MNC investments

An investment is an asset or item that
is purchased with the hope that it will
generate income or will appreciate in the
future.
In an economic sense, an investment
is the purchase of goods that are not
consumed today but are used in the future to
create wealth.
In finance, an investment is a
monetary asset purchased with the idea that
the asset will provide income in the future or
will be sold at a higher price for a profit.

The first Multinational business organization
was the Knights Templar, founded in 1120.
After that came the British East India
Company in 1600 and then the Dutch East
India Company, founded in March 20, 1602,
which would become the largest company in
the world for nearly 200 years.

IBM is the first MNC in India in 19th century
Most of the MNCs in India had originally entered the Indian market during
the Colonial era.
They grew fast with state patronage. During the post-
independence era, the actual number of MNCs; who entered was small.
The entry was generally made through collaboration with Indian
big business.
For instance, Bajaj Tempo and Telco joined hands with Dailmer
Benz of West Germany; and other houses also joined to promote large
private sector companies in collaboration with MNCs.
At the end of 1990, there were 469 foreign companies in India.
In addition, there are many Indian companies with foreign equity
participation.
Several Indian outfit of MNCs like Ponds, Johnson and Johnson,
Lipton, Brooke-Bond, Colgate-Palmolive, etc.,
There are around 4561 MNCs in India
First Domestic MNCs from India is Infosys

A multinational corporation (MNC) has
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 a
centralized head office where they coordinate
global management.
Very
large multinationals have budgets that exceed
those of many small countries.

Rank Company Country Industry
Revenue in
USD
1 Walmart United States Retail $466 billion
2 State Grid China Power $315 billion
3 Sinopec Group China Petroleum $268 billion
4
China National
Petroleum
China Petroleum $263 billion
5 Toyota Motor Japan Automobiles $255 billion
6 Volkswagen Germany Automobiles $240 billion
7 Royal Dutch Shell
Netherlands (Un
ited Kingdom) Petroleum $240 billion
8 Berkshire Hathaway United States Products $224 billion
9 Apple United States Technology $216 billion
10 Exxon Mobil United States Petroleum $205 billion

Rank Company Country Industry
Revenue in
USD
1 Walmart United States Retail $514 billion
2 Sinopec Group China Petroleum $415 billion
3 Royal Dutch Shell
Netherlands (Un
ited Kingdom) Petroleum $397 billion
4
China National
Petroleum
China Petroleum $393 billion
5 State Grid China Power $387 billion
6 Saudi Aramco Saudi Arabia Energy $356 billion
7 BP United Kingdom Petroleum $304 billion
8 Exxon Mobile United States Petroleum $290 billion
9 Volkswagen Germany Automobiles $278 billion
10 Toyota Motor Japan Automobiles $273 billion

RANK COUNTRIES No. OF MNC
1 United States 132
2 China 109
3 Japan 51
4 France 29
5 Germany 29
6 United Kingdom 21
7 South Korea 15
8 Netherlands † 15
9 Switzerland 13
10 Canada 11

RANK COUNTRIES No. OF MNC
1 United States 121
2 China 119
3 Japan 52
4 France 31
5 Germany 29
6 United Kingdom 18
7 South Korea 16
8 Netherlands † 14
9 Switzerland 13
10 Canada 12

SL No. Company Name Rank
1 INDIAN OIL CORPORATION 161
2 RELIANCE INDUSTRIES LIMITED 215
3 TATA MOTORS 226
4 SBI 232
5 BHARATH PETROLEUM 358
6 HINDUSTAN PETROLEUM 367
7 RAJESH EXPORTS 423

SL No. Company Name Rank
1 RELIANCE INDUSTRIES LIMITED 106
2 INDIAN OIL CORPORATION 117
3 Oil and Natural Gas
Corporation
160
4 STATE BANK OF INDIA 236
5 TATA MOTORS 265
6 BHARATH PETROLEUM 275
7 RAJESH EXPORTS 495

Rank Cities Biggest companies of India
1 Mumbai 177
2 Delhi-NCR 111
3 Kolkata 38
4 Chennai 34
5 Bangalore 25
6 Pune 25
7 Ahmedabad 19
8 Hyderabad 17

S L No. Continent No. of companies
1 Asia 197
2 North America 145
3 Europe 143
4 Rest of the world 15

Prior to 1991 Multinational companies did not play much
role in the Indian economy. In the pre-reform period the Indian
economy was dominated by public enterprises. To prevent
concentration of economic power industrial policy 1956 did not
allow the private firms to grow in size beyond a point. By definition
multinational companies were quite big and operate in several
countries.
While multinational companies played a significant role in
the promotion of growth and trade in South-East Asian countries
they did not play much role in the Indian economy where import-
substitution development strategy was followed. Since 1991 with
the adoption of industrial policy of liberalisation and privatisation
rote of private foreign capital has been recognised as important for
rapid growth of the Indian economy.
Since source of bulk of foreign capital and investment are
Multinational Corporation, they have been allowed to operate in the
Indian economy subject to some regulations. The following are the
important reasons for this change in policy towards multinational
companies in the post-reform period.

