MNCS

Transnational corporations (TNCs) or

Multinational corporations (MNCs)
are companies that operate in more than one
country. Sony, Toyota, Unilever, Shell Oil
Company, Total Oil Company, Coca-Cola, Pepsi-
Cola, Apple are all examples of TNCs. These
companies are often managed from and have a
central office headquartered in their home
country, but with offices worldwide
• Multinational corporations own assets in their
home market and at least one foreign nation.
Any asset held by the company outside of its
domestic borders qualifies for this
classification. Many focus on manufacturing or
production assets, but it could be a joint
venture contract an administrative satellite, or
even research and development efforts.
• They often have factories in countries that are
not as economically developed to take
advantage of cheaper labor. This is done so
that the cost of production is low and the
MNCs can earn greater profits.
• A company that is controlled from its home
country but has large operations in many
different countries.
• A multinational corporation/company is an
organization doing business in more than one
country. In other words it is an organization or
enterprise carrying on business in not only the
country where it is registered but also in several
other countries. It may also be termed as
International corporation, Global giant and
Transnational corporation.
Roles of MNCS
• Transnational corporations (TNCs) are playing
a key role in the ongoing globalization process.
Their strategies largely determine volume and
nature of trade flows, foreign direct
investments and financial flows.
Developing nations attracts multinational
subsidiary operations due to a number factors:
• cheap labour, low taxation and less vigilance
concerning workers rights and environmental
protection, cheap raw materials, costs
exemptions, government guarantee, cheap
land among others.
How many TNCs are there in the world?
• Today, there are an estimated 77,000 TNCs in
the world, with more than 770,000 foreign
affiliates.
• Employ about 86 million people worldwide.
• Two-thirds of the worlds exports of goods and
services are accounted for by MNCs
• 30-40 percent of this trade takes place
between affiliates of the Same MNC
How Important are MNCs?
• Produce about 25 of total World Economic
Output
Output is: “The total value of goods produced by a company, an industry or an
economy.”
In 2020, global GDP amounted to about 84.54 trillion U.S.
dollars.
Gross domestic product (GDP) is the monetary value of all finished goods and
services made within a country during a specific period. GDP provides an
economic snapshot of a country, used to estimate the size of an economy and
growth rate. GDP can be calculated in three ways, using expenditures,
production, or incomes.
• MNCs plays their role as modernizers of the
world economy through continuous and
constant promotions of new technologies
especially introducing and promoting
technologies to the developing economies,
rural, and remote areas and also present and
introduce new innovations across the globe.
• Multinational competition: Is the services or
products provided by competing companies that
serve international customers. Global
competition has allowed companies to buy and
sell their services internationally, which opens
the door to increased profits and flattens the
playing field in business.
• MNCs and industries are designed to be
competitive in the economic globalization in
order to enhance quality of consumer goods.
• The MNCs can create projects and bring
progresses by educating and employing
(transfer of knowledge and skills) people in
the poor economy countries.
• The MNCs also can distribute products that
are relatively cheap to the developed markets
by reducing or minimizing the production
costs of many products.
• By providing services and goods, it can
facilitate people’s lives; and also in addition,
some goods and services can contribute to
people’s high standard of living.
Standard of living refers to the level of wealth, comfort, material goods, and
necessities available to a certain class of people or geographic area.
• MNCs and FDI are interrelated to each other.
Corporations must acquire a controlling stake in a
foreign firm in order to become multinational
which can be done by creating a new foreign firm
or by acquiring an existing foreign firm and those
methods involve an international capital flow
which can be defined as Foreign Direct
Investment (FDI).
A foreign direct investment (FDI) is a purchase of an interest in a company by a
company located outside its own borders.
• FDI is an important channel for the transfer of
technology and finances between countries,
promotes international trade through access
to foreign markets, and can be an important
vehicle for economic development.
• Economic development is defined as an increase in a country's
wealth and standard of living.
• MNCs are known to be having a greater
influence in the national economy comparing
to trade. To attract MNCs facilities, national
and local governments tend to compete with
each other with the expectation they can
increase their tax revenues, employment, and
economic activities.
• In order to compete, the MNCs may be
offered by the political entities of the country
some incentives such as the tax breaks,
pledges of subsidized utilities (attract
investment)
• MNC’s break protectionism, curb local
monopolies, create competition among
domestic companies and thus enhance their
competitiveness.
• The host country can reduce imports and
increase exports due to goods produced by
MNC’s in the host country. This helps to
improve balance of payment.
The balance of payments (BOP) is an accounting of a country's international
transactions for a particular time period. Is the method by which countries
measure all of the international monetary transactions within a certain
period.
• Level of industrial and economic development
increases due to the growth of MNC’s in the
host country.
• MNC’s create opportunities for marketing the
products produced in the home country throughout
the world through modern marketing techniques.
• They create employment opportunities to the people
of home country both at home and abroad directly and
indirectly i.e. in agriculture, mineral, forest as the
need for raw materials increase and also directly in
their industries and other forms of businesses.
Provision of significant employment and training to the
labour force in the host country.
• It gives a boost to the industrial activities of
home country producing host countries
(growth and expansion of industries)
Why? Access to cheap raw materials, labour,
bigger market and low cost of production
• Home country can also get the benefit of
foreign culture and practices brought by
MNC’s from hosting countries
• The investment level as a result of employment
level improves income level of the host country
