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Module 1 (ism)
 

Module 1 (ism)

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    Module 1 (ism) Module 1 (ism) Document Transcript

    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 1 CCOONNCCEEPPTT OOFF MMNNCCSS Definition: MNC An enterprise operating in several countries but managed from one (home) country. Generally, any company or group that derives a quarter of its revenue from operations outside of its home country is considered a multinational corporation. There are four categories of multinational corporations: 1. A multinational, decentralized corporation with strong home country presence. 2. A global, centralized corporation that acquires cost advantage through centralized production wherever cheaper resources are available. 3. An international company that builds on the parent corporation's technology or R&D, or 4. A transnational enterprise that combines the previous three approaches. According to UN data, some 35,000 companies have direct investment in foreign countries, and the largest 100 of them control about 40 percent of world trade. TTYYPPEESS OOFF MMNNCCSS • Transnational Corporations: Strive to operate on a borderless basis and without being identified with one national home. • Ethnocentric: Strict headquarters control over foreign operations, expects to operate the same way it does at home. • Polycentric Gives it foreign operations more operating freedom, respects market differences among countries, and treats each country as a separate competitive domain. • Geocentric Like Traditional it seeks total integration of global operations by operating without "home country" prejudices, making major decisions for global perspective, and employing senior executives from many different countries. Characteristics of MNC
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 2 – A company with production and distribution facilities in more than one country. – With a parent company located in the home country – At least five or six foreign subsidiaries TTHHEE RRIISSEE OOFF TTHHEE MMUULLTTIINNAATTIIOONNAALL CCOORRPPOORRAATTIIOONN // GGRROOWWTTHH A Forces Changing Global Markets Massive deregulation Collapse of communism Privatizations of state-owned industries Revolution in information technology Wave of M&A Emergence of free market policies in Third World Nations Countless nations accepting the standards of free market capitalism B. The Rise of China as a Global Competitor The most dramatic change in the international economy over the last decade The number one destination for foreign direct investment (FDI) - the acquisition abroad of companies, property, or physical assets. C. The MNC’s Evolution Reasons to Go Global: 1. More raw materials 2. New markets 3. Minimize costs of production 1. Raw Material Seekers Exploit markets in other countries Historically first to appear Modern-day counterparts British Petroleum Exxon
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 3 2. Market Seekers Produce and sell in foreign markets Have heavy foreign direct investors Represented today by firms such as: IBM MacDonald’s Nestle Levi Strauss 3. Cost Minimizers Seek lower-cost production abroad Their motive: to remain cost competitive Represented today by firms such as: Texas Instruments Intel Seagate Technology D. What is the MNC? From a Behavioral View It’s a state of mind committed to globally producing, undertaking investment, marketing, and financing. E. The Global Manager: 1. Understands political and economic differences; 2. Searches for most cost-effective suppliers; 3. Evaluates changes on value of the firm. PPAARRTT IIII IINNTTEERRNNAATTIIOONNAALLIIZZAATTIIOONN OOFF BBUUSSIINNEESSSS AANNDD FFIINNAANNCCEE Globalization Political and Labor Union Concerns Consequences of Global Competition: The acceleration of the global economy/competitors – for example: Mexico/NAFTA/Immigration
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 4 PPAARRTT IIIIII.. MMUULLTTIINNAATTIIOONNAALL FFIINNAANNCCIIAALL MMAANNAAGGEEMMEENNTT ((MMFFMM)):: TTHHEEOORRYY AANNDD PPRRAACCTTIICCEE I. The MNC’s Policies A. Main Objective of MNC: Survival or Maximize shareholder wealth B. Other Objectives Reflect Its Ability to Link: Via affiliate transfer mechanisms C. Mode of Transfer: Reflects freedom to select a variety of financial channels. D. Timing Flexibility: Most MNC have some flexibility in timing of fund flows. E. Value: The ability to avoid national taxes has led to controversy. II. Functions of Financial Management A. Two Basic Functions: 1. Financing 2. Investing B. Additional Factors Facing the MNC Executive: 1. Political risk 2. Economic risk III. Theoretical Foundations A. Useful Concepts from Financial Economics: 1. Arbitrage 2. Market Efficiency 3. Capital Asset Pricing B. Importance of Total Risk: 1. Adverse Impact lower sales and higher costs. 2. Justifies hedging activities of MNC. 3. Diversification reduces risk. IV. The Global Financial Market Place A. Inter-linkage by Computers B. Market Acts as A Global Referendum Process Where: Currencies may rise or fall.
