Telangana TSBIE TS Inter 1st Year Commerce Study Material 11th Lesson Multi National Corporations (MNCs) Textbook Questions and Answers.
TS Inter 1st Year Commerce Study Material Chapter 11 Multi National Corporations (MNCs)
Long Answer Questions
Question 1.
Define MNC and explain its features.
Answer:
Meaning of MNC: The term “Multinational” is made out of two words “Multi” and “National”. Hence a multinational company corporation is an organisation doing business in two or more countries. In other words, MNC is an organization or enterprise carrying on business in not only the country where it is registered but also in several other countries.
MNCs are also called “International Corporations”, “Global Giant” and “Transnational Corporation”. MNCs are giant firms with their headquarters located in one country (home country) but their activities are spread over in other countries (host countries). MNC’s may engage in various activities like exporting, importing, and manufacturing in different countries.
For example INFOSIS, WIPRO, Reddy Labs, IBM, Microsoft, Coco-Cola, Sony, Wal- Mart, Honda etc.
Definitions of MNCs:
- According to David E. Liliental, MNC is defined as, “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well”.
- According to WH. Moreland “Multinational Corporations or Companies are those enterprises whose management, ownership and controls are spread in more than one foreign country”.
- In a report of the International Labour Organization (ILO), it is observed that, “The essential of the MNCs lies in the fact that its managerial headquarters are located is one country (home country), while the enterprise carries out operations in a number of other countries (host countries)”.
Features of MNCs:
Some of the main features of multinational companies are given below:
1) Large in Size: An MNC is generally big in size. Some of the MNCs own and control assets worth billions of dollars. Their annual sales turnover is more than the Gross National Product of many small countries.
2) International Operations: A multinational corporation carries on business in more than one country. Multinational corporations such as Wipro, Colgate-Palmolive, Coco-Cola have branches in seventy countries around the world.
3) International Management: The management of MNCs is international in character. It operates on the basis of best possible alternative available anywhere in the world. Its local subsidiaries are managed by the nationals of the host country. For example, the management of Hindustan Lever lies with Indians. The parent company Unilever is in the United States of America.
4) Mobility of Resources: The operations of multinational company involves the mobility of capital, technology, entrepreneurship and other factors of production across the territories.
5) Centralized Control: The branches of MNCs spread in different countries which are controlled and managed from the headquarters situated in the home country. All branches operate within the policy framework formed by headquarters.
6) Integrated Activities: A multinational company is usually a complete organization comprising manufacturing, marketing, research and development and other facilities.
7) Oligopolistic Powers: Oligopoly means power in the hands of few companies only. Due to their giant size, the MNCs occupy dominating position in the market. They also take over other firms to acquire huge power and improve market share.
8) Sophisticated Technology: MNCs make use of latest and advanced technology to supply world class products. They use capital-intensive technology and innovative techniques for production.
9) Several Forms: A multinational company may operate is host countries in several ways i.e., branches, subsidiaries, franchise, joint ventures. Turn key projects.
Question 2.
Explain various types of MNCs.
Answer:
Multinational Corporations are operated in the following ways.
Forms of MNCs:
1) Franchising: In this form, MNC grants firms in foreign countries the right to use its trade marks, patents, brand names etc. The firms get the right or licence to operate their business as per the terms and conditions of franchise agreement. They pay royalty or licence fee to MNC. This system is popular for products which enjoy good demand in host countries.
2) Branches: In this system, MNCs open branches in different countries. These branches work under the direction and control of head office. The headquarters frames policies to be followed by the branches.
3) Subsidiaries: An MNC may establish wholly owned subsidiaries in foreign countries. The subsidiary in foreign countries follow the policies laid down by holding (parent) company. An MNC can expand its business operations through subsidiaries all over the world.
4) Joint Venture: In this systems an MNC establishes a company in foreign country in partnership with local firms. The MNC and foreign country firm share the ownership and control of the business.
Generally, the MNC, provides technology and managerial skills and the day to day management is left to the local partner.
5) Turn Key Projects: In this method, the MNC constructs and operates the industrial plant by itself. It provides training to the staff in the operation of plant. It may also guarantee the quality and quantity of production over a long period of time.
Classification of MNCs:
There are three types of MNCs. They are (1) The Ethnocentric MNC (2) Polycentric MNC and (3) Regiocentric and Geocentric MNCs.
1) The Ethnocentric MNC:
- These are the type of MNCs which have strong orientation towards home country. This means that home country people are considered as superior and allocated all key posts.
