is superior to governmental aid as an instrument of development. e. MNCs are agents of change and progress, helping to create a worldwide economic order based on rationality, efficiency, and the optimal use of resources.

Host countries acquire plant and equipment that otherwise would not be available, accompanied by the skills and know-how necessary for its operation. f. Local recruitment of junior managers creates a pool of managerial talent in the local community that can transfer all its abilities across a wide range of industries. g. As a result of the operations of the MNCs prices are lower due to economies of scale following mass production. h. An MNC’s impact on a host country’s exports can be dramatic. A number of large MNCs have established ‘export platforms’ in low-wage. . Although MNCs sometimes shift jobs from high-wage to low-wage countries, it may still be the case that total employment in the nations losing these jobs will expand in consequence of increased international trade between richer and poorer countries. Efficient allocation of the world’s resources benefits every one in the long run. j. MNCs have a world-wide marketing organization that facilitates exports from developing countries and thus helps the process of transformation of a traditional less productive sector into a high productive export sector. k.

MNCs help to increase competition and break domestic monopolies. Competition leadsto efficiency and better allocation ofresources. l. It is argued that the multinationals work to equalize the cost of factors of production around the world. m. Another merit of the MNCs lies in the fact that provide an efficient means of integrating national economies. n. MNCs also stimulate domestic enterprise because to support their own operations, the MNCs may encourage and assist domestic suppliers. o. Themultinationals promote professionalization management in the companies of the host countries. . MNCs by producing certain required goods in the host country help in reducing its depend on imports. q. MNCs accelerate the growth process in the host country through rapid industrialization and allied activities. r. The growth of multinationals creates a positive impact on the business environment in the host country. s. The multinationals are regarded as agents of modernisation and rapid growth. t. Again, MNCs bring ideas and help in exchange of cultural values. u.

MNCS through their positive attitude and efforts work for the establishment of social welfare institutions and improvement of health facilities in the host countries. v. The growth of multinationals help in improving the balance of payments status of the host country. w. Multinationals are regarded as the vehicles for peace in the world. They help in developing cordial political relations among the countries of the world. x. Through basically seeking maximisation of profits by using all types resources and strategies of the global economy, eventually globalization has been promoted by the multinationals.

Disadvantages of the MNCs are: 1. Drain of Resources for Profit Maximisation:The basic objective of a MNC is profit-maximisation through exploitation of host country’s resources. It is least concerned with developmental areas, growth and equity of the poor host country. 2. Strain of scarce foreign exchange reserves:These days the multinational companies belonging to the developed countries are usually making huge investments in developing countries for the benefit of their home country. 3. Minimum transfer of Technology:It has been observed that the multinationals do not transfer their advanced technology to the host country.

They carry out their research and development in the home country only. Further, technology supplied by the multinationals to the less developed countries is capital-intensive and import-oriented which may not suit the real needs and conditions of these countries. 4. Insignificant Potential:The multinational corporations mostly operate in capital-intensive industries. Owing to their labour saving technology approach, employment generation out of their investment is not very significant. Moreover, they are not very enthusiastic in employing local nationals on high cadre of technical and managerial posts. . Interference in States’ sovereignty:There are possibilities of interference by the home governments of the MNCs in the host country’s policy matters and international economic-political relations through the influence of the MNCs. The multinationals may misuse their financial clout on the host governments in shaping their policies to the advantage of the MNCs. 6. Influence on Culture:The multinationals bring their cultural norms and attitudes in the host country and may cause destruction of its original culture in various ways. 7.

Ill-effects of advertisements:The multinational companies spend large amount on competitive advertisements which in effect may lead to high prices of the products, manipulation of demand, wastages of economic resources, demonstration effect to change the living styles of natives etc. 8. High-Profit orientation:The MNCs minimise their overall costs of production through economies of scale. They take advantage of national and international market imperfections to maximise their profits. Thus, they do not lower the prices due to economy and continue to charge high prices to earn more profits and exploit the consumers. . Unfavourable effect on Balance of Payment:The activities of the multinational operations have adverse impact on the balance of payments of the host country. This is because the MNCs by remittances of profits draw upon the foreign exchange reserves of the host country. This will add to the problem of balance of payments deficit which the country might be facing. 10. Monopoly Growth:The MNCs may create their monopolies in the markets. In the process the local competitors may be eliminated. 11.

Depletion of Non-renewable resources:The multinationals exploit the host country’s non-renewable natural resources to their advantage. This results in the depletion of non-renewable resources in the host country. 12. Evasion of Taxes:The MNCs realising the host country’s dependence on their investments may exert their force to make the country to accept their terms and conditions. They may even give threat of dis-investment. For instance, when the Government of India asked the IBM to reduce its equity share to 40 percent, the company decided to withdraw its branch from India. . Write short notes on the following: (a) FERA (b) Obstacles of foreign capital in developing economies (a)FERA: The Foreign Exchange Regulation Act (FERA) was legislation passed by the Indian Parliament in 1973 by the government of Indira Gandhi and came into force with effect from January 1, 1974. FERA imposed stringent regulations on certain kinds of payments, the dealings in foreign exchange and securities and the transactions which had an indirect impact on the foreign exchange and the import and export of currency.

