Chapter: 1-Introduction to MNCs

1. What is Multinational Corporations?

Or, What do you mean by Multinational Corporations? (2018)
 Multinational Corporations: A multinational corporation (MNC)[is a corporate organization
that owns or controls production of goods or services in at least one country other than its
home country.
A multinational corporation (MNC) has facilities and other assets in at least one country
other than its home country. A multinational company generally has offices and/or factories
in different countries and a centralized head office where they coordinate global
management.
A multinational corporation (MNC) is usually a large corporation incorporated in one
country which produces or sells goods or services in various countries. The two main
characteristics of MNCs are their large size and the fact that their worldwide activities are
centrally controlled by the parent companies.
So in the conclusion we can say that a multinational corporation is a company that operates
in its home country, as well as in other countries around the world. It maintains a central
office located in one country, which coordinates the management of all its other offices, such
as administrative branches or factories.
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2. Discuss the Characteristics of multinational corporations.
Or, Explain the characteristics of a multinational corporation. (2018)
 Characteristics of multinational companies are given below:
1. Productive organization: This organization produces various types of goods and
services. It is supplies in many countries. It uses its own technology, patent right for
manufacturing goods.
2. Worldwide: Multinational companies operate in whole world. It extends its business
worldwide. It establishes many branches in various companies. They extend their
business in more than one country.
3. Ownership and control: Ownership of company remains on both parent and host
country. Parent company control, manage and help in the operation of all host countries.
They have control in capital, high technology, and trade mark.
4. Transfer of technology: These multinational companies are establishes with hug capital
and advanced technology. It also transfers the technology in the host countries that can be
used for production.
5. Marketing superiority: It is large organization which has international name and fame.
It has good network worldwide for distribution of goods.
6. High efficiency: These organizations operate their business with efficiency. They use
advanced technology. They also involve keenly in research works. They used many
trained person that helps in the production of quality goods.
7. High Turnover and Many Assets: MNCs operate on a global scale. Which means they
have huge assets in almost all countries in which they operate. Their turnovers can also
be incomprehensibly large.
 8. Technological Advantages: As we saw earlier, an MNC has at its disposal huge amounts
of wealth and investments. This allows them to use the best technology available to boost
their products and their company.
9. Management by Professionals: An MNC is run by very competent and capable
individuals. They have suitable managers to take care of their business operations,
technology, finances, expansion etc.
10. Aggressive Marketing: MNCs can spend a lot of their money on marketing, advertising,
and promotional activities. Aggressive marketing allows them to capture the market and
sell their products globally.
11. International Operations Through a Network of Branches: MNCs have production
and marketing operations in several countries; operating through a network of branches,
subsidiaries and affiliates in host countries.
12. Better Quality of Products: A MNC has to compete on the world level. It, therefore, has
to pay special attention to the quality of its products.
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3. Discuss the advantages and limitations of MNCs.
Or, Discuss the advantages and disadvantages of multinational corporations.
(2018)
 Advantages of MNCs from the Viewpoint of Host Country:
1. Employment Generation: MNCs create large scale employment opportunities in host
countries. This is a big advantage of MNCs for countries; where there is a lot of
unemployment.
2. Automatic Inflow of Foreign Capital: MNCs bring in much needed capital for the rapid
development of developing countries. In fact, with the entry of MNCs, inflow of foreign
capital is automatic. As a result of the entry of MNCs, India e.g. has attracted foreign
investment with several million dollars.
3. Proper Use of Idle Resources: Because of their advanced technical knowledge, MNCs
are in a position to properly utilize idle physical and human resources of the host country.
This results in an increase in the National Income of the host country.
4. Improvement in Balance of Payment Position: MNCs help the host countries to
increase their exports. As such, they help the host country to improve upon its Balance of
Payment position.
5. Technical Development: MNCs carry the advantages of technical development 10 host
countries. In fact, MNCs are a vehicle for transference of technical development from
one country to another. Because of MNCs poor host countries also begin to develop
technically.
6. Managerial Development: MNCs employ latest management techniques. People
employed by MNCs do a lot of research in management. In a way, they help to
professionalize management along latest lines of management theory and practice. This
leads to managerial development in host countries.
7. End of Local Monopolies: The entry of MNCs leads to competition in the host
countries. Local monopolies of host countries either start improving their products or
reduce their prices.
8. Improvement in Standard of Living: By providing super quality products and services,
MNCs help to improve the standard of living of people of host countries.
 9. Promotion of international brotherhood and culture: MNCs integrate economies of
various nations with the world economy. Through their international dealings, MNCs
promote international brotherhood and culture; and pave way for world peace and
prosperity.