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 5 EEMMEERRGGEENNCCEE AANNDD GGRROOWWTTHH OOFF MMNNCCSS What do you think a MNC is?  A corporation that has its facilities and other assets in at least one country other than its home country.  Such companies have offices and/or factories in different countries and usually have centralised head office where they coordinate global management (headquarters)  Very large multinationals have budgets that exceed those of many small countries.  Sometimes referred to as “transnational corporations” Five main forms of FDI:  Greenfield Investment: A new operation.  Brownfield Investment: Expansions or reinvestment in existing foreign affiliates or sites.  Mergers & Acquisitions (M & As)  Privatisation and equity investment  New forms of investment: Joint ventures, strategic alliances, licensing. Why are they important?  In 1969 Howard Perlmutter wrote: ◦ “Multinational corporation is a new kind of institution - a new type of industrial social achitecture particularly suitable for the latter third of the twentieth century.” ◦ “This type of institution could make a valuable contribution to world order and conceivably excercise a constructive impact on the nation-state” “The geocentric enterprise (a type of MNC) offers an institutional and supra-national framework which could conceivably make war less likely, on the assumption that bombing costumers, suppliers and employees is in nobody’s interest” Governments attitudes towards FDI How do governments like FDI? In the 1970s ...
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 6  As FDI has become more significant, policies and attitudes to FDI have changed substantially during the last two decades or so.  During the 70s MNCs were commonly seen by many economists and policy makers as detrimental to host economies, because: they were thought to create monopoly situations.  In addition there was political sensitivity towards FDI. The main reason being that FDI “was not only owned and controlled by private groups in pursuit of private profits but also by private interests that are non-resident to boot.” In 1990s governments stimulated FDI  Regulations moved from restrict and control to promote and give guarantees.  Most host economies have reduced barriers to FDI, and many industrialising countries have created infrastructure and special concessions to attract it.  Standard tactics include extensions of tax holidays, exemptions from import duties and direct subsidies. 1. Why firms become multinational? ( The OLI Paradigm Dunning J.)  One of the dominant frameworks for explaining the existence of MNCs and the determinants of FDI  O = Ownership  L = Location  I = Internalization Ownership The firm that invests abroad has a competitive advantage (to exploit) and out-compete the firms that operate in the country where the investment is done  Economies of scale connected to large-sized company.  Possess technologies that give an advantage on the subsidiary abroad.  Monopolistic advantages in terms of privileged access to inputs or outputs markets  Skills of management.
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 7 Location Advantages of the foreign location: Different nations have different factor endowments:  Natural resources:  Cheap labour force  Skills and capabilities ◦ Country characteristics (political stability, regulations, cultural distance) Internalization  Internalization occurs when a firm expands its operations in another country, by acquiring the property of the assets that are abroad  Ownership of foreign assets more convenient than the market. Why? ◦ Information asymmetries (transaction costs can be too high) -> Market failures Keeping skills and capabilities. 2. Why firms become multinational? Ghoshal (1987) Becoming multinational to search a competitive advantage: 1. National differences: Exploiting national differences in factor costs 2. Scale Economies 3. Scope Economies 1. National Differences Different nations have different factor endowments:  A firm can gain cost advantages by configuring its value chain so that each activity is located in the country which has the least cost for the factor that the activity uses most intensively.  E.g. Land in Honduras, cheap labour force in China, cheap but skilled engineers in India. (changing over time).
