Background of MNC's, Types of MNC's, Global performance appraisal of MNC,

1. IMPACT OF MULTINATIONAL CORPORATIONS ON INDIAN ECONOMY
INTRODUCTION
In the present day world of Globalization, Multinational Companies have played an important
role in the development of home countries where the MNCs are operating. Foreign direct
investment by multinational companies involves much more than just transfer of capital as it
brings with them technologies of production, managerial services and other business
practices. Employment opportunities created by the MNCs have solved an important problem
of unemployment which is an important characteristic of the underdeveloped as well as
developing countries. With the shortage of savings for financing developmental projects,
there is need to depend on foreign capital. Inviting and making ways for MNCs to operate in
India will enhance the economic development of the country. Prime Minister Narendra
Modi’s initiatives for ‘Make in India’ and ‘Skill India’ campaigns, inviting Global
Companies to invest in India as well as efforts to simplify the Foreign Direct Investments
regulations will certainly make India a favourite destination of MNCs.
The word Multinational is the combined word of Multi and national which gives meaning of
many countries. Hence multinational companies are those business organization which have
head office in one country and their operation are spread over several other countries. There
are two classes of companies under multinational companies. The head office is regarded as
the parent company and branches as subsidiary company. The parent company manages and
control the activities of subsidiary company. The subsidiary companies are affiliated with
parent companies through investment, trade-mark, patent and technology. The multinational
companies are operated with huge investment and wide range of product or services. They
cover large area of market. Standard Chartered Bank, Coco-cola, SONY Electronics ,etc are
some examples of multinational companies.
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,
or
4. A transnational enterprise that combines the previous three approaches.
HISTORICAL BACKGROUND OF MULTINATIONAL CORPORATIONS (MNCS)
• The history of Multinational Corporations can be traced to trading and business
activities since time immemorial. Mesopotamian and Phoenician are said to be the
first transnational merchants entering into business activities with Greeks. With the
fall of Roman empire, Middle East and European took to transnational trading.
• However, due to fall of Roman empire and war between feudal lords and church's
prohibitory order of trading with Muslim states withheld the pace of trading. The city-
states of Venice, Florence, Geneva, Pisa provided a platform for trading to Christian.
In the 17th and 18th centuries, the modus operandi of business drastically changed
replacing barter economy with money economy.

2. • As a result the banks and financial institutions came up. These institutions, though in
their nascent form, served as expediter of multinationals.
• At the beginning of 19th century, flow of foreign investment through MNCs mainly
came from Western Europe to the underdeveloped countries of Asia. Africa and
America besides USA.
• There were four big players in the field of capital exports, namely, Britain, France, the
Netherlands and Germany. They were operating within their area of influence.
Actually, all of them made colonies.
• These countries basically got hold over the raw materials and other natural services of
their colonies in a big way. Most dramatic force, which shaped the destiny of MNCs
during this period, was industrial revolution and development of science and
technology.
• Mass scale production required a vast market. Production for domestic market was
large enough so these firms started looking beyond their domestic market for the
search of new market and then they started transnational business. Later on, these
transnational trading activities transformed into multinational corporations.
• Growth of MNCs took place in four phases; first phase run up to the 1st world war.
During this phase, companies were mostly from Europe. These were Dunlop Siemens,
Philips and Imperial Tobacco etc. During 1930-50, the MNCs were sluggishly
operative due to recessional trend in the world economy. Second phase started just
after the Second World War. During this period only IBM, Ford Motors and General
Motors of America surface on the screen of Global Economy.
TYPES OF MNCS:
MNCs can be grouped into three categories on the basis of their operational area, control
system, pattern of management. Investment origin, types of products etc.
1. MNCs engaged in trading
2. MNCs working in service sector
3. MNCs from manufacturing sector
MNCs engagedin trading or trading MNCs - Fifty per cent revenue collected from the
trading activities by a company called a trading company. Nearly 60 per cent of the world
export is dealt by the trading MNCs. These are the oldest forms of MNCs.
MNCs working in service sector - A MNCs will be called a service MNC if it is engaged in
service sector and derives at least fifty per cent revenue from service provided by it. This
types of MNCs are widely available in the field of banking, transport, tourism, finance,
insurance etc.
MNCs from manufacturing sector- A company engaged in manufacturing and derives its
50 per cent revenue from manufacturing activities will be a manufacturing MNCs such as
Parry, Colgate and Palmolive etc.
1. Promotion 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

3. 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.
 For example, the effect of Suzuki firm’s investment in Maruti Udyog
manufacturing cars is not confined to income and employment for the workers
and employees of Maruti Udyog but goes beyond that. Many workers are
employed in dealer firms who sell Maruti cars.
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 non-debt 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 India’s balance of payments (BOP).
3. 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
(d) where domestic assets and employment are created on a significant scale.
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 China’s exports in recent years is due to the large investment
made by multinationals in various fields of Chinese industry.