 Limitations of MNCs from the Viewpoint of Host Country:

1. Danger for Domestic Industries: Domestic industries cannot face challenges posed by
MNCs. Many domestic industries have to wind up, as a result of threat from MNCs. Thus
MNCs give a setback to the economic growth of host countries.
2. Repatriation of Profits: MNCs earn huge profits. Repatriation of profits by MNCs
adversely affects the foreign exchange reserves of the host country; which means that a
large amount of foreign exchange goes out of the host country.
3. No Benefit to Poor People: MNCs produce only those things, which are used by the
rich. Therefore, poor people of host countries do not get, generally, any benefit, out of
MNCs.
4. Danger to Independence: Initially MNCs help the Government of the host country, in a
number of ways; and then gradually start interfering in the political affairs of the host
country. There is, then, an implicit danger to the independence of the host country, in the
long-run.
5. Disregard of the National Interests of the Host Country: MNCs invest in most
profitable sectors; and disregard the national goals and priorities of the host country.
They do not care for the development of backward regions.
6. Misuse of Mighty Status: MNCs are powerful economic entities. They can afford to
bear losses for a long while, in the hope of earning huge profits-once they have ended
local competition and achieved monopoly.
7. Careless Exploitation of Natural Resources: MNCs tend to use the natural resources of
the host country carelessly. In this way, MNCs cause a permanent damage to the
economic development of the host country.
8. Selfish Promotion of Alien Culture: MNCs tend to promote alien culture in host
country to sell their products. They make people forget about their own cultural heritage.
9. Exploitation of People, in a Systematic Manner: MNCs join hands with big business
houses of host country and emerge as powerful monopolies. This leads to concentration
of economic power only in a few hands.
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4. Discuss the kinds or types of multinational corporations. (2018)
 The multinational corporations may be divided into seven categories depending upon their
activities. They may be colonial companies, resource based companies, public utilities
companies, manufacturing companies service institutions, licensing and turnkey projects.
 Their brief description is as follows:
1. Colonial Companies: Colonial companies are those companies which are established to
procure raw materials for the parental office at native country. They monopolies the
purchasing of raw materials. They have rights to operate in different countries. East India
Company’s name can be cited in this respect.
2. Resource Based Companies: It is the second category of multinationals. These
companies purchase raw resources from several countries. They do not believe in
 exploitation and purchasing of mineral resources. Many developed and developing
countries have propagated such types of companies.
3. Public Utility Companies: The public utility companies are established to help the
people of the country. The companies enjoy the position of natural monopoly. The
multinational in public utility concerns do not remain longer because of nationalism.
4. Manufacturing Companies: The manufacturing companies are engaged in several
manufacturing processes. They produce qualitative and quantitative goods in a huge
quantity. They invest adequate capital in foreign countries to get higher rate of return.
5. Service Institutions: They know the service technology and provide suitable and
sufficient services to the people of the countries where they are established. Banking,
Insurance, Hotels, Airways, etc., are the several examples of such companies.
6. Licensing: The multinationals grant licenses to some domestic companies to use their
trademarks and technical know-how. The license is granted to exploit potential market in
the host countries who pay license fees annually to the multinationals to use their know-
how for a fixed period.
7. Turnkey Project: Turnkey project is taken up by the multinationals to complete a
specific job within a fixed period. The contract for a turnkey project is made on open
tender or on the basis of cost plus fee for the services.
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5. What do you meant by the concept of ‘psychological’ or ‘psyche’ distance? (2018)

 Psychological Distance: Psychological distance is a cognitive separation between the self