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 8 2. Scale Economies  A firm expanding its total volume of sales, reduces its average costs in a given period of time  It is thus important to expand to several markets as to produce more of a product.  Higher volumes also favour experience economies (learning by doing).  However, large scale also implies higher complexity and organization is critical. 3. Scope Economies  Scope economies: when the cost of the joint production of two or more products can be less than producing them separately.  Scope economies achieved though: ◦ Shared equipment, brands, and other assets. ◦ Shared external relations. ◦ Shared knowledge. Main strategies for setting up subsidiaries (Dunning): 1. Natural-Resource Seeking 2. Efficiency Seeking 3. Market Seeking 4. Capability Seeking 1. Natural Resource Seeking  Oil : Niger Delta (Agip)  Copper, Salmon: Chile  Transgenic Soy: Argentina (Monsanto)  Bananas, pineapple: Central America 2. Efficiency Seeking  Cheap labour force or inputs  Fiscal incentives  Low cost, labour intensive manufacturing in most of Asian countries
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 9 3. Market Seeking  Access to new markets  Overcome trade barriers  High transport costs 4. Capability seeking (A growing phenomenon in developing countries) Beyond Silicon Valley, new “high-tech” spots are emerging in developing countries. How do they operate?  MNC are very different one to another  Perlmutter (1969) has been among the first to identify this heterogeneity and he distinguished between three types:- ◦ Ethnocentric ◦ Polycentric ◦ Geocentric There are also different types of subsidiaries: Nobel and Birkinshaw (1998) distinguish between 3 different attitudes and modes of learning: ◦ Local adaptor: limited mandate, only minor adaptation at the local level. ◦ International adaptor: more creative local laboratories, eg. To adapt technologies for a continent (Latin America, Asia) not just a country. ◦ International creator: Internationally interdependent laboratories which provide inputs into a centrally coordinated R&D program. International Strategic Management: Comprehensive and ongoing management planning process aimed at formulating and implementing strategies that enable a firm to compete effectively internationally.
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 10 What is strategy? • Strategy as Plan: Concerned with drafting the plan of war and shaping individual campaigns and within these deciding individual engagements (Von Clausewitz 1976) • Strategy as action: • Art of distributing and applying military means to fulfill the ends of the policy (Liddle Hart 1967) • A pattern in a stream of actions or decisions (Mintzberg 1978) • The creation of a unique and valuable position, involving a different set of activities, making trade-offs in competing creating a fit among a company’s activities (Porter 1996) • Strategy as integration • The determination of the basic long term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals (Chandler 1962). • An integrated and co ordinate set of commitments and actions designed to exploit core competencies and gain a competitive advantage. (Hitt, Ireland and Hoskisson 2003) • The analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages (Dess, Lumpkin, and Eisner 2008) Strategy- Integration school benefits • Best of both worlds • Leveraging the concept of theory (explanation and prediction) • Leads to companys own SWOT- replications and experimentations • Understanding the difficulty of strategic change • “From where are we to” “Where we must be” Strategic Theory • Theory- abstract and impractical • Theory- a statement describing the relationships between a set of phenomenon.
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 11 • Wal-Mart theory: everyday low prices essence of all activities done by its 1.8 million employees in 6000 stores in 15 countries. Wal-Mart’s latest: save money live better Factors Affecting International Strategic Management for U.S. Firms: • Language • Culture • Politics • Economy • Governmental interference • Labor • Labor relations • Financing • Market research • Advertising • Money • Transportation/ communication • Control • Contracts Sources of Competitive Advantage for International Businesses: • Global efficiencies • Multinational flexibility • Worldwide learning Strategic Alternatives • Home Replication Strategy • Multi Domestic Strategy • Global Strategy • Transnational Strategy