- Usually companies that are involved in extractive FDI such as oil or gas companies included in ethnocentric MNC. Communication and information is top down and all strategic decisions are steered from corporate headquarters. Subsidiaries sell products design and manufactured by parent companies with little or no local control.
2) Polycentric MNCs:
- Polycentric type of MNCs has strong orientation towards host country where few key people are nationals and remaining are from the host country.
- An MNC that adopts the polycentric innovation model evolving through four successive stages of maturity they are:
- At this stage, the MNCs R & D operations are mostly concentrated in the west. MNC starts shifting some of its R & D works to low cost countries like India that offer plenty of high quality scientists and engineers.
- MNC recognizes the massive potential of emerging markets and delegates more responsibilities to local units in emerging markets which initiates and manage their own R & D projects to cater to local needs.
- The MNC starts networking R & D activities in emerging markets.
- At this stage, the R & D hubs in emerging markets are given a global remit as they now own the P & L responsiblity for global design and rollout of new products.
3) Regiocentric and Geocentric MNCs:
- These MNCs have their concentration in whole world and they make selection for best employees whether they are from host country or home country it does not matter.
- When MNCs desire an integration of all of their foreign subsidiaries and melding of a world wide corporate culture, they adopt a geocentric management strategy.
Question 3.
Explain the role of Multinational Corporations in the Indian economy.
Answer:
MNCs made its foray in India after the 1991 economic reforms. The LPG (Liberalisation, Privatization, Globalisation) reforms opened the Indian economy to companies across the world. India hosts the largest number of MNCs from USA and Europe. MNCs comes to India through FDI route.
Some of the important roles played by MNCs in India are as follows:
1) Transfer of Technology: The most important role that MNCs play in India and across the globe is transfer of technology. Transfer of technology to developing countries increases the quality and productivity of output produced. India has not just received the technology from MNCs but also the beneficiary of technical know how which results in the skill enhancement of the work force.
2) Capital Investment: When MNCs come to India, they are responisible for non debt creating capital inflows. Post the 1991 economic reforms, MNCs contributed towards creating a positive balance of payment. Therefore when MNCs invest in India it goes into no debt creating capital receipts. Moreover, they contribute towards increasing the GDP of India.
3) Increase in Exports: MNCs have greatly contributed towards increasing our exports. India offers cheap labour and land. Hence, it is both economical it and profitable for MNCs to invest in India. When MNCs export their goods to other nations, it benefits us directly.
4) Managerial Practices: MNCs have also brought best managerial practices to India. The human resource management, financial controls, operation and advertising strategies have been emulated by Indian companies to their advantage.
5) Increase in Competition: Entry of MNCs promotes competition in the economy of the host country. This increase in competition results in lowering of prices, which is beneficial to the end user.
6) The Multiplier Effect: MNC contribute towards increasing income and employment opportunities. MNC’s like Hindustan Unilever, Toyota etc., are paying higher to management, engineering graduates. The Maruti Suzuki and Hero Honda collaborations have also contributed towards increasing employment.
7) Infrastructural Investment: MNCs have also invested in the field of infrastructure. These investments have contributed towards our economic growth and development. Power projects, Tele -communication have been immense benefit to India for expanding our horizons.
Therefore, MNCs have been a harbinger growth and development of the economy of India “Make in India” programme will further give a fillip to MNCs.
Question 4.
Define MNC and explain its advantages.
Answer:
Meaning: The term “Multinational” is made out of two words “Multi” and “National”. Hence, a multinational company corporation is an organization doing business in two or more countries. MNCs are giant firms with their headquarter located in one country (home country) but its activities are spread over in other countries (host countries).
MNCs are also called as “International Corporation” or “Global Gaint” and “Transnational Corporation” MNCs are engage in various activities like exporting, importing, manufacturing in different countries. Infosis, Wipro, Reddy Labs, IBM, Microsoft, Coco-Cola, Wal- Mart, Honda, Sony etc., are the example of MNC’s.
Definitions:
- According to David E. Liliental, MNC is defined as, “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well”.
- As per W.H.Moreland, “Multi national Corporations or companies are those enterprises whose management, ownership and control are spread in more than one foreign country”.
- As per the report of the International Labour Organization (ILO) it is observed that, “The essential of the MNC lies in the fact that its managerial headquarters are located in one country (home Country), while the enterprise carries out operations in a number of other countries (host Countries)”.
Advantages of MNC’s:
MNCs directly and indirectly help both home country and the host country. Various advantages of MNCs are explained below:
1) Economic Development: The developing countries need both foreign capital and technology to make use of available resources for economic and industrial development. MNCs can provide the required financial, technical and other resources to the needy countries in exchange for economic gains.
