MNCs: Definition, Meaning, Merits, Demerits
Multinational Companies (MNCs)
A multinational company is one which is incorporated in one country (called the home country); but whose operations extend beyond the home country and which carries on business in other countries (called the host countries) in addition to the home country.
It must be emphasized that the headquarters of a multinational company are located in the home country.
IBM computer and Pepsi-Cola from U.S.A., Siemens from Germany, Sony and Honda from Japan Philips from Holland etc., are some of the MNCs operating at international levels.
According to ILO report (i.e. International Labour Organization) “The essential nature of the multinational enterprises lies in the fact that its managerial headquarters are located in one country, while the enterprise carries out operations in number of other countries’.
Merits of MNCs
- Economic Development: The Developing countries need both foreign capital and technology to make use of available resources for economic and industrial growth. MNCs can provide the required financial, technical and other resources to needy countries in exchange for economic gains.
- Technology Gap: MNCs are the instruments of transfer of technology to the host country. Technology is necessary to bring down cost of production and produce quality goods on a large scale. The services of MNCs can be of great help to bridge the technological gab between developed and developing countries.
- Industrial Growth: MNCs are dynamic and offer growth opportunities for domestic industries. MNCs assist local producers to enter the global markets through their well established international network of production and marketing. And there by ensure industrial growth.
- Marketing Opportunities: MNCs have access to many markets in different countries. They have the necessary skills and expertise to market products at international level. For example, an Indian Company can enter into Joint Venture with a foreign company to sell its product in the international market.
- Work Culture: MNCs introduces a work culture of excellence, professionalism and fairness in deals. The sole objective of Multinational is profit Maximation. To achieve this, the Multinationals use various strategies like product innovation, technology up gradation, professional management etc.
- Export Promotion: MNCs assist developing countries in earnings foreign exchange. This can be done by promoting and developing export oriented and import substitute industries.
- Research and Development: The resources and experience of MNCs in the field of research enables the host country to establish efficient research and development system. It is a fact that many MNCs are now shifting their research units to countries like India to avail of monetary incentives and cheap labour.
Demerits of MNCs
- Problem of Technology: Technology developed by MNCs from developed countries does not fully fit in the needs of developing countries. This is because, such technology is mostly capital intensive.
- Political Interference: The MNCs from developed countries are criticised for their interference in the political affairs of developing nations. Through their financial and other resources, they influence the decision-making process of the governments of developing nations.
- Self-Interest: MNCs work towards their own self-interest rather than working for the development of host country. They are more interested in making profits at any cost.
- Outflow of foreign Exchange: The working of MNC is a burden on the limited resources of developing countries. They charge high price in the form of commission and royalty paid by local subsidiary to its parent company. This leads to outflow of foreign exchange.
- Exploitation: MNCs are criticised for exploiting the consumers and companies in the host country. MNCs are financially very strong and adopt aggressive marketing strategies to sell their products, adopt all means to eliminate competition and create monopoly in the market.
- Investment: MNCs prefer to invest in areas of low risk and high profitability. Issues like social welfare, national priority do not find any place on the agenda of MNCs.
- Artificial Demand: MNCs are criticised on the ground that they create artificial and unwarranted demand by making extensive use of the advertising and sales promotion techniques.