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 12 Low High Pressures for Local Responsiveness and Flexibility Components of International Strategy: 1. Distinctive competence 2. Scope of operations 3. Resource deployment 4. Synergy 1. Distinctive Competence • Answers the question – What do we do exceptionally well, especially as compared to our competitors? • Represents important resource to the firm 2. Scope of Operations • Answers the question – Where are we going to conduct business? • May be defined by – Geographical region – Market or product niches within regions – Specialized market niches
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 13 3. Resource Deployment • Answers the question – Given that we are going to compete in these markets, how will we allocate our resources to them? • May be specified by – Product lines – Geographical lines 4. Synergy • Answers the question – How can different elements of our business benefit each other? • Goal is to create a situation where the whole is greater than the sum of the parts The Internet makes business through virtual markets possible anytime and anywhere! SSTTEEPPSS IINN IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGYY FFOORRMMUULLAATTIIOONN::
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 14 Mission Statements • Clarifies the organization’s purpose, values, direction. • Communicates firm’s strategic direction. • Specifies firm’s target customers and markets, principal products, geographical domain, core technologies, concerns for survival, plans for growth and profitability, basic philosophy, and desired public image. • Hershey Foods • No. 1 confectionary company in North America, moving toward worldwide confectionary market share leadership • Carpenter Technology • Major, profitable, and growing international producer and distributor of specialty alloys, materials, and components Environmental Scanning • Environmental Scan: Systematic collection of data about all elements of the firm’s external and internal environments – Markets – Regulatory issues – Competitors’ actions – Production costs – Labor productivity SWOT Analysis • Strengths • Weaknesses • Opportunities • Threats Control Framework • Set of managerial and organizational processes that keep firm moving toward its strategic goals • Feedback loop prompts revisions in earlier steps in strategy formulation process
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 15 The Value Chain What is internationalization? Definition: Internationalization is defined as an expansion of economic activity among more countries and is related to all forms of international economic cooperation. Or, Internationalization is multidimensional process of increased incorporation of inward and outward company activities outside the borders of a home country. IINNTTEERRNNAATTIIOONNAALLIIZZAATTIIOONN DDEEVVEELLOOPPMMEENNTT SSTTAAGGEESS:: Internationalization steps of a company (COMPANY VIEW): 1. STAGE ~ Individual export tasks 2. STAGE ~ Establishing a subsidiary in the most promising markets 3. STAGE ~ Licensing and strategic alliances 4. STAGE ~ Establishing own production facility in the foreign market
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 16 Development stages of export operations (MARKET VIEW): 1. STAGE ~ Export of excess products • company does not have resources to perform continuous export 2. STAGE ~ Export marketing • company is already trying alone to win sales in foreign markets • company is prepared to adapt marketing in limited terms 3. STAGE ~ Development of foreign markets • company adapts its products and marketing to foreign markets needs 4. STAGE ~ Technological development • company develops new products for existing or new markets Internationalization Motives: INTERNNAL EXTERNAL PROACTIVE  Profit and Growth Goals  Managerial Urge  Marketing Advantage  Economies of Scale  Unique/Product / Technology Competence  Foreign Market Opportunities/Marke t Information  Agents Exchange REACTIVE  Risk Division  Extend Sales of Seasonal Products  Excess Capacity/ Over production  Unsolicited Foreign Orders  Domestic Market: Small and Saturated  Competitive Pressures  Proximity to International Customers / Psychological Distance