The bill was formulated with the aim of regulating payments and foreign exchange. According to these guidelines, the principal role was that all branches of foreign companies operating in India should convert themselves into Indian companies with at least 60 percent local equity participation. Furthermore, all subsidiaries of foreign companies should bring down the foreign equity share to 40 percent or less. The 1976 guidelines provided for three levels of foreign equity: i) 74 percent ii) 51 per cent iii) 40 percent.

Companies were allowed to retain foreign equity holdings above 40 percent and upto 74 percent on condition that they were engaged in i) core industries ii) predominantly export-oriented production iii) activities requiring sophisticated technology or specialised skills iv) tea plantation activities. Keeping in view the liberalization measures announced in the new industrial and trade policy in 1991 and the subsequent period, the government announced major concessions to FERA companies in November 1991 and January 1992.

On January 8, 1993, the government promulgated an ordinance to amend FERA with immediate effect. The ordinance has removed a large number of restrictions on companies with more than 40 percent non-resident equity, removed FERA controls on Indian firms setting up joint ventures abroad and allowed Indians to hold immovable property abroad, subject to certain conditions stipulated by the Reserve Bank of India. Important concessions announced in November 1991, January 1992 and January 1993 (b) Obstacles of foreign capital in developing economies 1.

Political Instability. In most of the developing countries, the governments are not stable. A new government comes into power overnight, either through coup defeat or army take over. The new government introduces a new system of rules for the operation of business which causes frustration and discontentment among the people. How does political instability affect growth is discussed in brief below. 3. Lack of investment. For an economy to grow, it must have investment. The funds for investment can come either from domestic savings or from abroad.

Both these sources of investment funds have their own peculiar problems which in brief are discussed as under. (i) Investment funding by domestic savings. For economic growth we must give up unnecessary expenditure so that the economy can achieve even greater consumption in the future. In developing countries, the people with per capita incomes of as low as $ 600 per year hardly meet the bare necessities of life. They have little to put into savings. The middle class persons do save for their old age, marriage of children etc and put their money in saving banks.

The rich people prefer to invest their savings abroad. The overall result is that domestic savings in most of the developing countries is as low around 13% of GDP; whereas it should not be less than 25% of GDP to promote growth. (ii) Investment funding from abroad. Another way to generate funds for investment is to obtain (a) Foreign loans or (b) foreign private investment or (c) both. The foreign loans or the foreign private investment has their own peculiar problems. (a) Foreign loans.

For financing development of the less developed countries (LDC’s) the flow of capital comes from (i) individual national govts (ii) multinational assistance organizations and (iii) multinational companies. (i) The individual national govts give financial assistance to LDC’s mainly for their own economic and political interests. So long as the developing country is protecting the interest of the donor countries, the flow of capital counties. It is stopped or very much slowed down when the recipient country is of no benefit to them (America stopped financial assistance to Pakistan after the Afghan War was over).

A developing country, therefore, cannot rely on such foreign aid for economic growth. (ii) Same is the position now of the multinational assistance organizations like the Word Bank and international Monetary Fund (lMF) These organizations which are mainly funded by the developed capitalists countries of the world are also using these organizations to promote their own economic and political interests. All the developing countries including Pakistan are now knee deep in bebts of these organizations. The problem of debt servicing, rescheduling has adversely affected economic growth of the poor countries. iii) As regards the flow of capital from multinational companies, they make investment in those countries where infrastructure facilities such as transportation, power, cheap labour force, raw material etc. are available. As these companies do not generally help in establishing infrastructure in poor countries, therefore they do not contribute much to economic growth of the LDC’s. The problem of lack pf proper investment, therefore, remains in developing countries. 6. Inefficient Human Capital. In addition to physical capital, human capital is also limited in developing countries.

The quality of population as measured by its skills, education and health is far below the standard in developed countries of the world. Deceases, starvation, glut of unskilled workers stand in the way of economic development of the developing countries of the world. 7. Dual Economy. In developing countries, there are two types of economies which are generally functioning. These economies are somewhat unrelated to each other. One economy is the market economy and the other is a traditional non market or subsistence economy. The life stile of the people, social customs, the methods of production etc. iffer very much from each other in these two different economies. The occurrence of dualism stand in the way of optimum utilization of resources. Thus dualism is also considered an important obstacle to economic growth. 8. Demonstration effect. Demonstration effect on consumption level is also a major constraint on the path of economic development of under developed countries. The international demonstration effect increases propensity to consume of the people and reduces the rate of saving and investment in the countries. 9. Inadequate infrastructure facilities.