4.  Historically in India, multinationals made large investment in plantations
whose products they exported. In recent years, Japanese automobile company
Suzuki made a large investment in Maruti Udyog with a joint collaboration
with Government of India. Maruti cars are not only being sold in the Indian
domestic market but are exported in a large number to the foreign countries.
5. 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
joint-venture 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 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.
GLOBAL PERFORMANCE APPRAISAL OF MNCS:
• The MNCs are termed as the unique species of the fag end of the 20th century when
majorities of the developed and developing economies of the world adopted socio-
economic openness to fall in line with a novel jargon of globalization. The
performance of MNCs in terms of openness with increasing technical collaboration,
flow of FDI, repatriations of capital, joint venture, merger and acquisition and
subsidiaries are appraised in the following paragraphs to substantiate the fact that
these MNCs have emerged as dominant players in the world economic horizon.
• North America has also planned to invest more in foreign investment as compared to
domestic investment. The destinations of investments by North America during the
period under reference are expected to go up to 22 per cent in Europe, 16 per cent in
Asia, 12 percent in Latin America and Caribbean's.
• Japan also plans to invest more in the foreign countries. Asia and North America are
the central attractions of the Japanese foreign investments.
Factors Responsible for the Growth of MNCs: Worldwide: Post Globalization
Phenomenon
From the foregoing discussion and analysis, it is an established fact that the MNCs all over
the world are growing at phenomenal rate. The main reasons responsible for this are
attributed to the following factors:
1. Growing Size of Market
2. Varied Field of Operations

5. 3. Improved Marketing Incentives
4. Sound Financial Background
5. Advanced Technology
Factory system of production resulted in mass scale production, for this ever-expanding
production, enterprises started looking for a vast market. So they expanded their business
activities beyond the physical boundaries of the country in which they originated.
Business operations of large sized firm enlarge, and they made an international loyalty and
image. They started to expand their field of operation. Most of big firms started producing
too many products under a single banner.
For MNCs to play a still more useful and productive role in Indian economy if the following
suggestions were implemented.
• Check is needed on the disinvestment of Public Sector Undertakings for foreign
enterprises.
• Opening insurance sector to MNCs is not advisable, since these Insurance
Corporation under public corporations are making significant contribution to
numerous social sectors such as health, education, communication and other
infrastructural development.
 Globalization in the Indian context should be linked to ever larger scope in creation of
jobs.
 The monetary and fiscal policies of the government should augment the corporate
value through reduction in rate of interest and taxation, establishing of exchange rates
and relaxation in price controls.
 MNCs should be encouraged to invest more in technology for development of the
agriculture sector and for strong industrial base in the Indian economy.
 The strong industrial base with appropriate technology and developed agriculture
sector will contribute to the strength of the economy to fall in line with the spirit of
global competitiveness.
CONCLUSIONS:
• In a nutshell, the MNCs the world over are the recent craze. The world economies
both developed and developing are buzzing with the activities of MNCs in a variety of
ways e.g. FDl inflows and outflows, M&A, joint venture, services etc. The investment
flows have gone up during the period under review. The International production has
expanded.
• Till the end of 1998, there were 53000 MNCs and 4 . 4 8 , 0 0 0 foreign affiliates
which have played key role with $3.5 trillion, accumulated stock of FDI, $9.5 trillion,
sales of foreign affiliates and $ 13 trillion global assets.
• Worldwide cross border M&A mostly in banking, insurance, chemical
pharmaceuticals and telecommunication valued to the tune of $ 236 billion speaks
volume of globalization during the current decade.
• Asian countries are hopefully the new destination for the foreign investment in the
form of FDI, joint venture, M&A and financial services on account of vast size of the
market, cheap availability of skilled and unskilled labour, marketing incentives and
great deal of opportunity for induction of advance technology.

6. • India has embarked upon the process of liberalization for globalization of her
economy in July 1 9 9 1 , bringing about a host of economic reforms, viz., and
financial, fiscal, banking, insurance and capital market. This liberalization programme
is expected hopefully to pave ways for easy and smooth integration of world economy
with the Indian economy.