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 17 IINNTTEERRNNAATTIIOONNAALLIIZZAATTIIOONN SSTTRRAATTEEGGYY:: • The internationalization model : Explanation…1  THE DECISION WHETHER TO INTERNATIONALIZE  THE DECISION WHICH MARKETS TO ENTER  MARKET ENTRY STRATEGIES  DESIGNING THE GLOBAL MARKETING PROGRAM  IMPLEMENTING AND COORDINATING THE MARKETING PROGRAM  THE DECISION WHETHER TO INTERNATIONALIZE CORPORATE POLICY INTERNATIONAL MOTIVES INTERNATIONAL COMPETITIVE ADVANTAGE IDENTIFICATION BUSINESS MISSION BUSINESS PHILOSOPHY - purpose - business domain - major objectives - values - norms - rules of behavior INTERNATIONAL THEORIES COMPARISON AND INTERNATIONALIZATION PROCESS PROPOSAL BARRIERS HINDERING INTERNATIONALIZATION PROACTIVE REACTIVE - THE PORTER DIAMOND - PORTER'S FIVE FORCES - VALUE CHAIN ANALYSIS - BENCHMARKING - COMPETENCE PROFILE MACRO MICRO SUCCESS FACTORS & DISTINCTIVE CAPABILITIES IDENTIFICATION & ASSESSMENT OF GLOBAL MARKET OPPORTUNITIES FOR THE FIRM'S PRODUCTS DEVELOPING FIRM'S INTERNATIONAL PROFILE - DEGREE OF INTERNATIONALIZATION AND OVERSEAS EXPERIENCE - SIZE / AMOUNT OF RESOURCES - INTERNATIONALIZATION GOALS - TYPE OF INDUSTRY / NATURE OF THE BUSINESS - EXISTING NETWORKS OF RELATIONSHIPS
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 18 Explanation…2  THE DECISION WHICH MARKETS TO ENTER HOW MANYMARKETS TO ENTER AND WHEN SEGMENTATION OF MARKETS IN SPECIFIC REGION LEVEL OF DEVELOPMENT (per capita income, growth) CULTURAL SIMILARITY OF THE COUNTRIES POPULATION COMPARISON PRELIMINARY SCREENING (using general criteria) MACRO INDICATORS ASSESSMENTOF THEANTICIPATED COSTS OF ENTERING THEMARKET - POLITICAL STABILITY - GEOGRAPHIC DISTANCE - ECONOMIC DEVELOPMENT - TRANSPORTATION COSTS - CUSTOMS DUTY - SUPPORTING THE PRODUCT IN THE MARKET - WAREHOUSING - DISTRIBUTION IN THE COUNTRY - STORAGE PESTANALYSIS IN-DEPTH SCREENING (using specific product / market criteria) MARKETPOTENTIAL ASSESSMENT IN-COUNTRYSEGMENTATION - MARKET SIZE - MARKET GROWTH RATE - HEIGHT OF ENTRY BARRIERS INCLUDING TARIFFS AND QUOTAS - STRENGTH&WEAKNESSES OF EXISTING&POTENTIAL COMPETITION - PRECISE TARGET SEGMENT FORECASTS - CULTURAL / PSYCHIC DISTANCE TO POTENTIAL MARKET PORTER DIAMOND & PORTER'S FIVEFORCES DECISION BASED ON THE HIGHEST MARKETPOTENTIAL FINAL COUNTRY SELECTION FORECASTED REVENUES AND COST COMPARISON SWOTANALYSIS FIRM'S COMPETENCIES COMPARED WITH STRENGTHS AND WEAKNESSES OF COMPETITORS DECISION BASED ON THE HIGHEST SALES POTENTIAL SEGMENTATION BYCUSTOMER GROUP TARGET MARKET REGIONAL MACRO SCREENING - COUNTRY IDENTIFICATION
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 19 Explanation…3 MARKET ENTRY MODES EXPORT MODES INTERMEDIATE MODES HIERARCHICAL MODES - EXPORT BUYING AGENT - BROKER - EXPORT MANAGEMENT COMPANY / EXPORT HOUSE - TRADING COMPANY - PIGGYBACK OPERATIONS INDIRECT EXPORT MODES sharedcontrol andrisk, split ownership 100 % externalizing (low control, low risk, high flexibility) 100 % internalizing (high control, high risk, low flexibility) DIRECT EXPORT MODES - FIXED EXPORT TASK - INDEPENDENT EXPORT DEPARTMENT - DISTRIBUTORS - AGENTS - "A CONTO META" OPERATIONS COOPERATIVEEXPORT MODES / EXPORT MARKETING GROUPS - CONTRACT MANUFACTURING - LICENSING - FRANCHISING - STRATEGIC ALLIANCES / JOINT VENTURES - MANAGEMENT CONTRACTING SALES REPRESENTATIVES DOMESTIC BASED RESIDENT SUBSIDIARY - FOREIGN SALES SUBSIDIARY - SALES AND PRODUCTION SUBSIDIARY - REGION CENTERS ACQUISITION OR GREENFIELD INVESTMENT
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 20 Explanation…4 Explanation…5  DESIGNING THE GLOBAL MARKETING PROGRAM MARKETING OBJECTIVES MARKETING STRATEGY DEVELOPMENT FORMULATE THE BUSINESS MARKETING MIX PRODUCT OR SERVICE PERSONAL SELLING PRICING SALES PROMOTION CHANNELS OF DISTRIBUTION TARGET CUSTOMER PRIMARY DATA ANALYSISSECONDARY DATA ANALYSIS MACRO ENVIRONMENT: political, economical, technological and socio-cultural environment MICRO ENVIRONMENT: suppliers, competitors, public audience, marketing agents. 1. 2. 1. 2. BUYER BEHAVIOR ANALYSIS COMPETITIVE PRACTICE ANALYSIS MARKETING INFORMATION SYSTEM MARKETING ORGANIZATION AND REALIZATION SYSTEM MARKETINGPLANNINGSYSTEM MARKETINGCONTROLSYSTEM  IMPLEMENTING AND COORDINATING THE MARKETING PROGRAM RESPONSE OF TARGET MARKET SEGMENTS ESTABLISH MARKETING PERFORMANCE STANDARDS EVALUATION & CONTROL ORGANIZATIONAL LEARNING {BETTER PERFORMANCE & INNOVATION}
