In this article we will discuss about:- 1. Definition of Multinational Corporation 2. Growth of Multinational Corporation 3. Criticisms.
Definition of Multinational Corporation:
A company can be described as international when it conducts its business operations in more than one country. In fact, a multinational corporation is a chain of companies conducting similar operations in several nations under separate national charters but under the same top management.
MNCs are firms with their head office in one country and subsidiaries in other countries. For example, Ford produces cars not only in the U.S.A. but also in Britain, Germany, and other countries. Most major U.S. corporations meet this qualification.
Growth of Multinational Corporation:
The world economy in the 1950s was still in the shadow of the dollar shortage of the earlier years. American decision makers argued that the outflow of financial capital from the USA was desirable. The rapid growth of MNCs, stemming from the immense outflow of investment funds mostly from the USA since World War—II, was the inevitable result. The direct (private) investment by US MNCs in manufacturing industries alone nearly tripled during the 1960s.
However, the growth of the MNCs was not solely an American phenomenon. Other best known giant corporations were based in countries like Italy, Switzerland, Canada, West Germany, Sweden and in Japan. They have grown and spread over different countries for worldwide sourcing—to discover markets for finished products and to find out cheap sources of raw materials and labour. Once an American firm has developed a new product for the domestic market at great research and development costs, it will want to sell it worldwide.
They have, of late, been engaged in international sub-contracting business, thus breaking down trade barriers. An American company may decide to produce in Korea, if this is cheaper than producing in the USA and paying the shipping cost. Alternatively, an American firm may go to Korea or Taiwan in search of low wages and cheap source of raw materials.
MNCs have brought benefits to both capital exporting and receiving countries. They acted as primary vehicles for transfer of technology across national borders. They have solved balance of payments problems of both countries. They have promoted co-operation among nations, induced growth among local suppliers and created new purchasing power and new tax revenues.
Criticisms of Multinational Corporation:
The MNCs have greatly altered the process of trade among nations. They have become the vehicle for transferring financial capital, managerial skill and technology from one nation to another.
Nevertheless, they have been subject to various criticisms:
(i) First, organised labour in the USA argue that MNCs export jobs to their foreign subsidiaries.
(ii) Secondly, it is alleged that they claim unfair tax advantages over smaller domestic firms.
(iii) Thirdly, they can make use of ‘transfer-pricing’ techniques to lighten their tax burden. For example, a company will charge an undue percentage of research and development costs to a subsidiary in a country with high taxes. The result is to transfer profits from where it is low to the detriment of one national treasury and to the benefit of another.
(iv) Fourthly, they posses excess economic power and may alter the fortunes of nations and act as a major force behind world monetary crisis.
(v) Finally, they often ignore (or even violate) national regulation, and their political interests do not necessarily coincide with those of any nation.
These and other criticisms are gradually occupying the attention of many economists and political leaders all over the world. It seems safe to predict that MNCs are heading into an era of closer scrutiny and regulation in the years to come.
True enough, it is often difficult for a host country’s government to deal with a MNC than domestic firm, because the MNC can more easily exercise the option of simply leaving the country to produce somewhere else. Coca Cola and IBM are obvious examples. They refused to conform of India’s FERA and preferred to leave the country in 1977.