2) Technology Gap: Technology is necessary to bring down cost of production and for producing quality goods on a large scale. MNCs can help to bridge the technological gap between developed and developing countries by transfer technology to the host country.
3) Industrial Growth: MNCs offer growth opportunities for domestic industries. MNCs assist local producers to enter the global markets through their well established inter-national network of production and marketing to ensure industrial growth.
4) 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 products in the international market.
5) Work Culture: MNCs introduce a work culture of excellence, professionalism and transparency in deals. The primary objective of MNCs is to maximise the profits and increase the market share by use of product innovation, technology upgradation, and professional management.
6) Export Promotion: MNCs helps developing countries in earning foreign exchange revenue. This can be achieved by promoting and developing export oriented and import substitute industries.
7) 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. In order to avail of monetary incentives and cheap labour in developing countries like India, MNCs are shifting research units to such countries.
Question 5.
Define MNC and explain the limitations of MNCs.
Answer:
A Multinational Corporation / Company is an organization doing business in more than one country. Its headquarters are located in one country (home country) but its activities are spread over in other countries (host countries). MNCs are also called as “International Corporation”, “Global Giant” and “Transactional Corporation”. Examples of MNCs are INFOSIS, WIPRO, Reddy Lab, Coca-Cola, Wal-Mart, Honda, IBM etc.
Definitions:
According to David E.Liliental, MNC is defined as “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well”.
According to W.H Moreland, “Multinational Corporations or Companies are those enterprises whose management, ownership and controls are spread in more than one foreign country”.
Disadvantages of MNCs:
1) Problem of Technology: Technology developed by MNCs from developed countries which does not fully fit in the needs of developing countries. This is because, such technology is mostly intensive.
2) Political Interference: The MNCs from developed countries are criticised for their interference in the political affairs of developing countries. Through their financial and other resources, they influence the decision-making process of the government of developing countries.
3) Self-Interest: MNCs work towards their own self interest rather than working for the development of host country. They are more interested in only making profits.
4) Outflow of foreign Exchange: MNCs 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.
5) Exploitation: MNCs are exploiting the consumers and companies in the host country. MNCs are financially very strong and they adopt aggressive marketing strategies to sell their products, adopt all means to eliminate competition and create monopoly in the market.
6) 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.
7) Artificial Demand: MNCs create artificial and unwanted demand by making extensive use of the advertising and sales promotion techniques.
Question 6.
What is Globalization ? Explain the necessity of Globalization.
Answer:
Globalization defined as the process of integration and convergence of economic, financial, cultural and political systems across the world. Globalization refers to the free cross border movement of goods, services, capital, information and people. It is the process of creating networks of connections among nations at multi – continental distances.
Importance of Globalization:
1) Economic Liberalization: Economic liberalization both in terms of regulations and tariff structure, has greatly contributed to the globalization of trade and investment.
2) Technological Break throughs: The breakthroughs in science and technology have transformed the world virtually into a global village, especially manufacturing, transportation and information and communication technologies.
3) Multilateral Institutions: A number of multilateral institutions under the UN frame-work, setup during the Post World War II era, have facilitated exchanges among countries and became prominent forces in present day globalization. Multinational organisations such as the GATT and WTO contributed to the process of globalization.
4) Creates Employment Opportunities: Globalization helps to provide employment to a large number of people. Multinational companies appoint a large number of personnel with high pay scale and other benefits.
5) Global Expansion of Business Operations: Growing markets and movement of capital flows across the countries have facilitated the rapid expansion of business operations globally.
6) Emergence of Global Consumer Segment: Globalization encourages free and fair competition at world level. Due to this, organizations try to supply quality goods and at a reduced prices. Customers may have more choices due to increased suppliers at global level.
7) Maximization of Economic Efficiencies: The global integration of economies has promoted a rapid rise in the movement of products, capital and labour across the borders. It contributes to the maximization of economic efficiencies, including efficient utilization of resources.
8) Enhanced Trade: Due to Globalization, trade across the countries has enhanced and business organizations are enjoying the benefits of global access to the customers resulting in enhanced revenues.
Short Answer Questions
Question 1.
Explain the meaning of MNC.
Answer:
Meaning of MNC: The term “Multinational” is made out of two words “Multi” and “National”. Hence, a multinational company corporation is an organization doing business in two or more countries. MNCs are giant firms with their headquaters located in one country (home country) but its activities are spread over in other countries (host countries).
NCs are also called “International Corporation” or “Global Gaint” and “Transnational Corporation”. MNCs are engaged in various activities like exporting, importing, manufacturing in different countries. INFOSIS, WIPRO, Reddy Labs, IBM, Microsoft, Coco-Cola, Wal-Mart, Honda, Sony etc., are the examples of MNCs.
