A Multinational enterprise also known as a multinational corporation is an organization that has a place of business in more than one country or nation. A multinational corporation or MNC can also be defined as a company functioning in countries other than its home country. it is said that when an organization is earning more than 25% from a country other than its domestic country it is known as MNC. Some examples of MNE’s are IBM, Nike, Toyota, Proctor & Gambler, Nestle etc.

MNC’s can earn profits by operating in different countries in a variety of ways- they can benefit from the cost advantages by spreading research and development expenses. They can utilize their technical know-how and managerial skills without spending any extra amount. They are in a position to exploit low priced labour services in developing countries.

An MNC is one that is founded in one country, but production or sales of goods and services take place in more than one country. their activities go on a worldwide scale, but operations are controlled by a company in its home country. MNC can have offices in more than one country. but the management is controlled by its parent company. These enterprises are also known as stateless, international, or transnational corporate institutions having budgets even more than that of countries with low per capita income.

MNC’s play a key role in molding the world both economically and politically. Some critics believe that MNC’s have a positive impact on the nation where they are functioning. As they create vast amount of employment opportunities and contributes to economic development of the country. but some critics have a contradictory point of view. They believe that MNC’s causes unemployment in their home countries. In USA MNC’s are causing a negative impact on their economy.

[ii]Foreign Direct Investment on other hand is defined as investment made by a firm in businesses of countries other than its home country with an aim to derive future benefits. It is also called a corporate global strategy of MNC’s. it is also considered as a long-term investment in the manufacturing of goods and services in other nation.

[iii]Foreign Direct Investment can be done in two ways–

1. Greenfield investment- in this type of investment firms or corporations establish the place of business in the form of a company or offices in foreign countries. The development of existing projects is also a part of greenfield investment. Example- Mercedes Benz, Hyundai motor company in the Czech Republic etc.
2. Merger and Acquisition- merger and acquisition is a way through which Foreign Direct Investment can be done. Merging and acquiring already established companies in their parent country is also a way through which investment can be made. This method is quite popular nowadays with one or more merger registering every day. Examples- tata steel and Corus, lupin and Gavin, hind Alco and novelis etc.

[iv]Attraction of MNC’s to developing countries

MNC’s are attracted to developing countries due to various benefits. MNC’s are very good at the exploitation of resources. The developing countries have plenty of a number of natural resources which is considered a great opportunity by MNC. Developing countries offer low manufacturing costs. Therefore, MNC’s can earn profits even after selling their products and services at lower prices.

Developing countries can help in avoiding trade hurdles including taxation or tariff, along with reduced manufacturing costs. Investment in developing countries also helps in avoiding conveyance charges. It provides taking benefits of growing markets. For example- China, India.

Many developing countries with an aim to attract more foreign direct investment are providing plenty of incentives and benefits to MNC’s in the form of reduced legal compliance, avoidance of various taxation costs etc.

[v]Pros and Cons

   Pros of MNC’s

MNC’s create employment opportunities for the people of the host country. they aim in setting a minimum standard of quality. Some MNC’s are so popular having a place of business in different countries. They create a sense of confidence among the consumers. The users can connect with the existing brands. For example, in the case of Mc Donald’s people know what they are likely to offer. Due to the presence of its various outlets in different countries.

   Cons of MNC’s

In some countries, MNC’s have disrupted the local economy. MNC causes loss of jobs in its home country. it strategizes to become a single seller surpassing all the local business. They tend to avoid competition. Considering the recent cases, MNC’s are a reason behind shutting down many local businesses. Several businesses have gone bankrupt.

[vi]Forms of MNC

1. Branches- The MNC establish a place of business in the form of branches in foreign countries. The control of such branches is with the head office. Certain guidelines are set up by the head office, which the branches must follow. The branches should adhere to the rules, laws, and regulations of the country in which they are working.
2. Subsidiaries- The enterprises set up a wholly-owned subsidiary in foreign countries. The control over the management is with the holding company. The parent company has control over the directors of subsidiary companies. The subsidiaries can even be partially owned when the people of the host country are holding a stake in the subsidiary. These subsidiaries are more profitable than the franchise.
3. Joint Venture- When an MNC with the help of a foreign company establishes a venture in a foreign country. it is known as a joint venture. The day-to-day control of the venture is with the local firm. The MNC shares managerial expertise and technical know-how.
4. Turnkey projects- When an MNC endeavour to formulate a project in a foreign country. they are known as turnkey projects. MNC after completing the projects hand over it to its clients. The client company do not take part in the construction of the project. These kinds of projects are undertaken in underdeveloped countries, which lack technical expertise and require professionals to undergo such projects.
5. Franchising- when a firm as a part of a franchise agreement allows others to use its trademark, brand etc. it is known as franchising. Two parties are involved in the franchisee-franchisor and the franchisee. The franchisor is the one who provides rights to sell goods and use the brand name. the franchisee is the one who gets the right. In return, the franchisee firm pays a fee in the form of a royalty charge for the usage of the brand name. The agreement can be written or oral. It is usually for a fixed period. The brand can be used only within the period of the agreement. If the franchisee violates any provision of the agreement, its license will be cancelled.

[vii]Advantages and disadvantages of FDI

Foreign Direct Investment is good for the overall growth of the economy of a country. When a company acquires or merges with a company in its home country, FDI boost the local economy. It even provides for the development of human capital. It leads to diversification of markets. Despite having many benefits, FDI has limitations too.

Due to the entry of MNC’s in the host country, the local business gets disturbed. As it becomes impossible for them to compete with MNC’s. The other disadvantage is the profits earned by the MNC’s will be repatriated to their home country it will not invest their profits back into the host country.

[viii]Types-

• Horizontal- When a firm invests in a similar kind of business in another country. This can also be called the expansion of its operations. E.g.-McDonalds.
• Vertical- When a business moves to a different level of the supply chain, they invest in a business with different operations, but which is related to its original business.
• Conglomerate- This type of investment involves when a firm acquires a business in a foreign country completely dissimilar to its area of operations.

Frequently Asked Questions-

1. What are MNC’s?

Multinational corporation or enterprise is which provides their services and goods to at least one country other than its home country. they have two main features- one their vast size and other is they are controlled by parent company. The MNC’s may be governed by laws and regulations of both the domicile and the additional jurisdiction where they are operating.

• Examples of MNC’s

Some examples of MNC’s are-

Microsoft, CITI group, Hewlett Packard, Wipro, google, TCS, E&Y, Bosch, Larsen and turbo, apple incorporation etc.

• Are MNC’s threat to sovereignty of a country?

Many MNC’s operate independently of government and state policies. It poses a threat to the sovereignty of the country. As these MNC’s have vast powers. They are privately controlled.

• Demerits of MNC’s

Some disadvantages of MNC’s are- they are considered a threat to host country, local business, sovereignty of the country. in some cases, it even causes loss of jobs.

• Why FDI is important?

Foreign Direct Investment helps in boosting the economy. For developing countries, it is very important as it provides finance which they need for augmenting their international sales. It provides job opportunities too.

• How FDI works?

Foreign Direct Investment is an investment done by firms or individuals of one nation into firms or corporations of other nations. FDI can be done by merger or acquisition, in form of greenfield investment or expansion of its operations etc. in India FDI is done either by automatic or approval route.

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[i] www.investopedia.com

[ii] Kokminglee.125mb.com

[iii] Ibid

[iv] Ibid

[v] Vittana.org

[vi] The Institute of Company Secretaries of India, International Business-Laws and Practices, (2014)

[vii] Kokminglee.125mb.com

[viii] Corporatefinanceinstitute.com