and other instances such as persons, events, or times.
Psychological distance is the degree to which people feel removed from a phenomenon.
Distance in this case is not limited to the physical surroundings; rather it could also be
abstract. Distance can be defined as the separation between the self and other instances like
persons, events, knowledge, or time.
 Psychic Distance: Psychic distance is a perceived difference or distance between objects.
The concept is used in aesthetics, international business and marketing, and computer
science.
Psychic distance is made up of the Greek word "psychikos", an adjective referring to an
individual's mind and soul, and "distance", which implies differences between two subjects
or objects. Some therefore argue that the concept exists in the mind's eye of the individual
and it is their subjective perception that uniquely determines "psychic distance".
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6. What are the reasons of Growth of Multinational Corporations?
Or, State the reasons for a company being multinational corporations. (2018)
 The reasons of Growth of Multinational Corporations are as follows:
1. Foreign investment: As the world economy is opening up with a fall in regulatory
barriers to foreign investment, better transport and communications, freer capital move-
ment0s, etc., international companies are finding it easier to invest where they choose to
cheaply, and with less risk.
 2. Loss of sovereignty: 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.
3. Foreign direct investment: 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.
4. Liberalization policies: Whether this trend will last or not will depend 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.
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7. Briefly explain the growth of multinational corporations around the globe.

(2018)
 In the latter half of the twentieth century the rise and spread of the MNC has been one of the
most conspicuous developments in the global economy.
From just a few hundred in 1945 the population of MNCs grew rapidly to reach over 9,000
by 1973, 30,000 by 1990. In 2011 the United Nations Conference on Trade and Development
estimated that there were over 100,000 MNCs controlling around 900,000 foreign affiliates.
The period since 1990 in particular has been something of a ‘golden age’ for the MNC.
Between 1990 and 2016 the total assets of MNC foreign affiliates grew to $112tr, sales of
MNC foreign affiliates rose to $37.5tr, and the value of exports of MNC foreign affiliates
quintupled to $6.8tr while the number of people employed by foreign affiliates quadrupled to
82m.
Although only around 2% of the world’s labor force is employed by MNCs many more jobs
are dependent on the supply chains they orchestrate.
MNCs are both a cause and a consequence of globalization and the global business
environment. Decisions by national firms to invest overseas, a process known as Foreign
Direct Investment (FDI), is a key mechanism through which the local and national economies
are becoming more integrated. Equally the increasingly globalised world has lowered the
mental, physical, and political barriers to FDI that once existed.
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8. Discuss the types, key features and critiques of internationalization theory.
 Internalization theory is a branch of economics that is used to analyze international business
behavior. Internalization theory explains the existence of the firm because it is the most
efficient way of coordinating a set of activities rather than market exchange.
 There are three types of internationalization theory:
1. Uppsala Model:
2. Transaction Cost Theory:
3. Network Model:
1. Uppsala Model: Uppsala Model of Internationalization is the theory that is based on the
learning and the evolutionary viewpoint. This theory is derived from the behavioral theory
which is explained as the nature of the firm through behavioral actions of its customers and
the country of its emergence
  The key features of Uppsala theory are:
a. Firms first of all achieve their knowledge from the home market before moving to the
distant markets.
b. Organizations start their overseas’ operations from culturally/geographically and
religiously close nations and progress slowly to culturally and geographically further
far-away countries.
c. Organizations also launch their overseas operations by making use of the traditional
exports and slowly but surely moving to the using of a more intensified and
demanding operational modes like sales subsidiaries at the company and target
country level.
d. It is the objectives of the firm to produce abroad I all markets.

 Critiques of Uppsala Model:

a. This model is too deterministic because its principles are predicted by the evolution
of time.
b. All its advances are based and controlled by the environment of which the firm exist
or planning to internalize.
c. The model does not take into account the interdependencies between different
countries’s markets of which a firm operates under.

2. Transaction Cost Theory: The transaction cost approach focuses on costs and how these
costs would affect a firm’s choice of market and their modes of entry into a new boundary
market.
 The key features of the Transaction Cost Theory are:
a. This theory views organizational structure as a single important arrangement for
establishing and safeguarding transactions and reducing transaction costs between
participants and across organizational boundaries.
b. The Transaction cost covers all the costs of searching for information about a foreign
market, products, buyers and sellers; negotiation costs; and monitoring which is part
of the enforcement costs.
c. Transaction costs and transactional difficulties increases when transactions are
characterized by: Asset specificity; Uncertainty (internal and external); and
Frequency of transaction.
d. The international market decision is made in a rational manner base on the analysis of
the cost of transaction.
e. Organizations make decisions based on the evaluations and comparing of their cost of
an entry mode that is related to their objectives.

 Critiques of Transaction Cost theory:

a. This theory can be wrong and also dangerous for corporate managers because of its
assumptions on which it is based on.
b. Firms are not mere alternatives for the structuring of efficient transactions when
markets results disappoints;
c. Transaction Cost theory is “bad for being put into practice” because it fails to
recognize the just mentioned difference.
3. Network Model: In the network model theory, the market is seen as a system of social and
industrial relationships among customers, suppliers, competitors, families and friends within
a given boundary and beyond. This is for the purpose of creating the opportunity and
motivation for internationalization.