Definitions:
- According to David E.Liliental, MNC is defined as, “Corporations which have their home in one country but operate and live under the laws and customs of other countries as well”.
- As per WH. Moreland, “Multinational Corporations or Companies are those enterprises whose management, ownership and control are spread in more than one foreign country”.
- As per the report of the International Labour Organization (ILO) it is observed that, “The essential of the MNC lies in the fact that its managerial headquarters are located in one country (home country) while the enterprise carries out operations in a number of other countries (host countries)”.
Question 2.
List out the features of MNCs.
Answer:
Some of the main features of Multinational Corporations are given below:
1) Large in Size: An MNC is generally big in size. Some of the MNCs own and control assets worth billions of dollars. Their annual sales turnover is more than the gross National Product of many small countries.
2) International Operations: An MNC carries on the business in more than one country. Multinational Corporations such as Wipro, Colgate-Palmolive, Coco-Cola, have branches in seventy countries around the world.
3) International Management: The management of MNCs is international in character. It operates on the basis of best possible alternative available anywhere in the world. It’s local subsidiaries are managed by the nationals of the host country. For example, the management of Hindustan Lever lies with Indians. The parent company Unilever is in United States of America.
4) Mobility of Resources: The operations of multinational company involves the mobility of capital, technology, entrepreneurship and other factors of production across the territories.
5) Centralized Control: The branches of MNCs spread in different countries which are controlled and managed from the headquarters situated in the home country. All the branches operate within the policy framework formed by headquarters.
6) Several Forms: A Multinational Company may operate in host countries in several ways i.e. branches, subsidiaries, franchise, joint ventures.
Question 3.
State any four advantages of MNCs.
Answer:
MNCs directly and indirectly help both home country and the host country. Various advantages of MNCs are explained below:
1) Economic Development: The developing countries need both foreign capital and technology to make use of available resources for economic and industrial development. MNCs can provide the required financial, technical and other resources to the needy countries in exchange for economic gains.
2) Technology Gap: Technology is necessary to bring down cost of production and for producing quality goods on a large scale. MNCs can help to bridge the technological gap between developed and developing countries by transfer of technology to the host country.
3) Industrial Growth: MNCs offer growth opportunities for domestic industries. MNC’s assist local producers to enter the enter global markets through their well established international network of production and marketing to ensure industrial growth.
4) 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 products in the international market.
5) Export Promotion: MNCs helps developing countries in earning foreign exchange revenue. This can be achieved by promoting and developing export oriented and import substitute industries.
Question 4.
State any four disadvantages of MNCs.
Answer:
Disadvantages of MNCs:
1) Problem of Technology: Technology developed by MNCs from developed countries which does not fully fit in the needs of developing countries. This is because, such technology is mostly intensive.
2) Political Interference: The MNCs from developed countries are criticised for their interference in the political affairs of developing countries, through their financial and other resources, they influence the decision making process of the governments of developing countries.
3) Self Interest: MNCs work towards their own self interest rather than working for the development of host country. They are more interested in only making profits.
4) Outflow of Foreign Exchange: MNCs charge high price in the form of commission and royality paid by local subsidiary to its parent company. This leads to outflow of foreign exchange.
5) 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.
Very Short Answer Questions
Question 1.
Globalization.
Answer:
1) Globalization defined as the process of integration and convergence of economic, financial, cultural and political systems across the world.
2) Globalization refers to the free cross – border movement of goods, services, capital, information and people.
3) In otherwords, Globalization refers to the increasing integration of markets, and production to include the mobility of resources like capital, labour, organization and knowledge.
Question 2.
Foreign Direct Investment.
Answer:
1) Foreign Direct Investment (FDI) is an investment made by a firm or individual in one countiy into business interests located in another country.
2) Foreign Direct Investment occurs when a firm invests its resources in business activities outside its home country.
Question 3.
International Trade.
Answer:
1) International Trade means trade between countries. It occurs when a firm exports goods or services to customers of other countries.
2) The trade which takes place between the nations is called International Trade. It is also called “foreign trade”.
Question 4.
Multinational Corporation.
Answer:
1) A Multinational Corporation is an organisation doing business in more than one country. In other words, it is an organisation or enterprise carrying on business in not only the country where it is registered but also in several other countries.
2) MNCs are giant firms with their headquarters located in one country and with a variety of business operations in several other countries.
3) For example Nike, WIPRO, IBM, Sony, Honda, Coco-Cola etc., are MNCs.