1. Global Business Environment Multinational Companies Concept and characteristics of MNCs Impact on host countries (political, economic and cultural)

2. Multinational Companies: Concept No single universally accepted definition Business becomes truly multinational when it has substantial number of shareholders in more than one country A firm only become multinational when headquarter`s management is recruited from several different countries Firms that controls subsidiaries in a large number of nations regarded as ‘multinational’ & further to this a firm that controls subsidiaries in a large number of nations While some view multinational are that they must produce (rather than distribute) abroad as well as in headquarters in country

3. Multinational Companies: Concept operate in certain number of countries derive some % of its income from foreign operations have a certain minimum ratio of foreign to total no. of employees or total value of assets direct foreign investment controls Some of arguments for above criteria Nationally exists in all MNCs (e.g. US multinational, Japanese multinational) Firms operating in many countries send profits to home country Management style & behaviour reflects social & cultural norms of company`s senior executives that is determined by national culture

4. Multinational Companies: Characteristics Reduce sourcing and distribution costs Can avoid tariffs, quotas & other trade barriers Can penetrate market throughout the world from supply points in several different countries Management plan, organise and control company operations on a worldwide scale, with national market as one segment Number of top jobs in MNCs will be allocated to nationals of various countries Large internal market within MNC

5. Multinational Companies: Characteristics Seek global profit maximization Have capability to relocate operations cause of political situation, industrial dispute and other factors could be lower wage rate in certain areas reduced transport costs desire to be located to suppliers threats of home country interference

6. Multinational Companies: Characteristics Advantages of MNCs –- Economic order based on efficiency and resource utilization –- Knowledge and skill transfer –- Technology transfer –- Economies of scale: lower prices for customers –- Economic development of 3rd world –- Diffusion of latest management techniques –- Enhanced host country export capacities to earn – foreign currency (assembling units in third – world countries)

7. Multinational Companies: Characteristics Criticism of MNCs Political Supporting repressive regimes Paying bribes to secure political regime Not respecting human rights Paying protection money to terrorists Destabilizing national governments of which they do not approve Economic domination

8. Multinational Companies: Characteristics Criticism of MNCs Sales & Marketing Deterioration of ancient traditions and cultures through advertising and marketing methods (east vs west) Misleading advertisements in the 3rd world markets Promoted irrelevant goods in poorer countries and wasted resources Unaccountable for unsafe products

9. Multinational Companies: Characteristics Criticism of MNCs Environmental management Exhausting natural resources Polluting the environment Not compensating for the damage Increasing risks of environmental hazards Technology Use of inappropriate technology in poorer countries (transfer of existing machineries instead of customized ones) Charging expensive license fees Not locating R&D in host countries Encouraging brain drain Creating dependency on the west Disallowing full access to information to local employees

10. Multinational Companies: Characteristics Criticism of MNCs Economic Importing raw materials from foreign subsidiaries inspite of being locally available Repatriation of profits causing –ve Balance of Payment Raises chances of inequality of income distribution Foreign firms periodically raise large amount of capital on domestic market Personnel management and industrial relations Discouraging trade-unions and not listening to collective voice Resulting in unequal opportunities: not passing managerial positions to locals Exploiting local labor

11. Resource Effects Positive contribution to host economy by supplying capital, technology & management resources capital, technology & management resources otherwise not be available otherwise not be available Capital MNCs have access to financial resources by virtue of their large size & financial strength Technology Technology stimulate economic development and industrialization (it can be in production process or incorporated in product) Multinational Companies: Economic Impact

12. Technology With LDCs there is lack of R & D depends on advanced/developed countries for new technology Technology can be provided either in form of FDI and license by MNCs Management Foreign management trained in latest management techniques can help to improve efficiency of operations Superior management skills of MNCs stimulate local suppliers Multinational Companies: Economic Impact