increases due to the operation of MNC’s.
• Transfer of skills and expertise, helping to develop
the quality of the host labour force. The
industries of host country get latest technology
from foreign countries through MNC’s.
• MNCs add to the host country GDP through their
spending, for example with local suppliers and
through capital investment.
• Competition from MNCs acts as an incentive to
domestic firms in the host country to improve their
competitiveness, perhaps by raising quality and/or
efficiency
• MNCs extend consumer and business choices in the
host country. The domestic traders and market
intermediaries of the host country gets increased
business from the operation of MNC’s.
• Profitable MNCs are a source of significant tax
revenues for the host economy (for example on profits
earned as well as payroll and sales-related taxes)
• The host country’s business also gets
management expertise from MNC’s. (Transfer
of entrepreneurship skills)
Entrepreneurship is 'an individual's ability to turn ideas into action. It
includes creativity, innovation and risk-taking, as well as the ability
to plan and manage projects in order to achieve objectives. Fostering
entrepreneurial spirit supports the creation of new firms and
business growth.
• Multinational firms may help improve
infrastructure in the economy. Foreign
investment may stimulate spending in
infrastructure in communication and
transport, power, banking, education, security
and sports facilities.
• Multinationals provide an inflow of capital
into the developing country. E.g. the
investment to build the factory is counted as a
capital flow on the financial account of the
balance of payments. This capital investment
helps the economy develop and increase its
productive capacity.
Potential problems of MNCs on host countries
include:
• Domestic businesses may not be able to
compete with MNCs and some will fail to
catch up with competition
• MNCs may not feel that they need to meet the
host country expectations for acting ethically
and/or in a socially-responsible way
• MNCs may be accused of imposing their
culture on the host country, perhaps at the
expense of the richness of local culture. Might
MNCs reduce cultural diversity around the
world as they continue to expand, particularly
into less developed or developing countries?
MNCs bring their cultural norms and attitudes
in the host country and may cause destruction
of its original culture in various ways.
• High Profit-orientation: MNCs minimize their overall
costs of production through economies of scale. They
take advantage of national and international markets
to maximize their profits. Thus, they sometimes do not
lower the prices due to economy and continue to
charge high prices to earn more profits and exploit
consumers basic needs/requirements e.g.
communication, transport, pharmaceutical sectors
among others
• Profits earned by MNCs may be remitted back to the
MNC's base country rather than reinvested in the host
economy (capital and finance repatriation/flight)
• Profit repatriation. Although multinationals
invest in developing economies, the profit is
repatriated to the location of the
multinational, so the net capital inflows are
less than they seem.
• MNCs may make use of transfer pricing and
other tax avoidance measures to significant
reduce the profits on which they pay tax to
the government in the host country
(undervalue their investments to avoid taxes)
Transfer pricing is an accounting practice that represents the
price that one division in a company charges another division
for goods and services provided.
• Minimum Transfer of Technology: It has been
observed that the MNCs generally do not
transfer their advanced technology to the host
county. They carry out their research and
development in the home country only.
• Further, technology supplied by the MNCs to
LDCs is capital-intensive and import-oriented
which may not suit the real need of these
countries. Moreover, they are most obsolete.
• Insignificant Employment Potential: The MNCs
mostly operate in capital-intensive industries.
Owing to their labour-saving technology
approach, employment generation out of their
investment is not very significant in a LDC.
Moreover, they are very hesitant in employing
local nationals on high cadre of technical and
managerial posts.
• Skilled labour engagement- When undertaking
new projects, the multinational may have to
employ skilled labour from other economies
and not the developing economy. This means
best jobs are not received by local workers
and the investment is diffused.
• Interference in States’ Sovereignty: There are
possibilities of interference by the home
governments of the MNCs in the host countries’
policy matters and international economic-
political relations through the influence of the
MNCs. MNCs may misuse their financial influence
on the host governments in shaping their policies
to the advantage of the MNCs. They may also
play their power game in getting a political party
of their own choice elected to the government.
Disadvantages
• MNCs may transfer technology which has become outdated
in the home country.
• MNCs do not operate within the national autonomy, they
may pose a threat to the economic and political sovereignty
of host countries by interfering with economic and political
matters of states. The host nation may lose control over its
own economy.

• MNCs may kill the domestic industry by monopolizing the

host country’s market. They may create their monopolies
in the markets and eliminate local competitors; somehow
creates dependence on the host countries.
• MNCs may use natural resources of the home country
indiscriminately and cause depletion of the resources
in the name of profit making. This results in the
depletion of non-renewable scarce resources in the
host country. Exploitation of the hosts’ irreplenishable
natural resources leading to the dwindling them.
• A large component of multinational investment in
developing economies is seeking out raw materials –
oil, diamonds, rubber and precious metals. The
extraction of raw materials can cause environmental
problems – polluted rivers, loss of natural landscape.
• 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. Their
investments are highly capital intensive. They
can Exploit labour of the host when the
country needs it by underpaying it. Why?
• Political interests of MNCs may mirror the
political interest of their respective home
nations, and this may be detrimental to the
host nation.
Drain of Resources for Profit Maximization
• The basic objective of a MNC is profit
maximization through” exploitation of host
country’s resources. It is least concerned with
developmental areas, growth and equity of the
poor host country.
• MNC’s may neglect the home countries industrial
and economic development because investments
in foreign countries is more profitable and
attractive