In the recent years, external assistance to developing countries
has been declining. This is because the donor developed countries have not
been willing to part with a larger proportion of their GDP as assistance to
developing countries. MNCs can bridge the gap between the requirements of
foreign capital for increasing foreign investment in India.
The liberalised foreign investment pursued since 1991, allows
MNCs to make investment in India subject to different ceilings fixed for
different industries or projects. However, in some industries 100 per cent
export-oriented units (EOUs) can be set up. It may be noted, like domestic
investment, foreign investment has also a multiplier effect on income and
employment in a country.
For example, the effect of Suzuki firm’s investment in Maruti
Udyog manufacturing cars is not confined to income and employment for the
workers and employees of Maruti Udyog but goes beyond that. Many workers
are employed in dealer firms who sell Maruti cars.
Moreover, many intermediate goods are supplied by Indian
suppliers to Maruti Udyog and for this many workers are employed by them
to manufacture various parts and components used in Maruti cars. Thus their
incomes also go up by investment by a Japanese multinational in Maruti
Udyog Limited in India.

In pre-reform period in India when foreign direct
investment by MNCs was discouraged, we relied heavily on
external commercial borrowing (ECB) which was of debt-
creating capital inflows. This raised the burden of external
debt and debt service payments reached the alarming figure
of 35 per cent of our current account receipts.
This created doubts about our ability to fulfill our
debt obligations and there was a flight of capital from India
and this resulted in balance of payments crisis in 1991. As
direct foreign investment by multinational corporations
represents non-debt creating capital inflows we can avoid
the liability of debt-servicing payments.
Moreover, the advantage of investment by MNCs lies
in the fact that servicing of non-debt capital begins only
when the MNC firm reaches the stage of making profits to
repatriate Thus, MNCs can play an important role in reducing
stress strains and on India’s balance of payments (BOP).

 Another important role of multinational corporations is that they
transfer high sophisticated technology to developing countries
which are essential for raising productivity of working class and
enable us to start new productive ventures requiring high
technology.
 Whenever, multinational firms set up their subsidiary production
units or joint- venture units, they not only import new equipment
and machinery embodying new technology but also skills and
technical know-how to use the new equipment and machinery.
 As a result, the Indian workers and engineers come to know of
new superior technology and the way to use it. In India, the
corporate sector spends only few resources on Research and
Development (R&D). It is the giant multinational corporate firms
(MNCs) which spend a lot on the development of new
technologies can greatly benefit the developing countries by
transferring the new technology developed by them. Therefore,
MNCs can play an important role in the technological up-
gradation of the Indian economy.

 With extensive links all over the world and producing products efficiently
and therefore with lower costs multinationals can play a significant role
in promoting exports of a country in which they invest. For example, the
rapid expansion in China’s exports in recent years is due to the large
investment made by multinationals in various fields of Chinese industry.
 Historically in India, multinationals made large investment in planlations
whose products they exported. In recent years, Japanese automobile
company Suzuki made a large investment in Maruti Udyog with a joint
collaboration with Government of India. Maruti cars are not only being
sold in the Indian domestic market but are exported in a large number to
the foreign countries.
 As a matter of fact until recently, when giving permission to a
multinational firm for investment in India, Government granted the
permission subject to the condition that the concerned multinational
company would export the product so as to earn foreign exchange for
India.
 However, in case of Pepsi, a famous cold -drink multinational company,
while for getting a product license in 1961 to produce Pepsi Cola in India
it agreed to export a certain proportion of its product, but later it
expressed its inability to do so. Instead, it ultimately agreed to export
things other than what it produced such as tea.

 With a large command over financial resources and their
superior ability to raise resources both globally and inside
India it is said that multinational corporations could invest
in infrastructure such as power projects, modernisation of
airports and posts, telecommunication.
 The investment in infrastructure will give a boost to
industrial growth and help in creating income and
employment in the India economy. The external economies
generated by investment in infrastructure by MNCs will
therefore crowd in investment by the indigenous private
sector and will therefore stimulate economic growth.
 In view of above, even Common Minimum Programme of
the present UPA government provides that foreign direct
investment (FDI) will be encouraged and actively sought,
especially in areas of (a) infrastructure, (b) high
technology and (c) exports, and (d) where domestic assets
and employment are created on a significant scale.