13. Balance of Payment First: When MNCs establish a foreign subsidiary, the capital account of host country benefits from capital inflow. But this is one-time-only effect. Second: If FDI is a substitute of imports of goods and services, it can improve the current account of the host country`s BoP (e.g. Japanese automobile companies supplying cars to US market from its units in USA itself) Third: Potential benefit to host country`s balance of payment position arises when MNCs uses foreign subsidiaries to export goods and services to other countries (e.g. Skoda automobile company of Czech Republic after its sales to Volkswagen then exports was directed to EU resulted in sales of exports from 34% in 1990 to 52% in 1995 and 80% in 1999) Multinational Companies: Economic Impact

14. Growth and employment effects Most jobs to host country- direct or indirect Critics claim that “all new jobs” are not always created by MNCs e.g. Japanese auto companies in USA created news jobs but displaced from US companies Home country gains Balance of Payment of home country benefits inward flow of foreign earnings Employment effect: + ve effect arises when foreign subsidiary creates demand for home country exports of capital equipment, intermediate goods, complementary products and the like Home country MNCs learns valuable skills from its exposure to foreign market and can be transferred back to home country e.g. General Motors and Ford made investment in Isuzu and Mazda to learn about Japanese production process Multinational Companies: Economic Impact

15. Costs to Host Country Adverse effect on competition Host country government worry that subsidiaries of foreign MNEs have greater economic power that indigenous competitors MNEs might subsidize its costs in host market, with funds generated from elsewhere Adverse effect on BoP Initial capital inflow that comes with FDI must be subsequent outflow of earnings from foreign subsidiary to its parent company (Some governments have restricted the amount of earnings that can be repatriated to a foreign subsidiary home) Foreign subsidiary imports a substantial number of inputs from aboard, results in a debit on the current account of host country`s BoP. Multinational Companies: Economic Impact

16. Costs to Home Country Home country losses Home country labor claims that jobs are exported through FDI Most of US’s technologies are being transferred and operated elsewhere as FDI Critics argue if it was not for outflow of resources, host countries would buy from them and employment in the home country would not have lost opportunity Eg. Boeing parts manufacturing in China Effect on home country wages: both +ve and -ve Cost saving from foreign production increases demand for foreign products….requiring more managerial personnel in the home country US software companies outsourcing Indian programmers at dirt cheap price shook the wage rate in the US Multinational Companies: Economic Impact

17. Multinational Companies: Political Ideology Impact IdeologyCharacteristics Host Government Policy Implications Radical - Marxists roots - Views MNCs as form of imperialism - Prohibit FDI - Nationalize subsidiaries of MNCs Free market - Views MNCs as instrument of allocating production to most efficient locations - No restrictions on FDI Pragmatic - View FDI as having both benefits and costs - Restricts FDI where cost outweigh benefits - Bargain for greater benefits & fewer costs

18. MNCs undermines the sovereignty of host nations. MNCs will be foreign-policy instrument of its home country MNCs might become independent of both home and host countries making it difficult to regulate by both the countries MNCs may become so dependent that the host country may use it as an agent against its own home country home country or other countries Multinational Companies: Political & Legal Impact

19. Extraterritoriality It occurs when government apply their laws to their domestic companies' foreign operations MNCs concern: conflict of laws of host and home country leaving it in between U.S. government is mostly criticized for controlling US companies abroad through Trade Restrictions and Antitrust Laws Trade restrictions: US government`s attempt to prevent foreign subsidiaries of U.S. companies to sell to unfriendly countries like Cuba, Libya Multinational Companies: Political & Legal Impact

20. Extraterritoriality Antitrust Laws: (designed to protect trade and commerce from unfair business practices) - US government acted against domestic firms` foreign investments whenever it has concerns about those companies` participation in cartels, grating exclusive distributorships abroad, and about joint R&D or manufacturing operations in foreign countries Key Sector Control Fear to host country is that foreign company dominate the key industries and decisions on production, selling by subsidiaries in host countries are often decided in headquarters Multinational Companies: Political & Legal Impact