The under developed countries suffer from lack of basic infrastructure such as transport and communication system, power supply, banking and other financial facilities. The provision of inadequate infrastructure facilities stand in the way of economic development of the poor countries. 10. Inappropriate Social Structure. Inappropriate social system such as outdated religious beliefs, caste system, irrational attitude toward family planning etc. is also a constraint on the economic development of developing countries. 11. Market imperfections.

Market imperfections in the form of immobility of factors of production, ignorance of market conditions, price rigidity etc. are serious obstacles in the path of economic development of the backward countries. 5. Write a brief note on international HRM strategy. While devising an HRM strategy for a large multinational company it is important to assess the size, nature, scope and human resources requirements of the future organisation and to define the measures necessary to supply the human resources needed to attain the company goals. HR strategies should be formulated after other major functional strategies have been determined.

Thus the firm must decide its strategic objectives; specify its production and marketing strategies, organisation structure and operational plans; and then address the issue of how best to manage the HR required to implement the chosen options. Next, the firm must compare its present HR with the demands implied by its overall corporate plan. The comparison needs to examine: •Existing and desired organisational climates, including leadership style and employee participation mechanisms. •The types of people required in terms of skills, attitudes and performance capabilities. Motivation and reward systems. •Current and anticipated skill requirements. •The firm’s training and employees development capabilities. Further matters requiring consideration include potential obstacles to the efficient use of the firm’s human resources, the quality ofinternal company communications, techniques for measuring performance, and general personnel policies. Gaps between actual and desired situations will become apparent. Measures for bridging these gaps should now be defined HR strategies are necessarily affected by a variety of environmental factors.

External influences include the following: a) The legal framework. Laws on collective bargaining in various countries, the right to strike, employment protection, employee participation in management decisions, minimum wage levels, etc. in each of the nations in which the company does or intends to do business. b) Political factors: Host country government attitudes, guidelines and Codes of Practice on employment matters. The general ambiences of host nation governments towards industrial relations and employment matters. ) Economic factors: Unemployment and inflation rates in host nations, competition within industries and so on. d) Social trends: Extents offemale participation in national labour forces, amount of part-time working, attitudes towards work and working hours, demands for improvements in the quality of working life, changes in living standards, educational opportunities etc. e) The technological environment: Changes in working methods, needs for reskilling and greater flexibility of labour and the implications of various technologies for management style.

Internal factors affecting multinational HRstrategy arethe degree of decentralisation of the organisation; the present state of morale; whether jobs can be completed by unskilled people, the nature of host country workforce in terms of background, education, perspectives, etc. , the degree of trade union activity within subsidiaries, the attitude of the company’s principal shareholders towards employee relations; and the perspectives of individual senior managers. 6.

Discuss the organizational structures for multinational strategies. When a company first goes international, it seldom changes its basic organizational structure. Most companies act first as passive exporters. They simply fill orders using the same structures, procedures and people used in domestic sales. Even with greater involvement in exporting, companies often avoid fundamental organizational changes. Instead they use other companies to provide them with international expertise and to run their export operations.

Export management companies and export trading companies manage exporting for companies without the resources or skills to run their own export operations. Similarly the choice of licensing as a multinational participation strategy also has little impact on domestic organizational structures. The licenser need only negotiate a contract and collect the appropriate royalties. When international sales become more central to a firm’s success, more sophisticated multinational and participation strategies usually become a significant part of a company’s overall business strategy.

As a result, companies mustthenbuildappropriateorganizational structuresto manage their multinational operations and implement their multinational strategies. The Export Department: When exports become a significant percentage of company sales and a company wishes greater control over its export operations, managers often create a separate export department. A separate department shows that top management believes that the investment of human and financial resources in exporting is necessary to sustain and build international sales.

The export department deals with all international customers for all products. Managers in the export department often control the pricing and promotion of products for the international market. People within the department may have particular country or product expertise. Export-department managers have the responsibility to deal with export management companies, with foreign distributors and with foreign customers. When the company uses a direct exporting strategy, sales representatives located in other countries may also report to the export- department management.

As companies evolve beyond initial participation strategies of exporting and licensing, they need more sophisticated organizational structures to implement more complex multinational strategies. These more complex structures include the international division, the worldwide geographic and products structures, the worldwide-matrix structure and the transnational network structure. International Division: As companies increase the size of their international force and set up manufacturing operations in other countries, the export department often grows into an international division.

The international division differs from the export department in several ways; it is usually larger and has great responsibilities. Besides managing exporting and an international sales force, the international division oversees foreign subsidiaries that perform a variety of functions. Most often these are sales units. However, units that procure raw materials and produce the company’s products in other countries are common. The international division also has more extensive staff with international expertise.

Top management expects these people to perform functions such as negotiating licensing and joint-venture agreements, translating promotional material, or providing expertise on different national cultures and social institutions The following exhibit gives an example of international division in a domestic product structure. In this example, the international division handles all products and controls foreign subsidiaries in Europe and Japan and general sales force in the rest of Asia.