 The key features of the Network Model are as follows:

a. This model is based on the theories of social exchange and focuses on firm behavior
in the context of inter-organizational and interpersonal relationships.
b. The ‘glue’ that bonds the relationships together between the actors is based on
technical, economic, legal and above all personal ties.
c. The long-term relationships between business actors and the background in which the
organization operates have the illustrative significance in the description of the
internationalization of firms.
d. A firm does not act alone in relation to other actors in a market.
e. A conjecture in this model is that an organization is reliant on other firms’ resources
surrounded by the same network; an example is the customer and supplier
relationships.

 Critiques of the Network Model:

a. The start-up problem in this model prevents even-adoption of superior products;
b. In many cases, the existence of network effects could lead to a weak and inferior
result in markets.
c. Also, In the case of sponsored technologies, there is a possibility to internalize the
otherwise more or less lost of network gains by strategic inter-temporal pricing.
d. Private incentives to providing networks that can overcome the inertia problems can
be made possible but still the assurance of social optimality would not be certain.
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9. Why are multinationals increasingly being criticized? Are such criticisms always
justified? Are such criticisms always justified? (2018)
 Multinational corporations are large companies with operations in several countries across
the world. For example, Apple, Ford, Coca-Cola, Alphabet (Google) and Microsoft. Their
size and turnover can be greater than the total GDP of many developing economies.
Some criticisms of MNCs may be due to other issues. For example, the fact MNCs pollute is
perhaps a failure of government regulation. MNCs may pay low wages by western standards
but, this is arguably better than the alternatives of not having a job at all.

Criticisms of Multinational Corporations:

1. Expense of the consumer: Companies are often interested in profit at the expense of the
consumer. Multinational companies often have monopoly power which enables them to
make an excess profit.
2. Tax avoidance: Many multinationals set up companies in countries with the lowest tax
rate. They funnel profit through the countries with the lowest corporation tax rates – e.g.
Bermuda, Ireland, Luxemburg.
3. Cash reserves: Apple has cash reserves of $216bn, 93% of which is overseas. This
represents deadweight welfare loss. It is not being used for investment
 4. Push local firms: In developing economies, big multinationals can use their economies
of scale to push local firms out of business.
5. Pollution: In the pursuit of profit, multinational companies often contribute to pollution
and use of non-renewable resources which is putting the environment under threat. For
example, some MNCs have been criticized of outsourcing pollution and environmental
degradation to developing economies where pollution standards are lower.
6. Slave labor: ‘Sweat-shop labor’ MNCs have been criticized for using ‘slave labor’ –
workers who are paid a pittance by Western standards.
7. Outsourcing: Outsourcing to cheaper labor-cost economies has caused loss of jobs in the
developed world. This is an issue in the US where many multinationals have outsourced
production around the world.
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10. What are the three models of internationalization strategy? Discuss with
examples.
 The three models of internationalization strategy are as follows:
 Multidomestic Strategy;
 Global Strategy;
 Transnational Strategy
1. Multidomestic Strategy: A firm using a multidomestic strategy sacrifices efficiency in
favor of emphasizing responsiveness to local requirements within each of its markets.
Rather than trying to force all of its American-made shows on viewers around the globe,
MTV customizes the programming that is shown on its channels within dozens of
countries, including New Zealand, Portugal, Pakistan, and India. Similarly, food
company H. J. Heinz adapts its products to match local preferences. Because some
Indians will not eat garlic and onion, for example, Heinz offers them a version of its
signature ketchup that does not include these two ingredients.
2. Global Strategy: A firm using a global strategy sacrifices responsiveness to local
requirements within each of its markets in favor of emphasizing efficiency. This strategy
is the complete opposite of a multidomestic strategy. Some minor modifications to
products and services may be made in various markets, but a global strategy stresses the
need to gain economies of scale by offering essentially the same products or services in
each market.
Microsoft, for example, offers the same software programs around the world but adjusts
the programs to match local languages. Similarly, consumer goods maker Procter &
Gamble attempts to gain efficiency by creating global brands whenever possible. Global
strategies also can be very effective for firms whose product or service is largely hidden
from the customer’s view, such as silicon chip maker Intel. For such firms, variance in
local preferences is not very important.
3. Transnational Strategy: A firm using a transnational strategy seeks a middle ground
between a multidomestic strategy and a global strategy. Such a firm tries to balance the
desire for efficiency with the need to adjust to local preferences within various countries.
For example, large fast-food chains such as McDonald’s and Kentucky Fried Chicken
(KFC) rely on the same brand names and the same core menu items around the world.
 These firms make some concessions to local tastes too. In France, for example, wine can
be purchased at McDonald’s. This approach makes sense for McDonald’s because wine
is a central element of French diets.
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11. Define the oligopoly.
 Oligopoly: An oligopoly is a market structure in which a few firms dominate. When a
market is shared between a few firms, it is said to be highly concentrated. Although only a
few firms dominate, it is possible that many small firms may also operate in the market.
Oligopoly is a market structure with a small number of firms, none of which can keep the
others from having significant influence. The concentration ratio measures the market share
of the largest firms.
Considering the market for air travel, major airlines like British Airways (BA) and Air
France often operate their routes with only a few close competitors, but there are also many
small airlines catering for the holidaymaker or offering specialist services.
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12. Discuss the key characteristics of oligopoly theory.
 The main characteristics of firms operating in a market with few close rivals include:
1. Interdependence: Firms operating under conditions of oligopoly are said to be
interdependent, which means they cannot act independently of each other.
2. Strategy: Strategy is extremely important to firms that are interdependent. Because firms
cannot act independently, they must anticipate the likely response of a rival to any given
change in their price, or their non-price activity.
3. Barriers to entry: Oligopolies and monopolies frequently maintain their position of
dominance in a market might because it is too costly or difficult for potential rivals to
enter the market. These hurdles are called barriers to entry.
4. Factors: Economic, legal, and technological factors can contribute to the formation and
maintenance, or dissolution, of oligopolies.
5. Government policy: Government policy can discourage or encourage oligopolistic
behavior, and firms in mixed economies often seek government blessing for ways to limit
competition.
6. Profit maximization conditions: An oligopoly maximizes profits.
7. Ability to set price: Oligopolies are price setters rather than price takers.
8. Entry and exit: Barriers to entry are high. The most important barriers are government
licenses, economies of scale, patents, access to expensive and complex technology.
9. Number of firms: There are so few firms that the actions of one firm can influence the
actions of the other firms.
10. Long run profits: Oligopolies can retain long run abnormal profits. High barriers of
entry prevent sideline firms from entering market to capture excess profits.
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13. What is tariff jumping hypothesis:
 Tariff Jumping Hypothesis: Tariff Jumping Hypothesis states that MNCs
(Multinational Corporations) attempt to jump over tariff or non-tariff barriers by
establishing foreign subsidiaries.
Tariff‐jumping foreign direct investment (FDI) allows a foreign firm to avoid a trade
barrier by locating production within the destination market.
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14. What are the international trade barriers?
 Trade barriers are government-induced restrictions on international trade. Man-made
trade barriers come in several forms, including:
 Tariffs;
 Non-tariff barriers to trade;
 Import licenses;
 Export licenses;
 Import quotas;
 Subsidies;
 Voluntary Export Restraints;
 Local content requirements;
 Embargo;
 Currency devaluation;
 Trade restriction
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15. What is Obsolescing Bargain Model?
 Obsolescing Bargain Model: A model of interaction between a multinational
enterprise and a host country government, which initially reach a bargain that favors
the MNE but where, over time as the MNE's fixed assets in the country increase, the
bargaining power shifts to the government.
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16. What is a Foreign Direct Investment (FDI)?
 A foreign direct investment (FDI) is an investment made by a firm or individual in
one country into business interests located in another country. Generally, FDI takes
place when an investor establishes foreign business operations or acquires foreign
business assets in a foreign company. However, FDIs are distinguished from portfolio
investments in which an investor merely purchases equities of foreign-based
companies.
 Foreign direct investments (FDI) are investments made by one company into
another located in another country.
 FDIs are actively utilized in open markets rather than closed markets for investors.
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17. Discuss the Benefits of Foreign Direct Investment.
 Foreign direct investment offers advantages to both the investor and the foreign host
country. These incentives encourage both parties to engage in and allow FDI.
 Below are some of the benefits for businesses:
 1. Market diversification.
2. Tax incentives;
3. Lower labor costs;
4. Preferential tariffs;
5. Subsidies.
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