 In recent years foreign direct investment through multinational
corporations has vastly increased in India and other developing
countries. This vast increase in investment by multinational
corporations in recent years is prompted by factors (1) the
liberalisation of industrial policy giving greater role to the private
sector, (2) opening up of the economy and liberalisation of
foreign trade and capital inflows. In this economic environment
multinational corporations which are in search for global profits
are induced to make investment in developing countries.
 As explained above, foreign direct investment by multinational
firms bring many benefits to the recipient countries but there are
many potential dangers and disadvantages from the viewpoint of
economic growth and employment generation.
 Therefore, role of multinational corporations in India and other
developing countries have been criticised on several grounds. We
discuss below some of the criticisms levelled against
multinational corporations.

Investment is the sacrifice of current
liquidity or current rupees or current Dollars
for future liquidity, future rupees or future
Dollars. There are different concept and types
of investment.
There are 2 concept of investment.
1) The economic concept
2) The financial concept

The economic concept of investment
refers to investment expenditures on new
plants, machinery, capital equipment and so
forth with the hope of making added wealth.
The financial concept of investment
refers to investment as, commitment of funds
in financial assets with the hope of getting
current income in the form of dividend or
interest and/or capital gain.

Whatever may be the nature of investment, whether it is economic
or financial, it has lot of motives. They are as follows:
 Get the current income
 Obtain reasonable gains
 Right to participate in growth
 Reduce risk on overall return
 Maximize return
 Ensure safety of investment
 Provide for liquidity on investment
 Easy transferability
 Preference of pledge ability
 Protection for future
 Beat the inflation
 Sense of participation in national economic development
 Fulfilment of security, social and esteem needs
 Economic power

‘International portfolio investment; is a grouping of
investment assets that focuses on securities from foreign market
rather than domestic market.
An international portfolio is designed to give the investor
exposure to growth in emerging and international market and
provide diversification.
Foreign portfolio investment is the entry of funds into a
country where foreigners make purchases in the country’s stock and
bond markets, sometimes for speculation.
It is usually short term investment, as opposed to the long
term foreign direct investment partnership, involving transfer of
technology and ‘know-how’.
Foreign portfolio investment (FPI); passive holding of
securities and other financial assets, which do not entail active
management or control of the securities transfer. FPI is positively
influenced by the high rates of return and reduction of risk through
geographical diversification. The return on the FPI is normally in the
form of interest payment or non-voting.

Portfolio investment includes investments by a
resident entity in one country in the equity and debt
securities of an enterprise resident in another country
which seek primarily capital gains and do not
necessarily reflect a significant and lasting interest in
the enterprise.
The category includes investments in bonds,
notes, money market instruments and financial
derivatives other than those included under direct
investment,
In other words, investments which are both
below the 10% rule and do not involve affiliated
enterprises. In addition to securities issued by
enterprises, foreigners can also purchase sovereign
bonds issued by governments.

In June 2016, the United States received
approximately 84% of total remittances, which was
the majority of outflows for FPI.
The United Kingdom, Singapore, Hong Kong
and Luxembourg rounded out the top five
countries receiving FPI, with approximately 81% of
the combined share.
Net inflows from all countries were $451
million. Outflows were approximately $1.3 billion.
Approximately 84% of investments were in
Philippine Stock Exchange-listed securities
pertaining to property companies, holding firms,
banks, telecommunication companies, food,
beverage and tobacco companies.

FDI is a;
 Direct investment into production or business in a
country or a company of another country.
 In the form of either buying a company in a target
country or by expanding operation of an operations
into that country
 Example; A Chinese company building a factory can
expand its supply chain in the US in order to tap into
the American market would be an example of Chinese
foreign direct investment into America.
foreign direct investment can be defined as FDI includes
‘ Mergers and acquisitions, building new facilities,
repatriating profits earned from overseas operations.

 HORIZONTAL FDI; is arises when a firm
duplicates its home country based activities at the
same value chain stage in a host country through
FDI. In short, the investment in the same industry
abroad as firm operates in at home.
 VERTICAL FDI ; it takes place when a firm
through FDI moves upstream or downstream in
different value chain i.e, when a firm performs
value- adding activities stage by stage in a vertical
fashion in a host country.