21. Key Sector Control MNCs can become so powerful that it can influence politics Japanese companies and Japanese government advocate to prevent new import restrictions by US government Country depending on foreign investments is pressured by home country to take actions that may be unfavorable to the host population Countries have selectively prevented foreign domination in key industries e.g. U.S. : airlines, communications; Mexico: energy, rail; Nepal: media Some government have required MNCs to manage local subsidiaries with local personnel to protect local interest Some countries promote competitive local industries to ward off foreign investors Multinational Companies: Political & Legal Impact

22. Key Sector Control MNCs in time of conflict favour home country interests, the government-owned enterprises may be much prone to do so MNC Independence MNC can play one country against another and thereby evade regulation by all countries (e.g. if MNCs dislike wage rate, union laws or safety standards in one country, they can move elsewhere or at least threaten to do so) Ability to play one country against another, especially if countries are members of a regional trade association HOWEVER, generally once operated, MNCs would not prefer moving out of the host country because of already invested fixed resources and relationship with the host Multinational Companies: Political & Legal Impact

23. Host-Country Captives MNC can also become dependent on foreign operations They can influence their home country government to adopt policies favorable to host nations American MNCs lobbying against US sanctions against China for removing their own property rights to enter the lucrative Chinese markets Bribery MNCs are accused of bribing the host government officials to - secure business from competitors - facilitate services - ensure the safety of employees and facilities Multinational Companies: Political & Legal Impact

24. Bribery Higher levels of corruption are strongly associated with lower growth and lower levels of per capita income Transparency International keeps eye on such activities Differences in national attitudes towards MNCs Host countries may take completely restrictive or laissez-faire position towards MNCs e.g. Cuba, North Korea are close to restrictive while USA, Netherlands are towards laissez-faire Home country stakeholders are generally unconcerned when exports but are concerned when company starts producing abroad Host country stakeholders pay more attention to foreign companies that are wholly owned than to those that share ownership Perception of a company`s operations in one country may have effect on perceptions of stakeholders in other countries Multinational Companies: Political & Legal Impact

25. Multinational Companies: Cultural Impact One School of thought - The presence of MNCs is characterized as constituting a form of cultural imperialism Developing country (mainly host countries) loses control over its culture and its social development Imported foreign values - create demands for luxury and other goods that do not meet the true needs of the masses Involves the creation of new tastes and unaccustomed desires / Westernization of local culture (e.g. preference of pizza, burger over traditional foods) MNCs may foster the desire for luxury goods, the consumption patterns of the developed countries have a demonstration effect upon elites and masses everywhere Women may be encourage to work, taking them from the family home Positive impact on the work culture on local firms/companies

26. Pressure Multinational companies: Political and legal impact Home country: India Indian companies Host country: Nepal Indian subsidiary 1 Indian subsidiary 2 Indian subsidiary 3 Indian subsidiary 4 Nepali Government Indian Government Nepali Policies Economic Downturn

27. Case of Kodak Nepal (time frame is around year 2000) Joint venture of Eastman Kodak of USA (80%) and Kodak India (20%) Plant in Hetauda Industrial Estate with investment of US $ 6 million with annual production of around 2 million sq. mtrs. Of photographic paper Target market was India Nepal India Trade Treaty of 1996: India allows duty free access of products manufactured in Nepal with 30% of local value addition (limits have been specified in certain products) Indian government refused to recognize Kodak Nepal product as manufactured in Nepal and Confederation of Indian Industries asked FNCCI not to issue Certificate of Origin to Kodak Nepal products Multinational Companies: Political & Legal Impact

28. Nepali authorities insisted that company is following a manufacturing activity, similar to standard production process of photographic films and papers like elsewhere in world Issue was touched upon visit of US President Bill Clinton`s visit to India and also Indian Prime Minister Vajpayee visit to USA Indian government informed in writing that it is not to provide duty free access to Kodak Nepal products Kodak Nepal moves out of Nepal It has been said that Kodak could wipe out domestic industry in India Multinational Companies: Political & Legal Impact