MNCs- Origin, Growth, & Its Effects
Origin of MNCs
A powerful influence on patterns of world trade and factor movements is the multinational firm. A multinational corporation is a company with headquarters in one country or but they operate in many countries.
Most U.S. and Japanese companies are multinationals -m Ford, General Motors, IBM, Honda and Mitsubishi. Nestle and Shell Oil are two examples of European multinational. There are various reason for the origin of multinationals. Firstly, exporting may not be the best alternative because of trade barriers, perishability, or a need to produce a product tailored to the local market. No doubt, investing in a firm by purchasing stock or making loans appears to be an easy solution.
But often the firm wants greater control over management, product quality, and patented processes. Sometimes the only way to get access to needed local resources, especially raw materials, is to build a local plant. However, trade barriers or the needs of the local (foreign) market are much more common reasons for building foreign plants than the attraction of cheap labour.
Of the top ten global enterprises, ranked by Fortune recently, six are American, one is British, one is British/Dutch, one is Japanese and one is Italian.
The companies are:
- General Motors,
- Royal Dutch/Shell Group (Britain/Netherlands),
- Ford Motor Company,
- International Business Machines (IBM),
- Toyota Japan),
- IRI (Italy – government-owned),
- British Petroleum (Britain), and
- General Electric.
From Ethnocentric to Geocentric Orientation:
In the 1950s and 1960s, MNCs adopted an ethnocentric outlook; that is, the orientation of the foreign operation was based on that of the parent company. The modern MNC has a geocentric orientation.
This simply means that the whole organized is treated as an interdependent system operating in many countries. In other words, the orientation of the MNC is truly international and goes beyond a narrow nationalistic view point:
A company goes international for various reasons:
- Firstly, the MNC can sell its products in the vast global market.
- Secondly, it can raise money for its operations throughout the world.
- Thirdly, they are able to establish production facilities in countries where labour cost is low and raw materials are abundant in supply. In fact, global firms have greater access to various natural resources and raw materials than domestic firms. This enables them to carry on production effectively and efficiently.
- Finally, MNCs can employ efficient managers by being able to recruit the most technically qualified and managerially efficient people from the whole world.
Growth of MNCs
As the world economy is opening up with a fall in regulatory barriers to foreign investment, better transport and communications, freer capital movements, etc., international companies are finding it easier to invest where they choose to cheaply, and with less risk.
Moreover, the developing countries no longer consider the presence of MNCs to be synonymous with a loss of their sovereignty. It is now realized that MNCs are merely a part of a much wider force that is integrating the world economy.
Over the years, foreign direct investment by MNCs in the developing countries has been steadily on the rise, from as low as 19% of total flows in 1990, to 30% in 1994 & 100% in 1991 under LPG (Liberalization, Privatization, Globalization) policy. So, we can conclude that the growth of MNCs depends chiefly on the liberalization policies of the governments of the developing countries, who are responsible for allowing entry to the MNC’s into their home economies, and who can re-impose the barriers if they so wish.
Liberalization as regards foreign investment would last as long as the governments of these developing countries believe that it is beneficial for them. However, the biggest danger lies in the excessive expectations of the liberalizing governments, as many of them see foreign investment as a short-cut to prosperity, capital and technology transfer, and skill enhancement. MNCs do bring in these assets to an extent, but these alone cannot make up for all the short-comings of the host economy.
Effects of MNCs
Multinationals are often accused by their critics of shifting competition in the countries in which they locate, creating balance of payments problems, and leading to undue concentration of economic and political power at home and abroad. Advocates argue that they often increase competition, accelerate the transfer of financial capital and modern technology and help promote free multi-lateral trade.
In some cases, the multinational ‘shakes up’ sleepy domestic competitors, forcing them to try harder when they can no longer hide behind a protective tariff wall. One the other hand, multinationals often simply buy out local competitors or keep local competition from developing. Sometimes multinationals increase competition, and at other times they reduce it.
Transfer of Technology:
Multinationals speed up flows of technology between (among) countries. They use processes and methods that the firm would not share with a competitor but will make available to its own subsidiaries.
Less developed countries like India often argue that this transfer does not spill over to other industries for maximum, benefit. They also argue that multinationals, which are generally from developed industrial countries, don’t try very hard to adapt technology to the local mix of available resources.
From Multinational to Global or Transnational Corporations:
Of late we observe the shift of emphasis in the area of international business. By now MNCs have now realized that it is not enough to operate in different countries.
It is not even sufficient to establish manufacturing plants in several countries (as Ford and Exxon have done) to remain internationally competitive. The shift is toward the global or transnational corporation, which views the whole world as one market.
This means that the MNCs have to develop new products with the whole world in mind. This means that a corporation has to adapt itself to national and even local needs in order to survive and grow in today’s dynamic world characterized by increasing nationalism in many countries as also acquisition of new skills by such countries and frequent and often unpredictable changes in government policies in host countries.
An example of a global corporation with a geocentric organization is ABB Asea Brown Boveri, the result of a merger between the Swiss Brown and Boveri Company and Swedish Asea. The company’s core businesses are electric power, mass transportation, and environmental controls, as well as process automation.
This company really has no ‘home’ country. While the headquarter is in Zurich, Switzerland, only 100 of the 240,000 employees work there. The CEO and only one fourth of the board are Swedish. In a sense, the financial system is American because the data are compiled in US dollars.
This truly global corporation is guided by the motto: “Think global and act local”. In other words, this company combines a global approach while paying attention to the local needs and demands. The firm may become a model for future global organizational arrangements.
Another operation of a global nature is finance, in which big firms can raise finance from wherever it is cheapest to do so, and many will also lend and invest globally. Another service industry which exhibits a global tendency is marketing as some consumer brands are becoming well-known around the world.
R & D effects of some firms have also gone global as these firms seek to remain competitive by building or buying R&D facilities wherever the expertise exists.
Conclusion to MNCs
Probably the most serious concern is that small countries are at a disadvantage in dealing with large multinationals. That giant firm may have an annual revenue much larger than the small country’s GNP.
The multinational may be the largest employer, landowner, and taxpayer in a small country. That can threaten the sovereignty of the host (capital-importing) country in dealing with a firm that is larger and more powerful than the government.
Despite these problems, there are genuine benefits that can be derived from having multinationals. They offer a way around trade barriers for a flow of resources and technology, which has been very beneficial to the world economy. In most cases, they promote the same free-trade goals of more output with less effort.
To conclude with N. Fatem, “The multinational corporation is the only organization which has the resources and scope to think, to plan, and to act with worldwide planning of markets and sources. Many international opportunities require capital and technology on scale only large multinational corporations can supply.”
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