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 21 PPOOSSIITTIIVVEE RROOLLEE OOFF MMNNCCSS • The first important contribution of MNCs is its role in filling the resource gap between targeted or desired investment and domestically mobilized savings • An inflow of foreign capital can reduce or even remove the deficit in the balance of payments if the MNCs can generate a net positive flow of export earnings.. • The third important role of MNCs is filling the gap between targeted governmental tax revenues and locally raised taxes. • Fourthly, Multinationals not only provide financial resources but they also supply a “package” of needed resources including management experience, entrepreneurial abilities, and technological skills. • Moreover, MNCs bring with them the most sophisticated technological knowledge about production processes while transferring modern machinery and equipment to capital poor LDCs. Other Beneficial Roles: The MNCs also bring several other benefits to the host country. • (a) The domestic labour may benefit in the form of higher real wages. • (b) The consumers benefits by way of lower prices and better quality products. • (c) Investments by MNCs will also induce more domestic investment. For example, ancillary units can be set up to ‘feed’ the main industries of the MNCs • (d) MNCs expenditures on research and development (R&D), although limited is bound to benefit the host country. NNEEGGAATTIIVVEE RROOLLEE OOFF MMNNCCSS  Although MNCs provide capital, they may lower domestic savings and investment rates by stifling competition through exclusive production agreements with the host governments. MNCs often fail to reinvest much of their profits and also they may inhibit the expansion of indigenous firms.  Although the initial impact of MNC investment is to improve the foreign exchange position of the recipient nation, its long-run impact may reduce foreign exchange earnings on both current and capital accounts.
    • IINNTTEERRNNAATTIIOONNAALL SSTTRRAATTEEGGIICC MMAANNAAGGEEMMEENNTT Module 1 Page 22  While MNCs do contribute to public revenue in the form of corporate taxes, their contribution is considerably less than it should be as a result of liberal tax concessions, excessive investment allowances, subsidies and tariff protection provided by the host government.  The development of local skills may be inhibited by the MNCs by stifling the growth of indigenous entrepreneurship as a result of the MNCs dominance of local markets.  In many situations MNC activities reinforce dualistic economic structures and widen income inequalities. They tend to promote the interests of some few modern-sector workers only. They also divert resources away from the production of consumer goods by producing luxurious goods demanded by the local elites.  MNCs typically produce inappropriate products and stimulate inappropriate consumption patterns through advertising and their monopolistic market power. Production is done with capital-intensive technique which is not useful for labour surplus economies. This would aggravate the unemployment problem in the host country.  The behaviour pattern of MNCs reveals that they do not engage in R & D activities in underdeveloped countries. However, these LDCs have to bear the bulk of their costs.  MNCs often use their economic power to influence government policies in directions unfavorable to development. The host government has to provide them special economic and political concessions in the form of excessive protection, lower tax, subsidized inputs, and cheap provision of factory sites. As a result, the private profits of MNCs may exceed social benefits.  Multinationals may damage the host countries by suppressing domestic entrepreneurship through their superior knowledge, worldwide contacts, and advertising skills. They drive out local competitors and inhibit the emergence of small-scale enterprises. WHY ARE MULTINATIONAL COMPANIES IN INDIA? • Huge market potential of the country • FDI attractiveness • Labor competitiveness • Macroeconomic Stability