The foreign direct investor may acquire
voting power of an enterprise in an economy of a
host country through the following methods:
 By incorporating a wholly owned subsidiary or
company anywhere
 By acquiring shares in an associated enterprise
 Through a merger or an acquisition of an unrelated
enterprise.
 Participating in an equity joint venture with
another investor or enterprise

Foreign direct investment incentives may take the
following forms;
 Low corporate and individual tax and other type of
tax considerations.
 Preferable tariffs.
 Special economic zones.
 Export processing zones.
 Bonded warehouses.
 Investment financial subsidies
 Infrastructure subsidies
 R & D supports

1. Economic Development Stimulation.
Foreign direct investment can stimulate the target country’s economic development, creating a
more conducive environment for you as the investor and benefits for the local industry.
2. Easy International Trade.
Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is
quite difficult. Also, there are industries that usually require their presence in the international
markets to ensure their sales and goals will be completely met. With FDI, all these will be made
easier.
3. Employment and Economic Boost.
Foreign direct investment creates new jobs, as investors build new companies in the target
country, create new opportunities. This leads to an increase in income and more buying power to the
people, which in turn leads to an economic boost.
4. Development of Human Capital Resources.
One big advantage brought about by FDI is the development of human capital resources, which is
also often understated as it is not immediately apparent. Human capital is the competence and
knowledge of those able to perform labour, more known to us as the workforce. The attributes
gained by training and sharing experience would increase the education and overall human
capital of a country. Its resource is not a tangible asset that is owned by companies, but instead
something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its
human resources while maintaining ownership.

5. Tax Incentives.
Parent enterprises would also provide foreign direct investment to get additional
expertise, technology and products. As the foreign investor, you can receive tax
incentives that will be highly useful in your selected field of business.
6. Resource Transfer.
Foreign direct investment will allow resource transfer and other exchanges of
knowledge, where various countries are given access to new technologies and
skills.
7. Reduced Disparity Between Revenues and Costs.
Foreign direct investment can reduce the disparity between revenues and costs.
With such, countries will be able to make sure that production costs will be the
same and can be sold easily.
8. Increased Productivity.
The facilities and equipment provided by foreign investors can increase a
workforce’s productivity in the target country.
9. Increment in Income.
Another big advantage of foreign direct investment is the increase of the target
country’s income. With more jobs and higher wages, the national income
normally increases. As a result, economic growth is spurred. Take note that larger
corporations would usually offer higher salary levels than what you would normally
find in the target country, which can lead to increment in income.

1. Hindrance to Domestic Investment.
As it focuses its resources elsewhere other than the investor’s home
country, foreign direct investment can sometimes hinder domestic
investment.
2. Risk from Political Changes.
Because political issues in other countries can instantly change,
foreign direct investment is very risky. Plus, most of the risk factors
that you are going to experience are extremely high.
3. Negative Influence on Exchange Rates.
Foreign direct investments can occasionally affect exchange rates
to the advantage of one country and the detriment of another.
4. Higher Costs.
If you invest in some foreign countries, you might notice that it is
more expensive than when you export goods. So, it is very
imperative to prepare sufficient money to set up your operations.
5. Economic Non-Viability.
Considering that foreign direct investments may be capital-
intensive from the point of view of the investor, it can sometimes
be very risky or economically non-viable.

6. Expropriation.
Remember that political changes can also lead to
expropriation, which is a scenario where the government will
have control over your property and assets.
7. Negative Impact on the Country’s Investment.
The rules that govern foreign exchange rates and direct
investments might negatively have an impact on the investing
country. Investment may be banned in some foreign
markets, which means that it is impossible to pursue an
inviting opportunity.
8. Modern-Day Economic Colonialism.
Many third-world countries, or at least those with history of
colonialism, worry that foreign direct investment would
result in some kind of modern day economic colonialism,
which exposes host countries and leave them vulnerable to
foreign companies’ exploitations.

Conclusion
Investing into another country’s economy, buying into a
foreign company or otherwise expanding your business
abroad can be extremely financially rewarding and
might provide you with the boost needed to jump to a
new level of success. However, foreign direct
investment also carries risks, and it is highly important
for you to evaluate the economic climate thoroughly
before doing it. Also, it is essential to hire a financial
expert who is accustomed to working internationally, as
he can give you a clear view of the prevailing economic
landscape in your target country. He can even help you
monitor market stability and predict future growth.
Remember that we live in an increasingly globalized
economy, so foreign direct investment will become a
more accessible option for you when it comes to
business. However, you should weigh down its
advantages and disadvantages first to know if it is the
best road to take.

MNC investments

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