Multinational Corporations (MNCs) / Transnational Corporations (TNCs)

Definition and Scope:

 MNCs (also called TNCs, global corporations, international firms) are enterprises operating in multiple
countries with a network of subsidiaries or affiliates.
 They conduct activities that impact trade, commercial policy, foreign exchange, balance of
payments, and development economics.

Significance in the Global Economy:

 MNCs operate quickly and efficiently across borders, influencing the international economic and
financial position of nations.
 They are major drivers of foreign investment, industrial production, employment, and trade
worldwide.

Role in International Trade:

 MNCs are central to understanding international economics because they carry out most cross-border
production, investment, and trade activities efficiently.
 Their operations shape global economic patterns, affecting markets, employment, and industrial
distribution.

Code of Conduct for MNCs

Rationale:

 Given the size, influence, and global reach of MNCs, their operations can have both positive and
negative impacts on host countries, such as:
o Economic benefits: Employment, technology transfer, capital inflows.
o Potential risks: Market dominance, exploitation, environmental damage, tax avoidance.

Proposed Code of Conduct:

 MNCs should follow ethical, transparent, and socially responsible practices globally.
 Key elements include:
1. Respect for local laws and cultures.
2. Ensuring fair treatment of labor and human rights.
3. Minimizing environmental harm and promoting sustainability.
4. Transparency in taxation, repatriation of profits, and corporate governance.
5. Equitable contribution to host countries’ economic development.

Implementation Challenges:

 MNCs operate across jurisdictions, making enforcement difficult.

 Host countries may have weak regulatory frameworks, especially in developing nations.
 Voluntary guidelines exist (e.g., UN Global Compact), but binding international norms are limited.

Conclusion:

 MNCs are indispensable for global economic integration.

 A well-defined code of conduct ensures that their operations benefit both home and host countries,
while mitigating negative social, environmental, and economic impacts.
Definition and Meaning of Multinational Corporations (MNCs)-
 No single definition:
o MNCs have multiple dimensions—size, structure, performance, and behavior

Definitional Dimensions

1. By Size:
o MNCs are often identified by market value, sales, profits, or return on equity.
o Size alone does not determine multinationality; some smaller firms are more global than large
ones.
2. By Structure:
o Structural criteria include number of countries of operation, and citizenship of owners and
top management.
3. By Performance:
o Relates to earnings, sales, and assets committed to foreign operations.
4. By Behavior:
o Focuses on management mindset and the firm’s global orientation.
o Internationalization includes the attitudes and strategic orientation of top management.

Sullivan’s Aggregate Index of Internationalization

Five variables to measure the degree of multinationality:

1. Ratio of foreign sales to total sales.

2. Ratio of foreign assets to total assets.
3. Proportion of overseas subsidiaries to total subsidiaries.
4. International experience of top managers.
5. Psychic dispersion of international operations (cultural/geographical spread).

Popular Definitions

 MNCs have headquarters in one country (home) and operations in multiple other countries (host).
 Key criteria:
o Controls production facilities abroad (FDI).
o Derives a significant portion of income from foreign operations (e.g., ≥25%).
o Minimum number of countries of operation (e.g., six).
o Foreign assets, employees, or management with geocentric orientation.
o Direct control of foreign investments (not just holding shares).

Related Terms -

1. Branch – An extension of the parent company in another country, not a separate legal entity.
o Example: A foreign bank branch in Bangladesh.
2. Subsidiary – A separate company in another country, but controlled/owned (more than 50% shares) by
the parent company.
 o Example: Nestlé India (subsidiary of Nestlé Switzerland).
3. Affiliate – A company in which the MNC owns less than 50% shares, so it has influence but not full
control.
o Example: Toyota might hold 30% in a local car company → that’s an affiliate.
4. Associate – A company where the MNC owns 20–50% shares. The parent has significant influence but
not full control.
o Example: Microsoft owning about 30% stake in another tech firm.
5. TNC (Transnational Corporation) – Another word for MNC, but usually used for firms with more
decentralized operations, where decision-making isn’t only in the home country.
6. Parent Company (Headquarters) – The main company that owns or controls subsidiaries, associates,
and affiliates abroad.

Organisational Models of MNCs-

Multinational corporations (MNCs), international corporations (ICs), transnational corporations (TNCs), and
global corporations are often used interchangeably. However, differences exist in their structure, decision-
making, and approach to overseas operations.

🔹 Organisational Models of MNCs

1. Multinational Organisation Model

o Operates in many countries, but each subsidiary adapts to local conditions.
o Decision-making: Mostly decentralized (local managers decide for their markets).
o Example: Unilever (different products/brands for different countries).
2. International Organisation Model
o Home country dominates, foreign operations are extensions of the domestic business.
o Decision-making: Centralized at headquarters; foreign units depend on parent.
o Example: sony
3. Global Organisation Model
o Sees the world as one big market → offers standardized products worldwide.
o Decision-making: Strongly centralized, uniform strategy across countries.
o Example: Apple (iPhone design & strategy same worldwide).
4. Transnational Organisation Model
o A mix: integrates global efficiency with local responsiveness.
o Decision-making: Shared between HQ and subsidiaries → network-based.
o Example: McDonald’s (core brand globally, menu adapted locally).

Model Focus Decision-Making Product/Strategy Example

Decentralized
Each country as Adapted to local Unilever – different
Multinational (subsidiaries
separate market needs products/brands in each country
decide)
Sony-Electronics designed in Japan
Home country Centralized (HQ Domestic strategy
International HQ were produced and sold in foreign
dominance controls) extended abroad
countries without significant changes.
World as a Centralized (HQ Standardized
Global Apple – iPhone same everywhere
single market strong control) worldwide
Shared (HQ +
Both global + Core global brand, McDonald’s – global brand, local
Transnational subsidiaries
local local adaptation menus
collaborate)
Benefit/Importance and Dominance of Multinational Corporations
(MNCs)-
Benefir/Importance of MNCs

1. Economic Growth and Employment

o MNCs create jobs in host countries, both directly (through their subsidiaries) and indirectly
(through suppliers and service providers).
o They contribute to the GDP of host countries by investing capital and generating income.
2. Technology Transfer
o MNCs bring advanced technology and expertise to developing countries.
o This improves local industries’ productivity and competitiveness.
3. Access to Global Markets
o Local firms in host countries can access international markets through MNC networks.
o MNCs also facilitate trade by exporting goods and services from host countries.
4. Capital Inflows and Investment
o Foreign Direct Investment (FDI) from MNCs provides capital for industrial and infrastructure
development.
o This helps developing countries improve facilities, resources, and productivity.
5. Skill Development
o MNCs train local employees in modern management, engineering, marketing, and technology.
o This raises the human capital of the host country.
6. Innovation and R&D
o MNCs often invest in research and development (R&D) in host countries.
o This encourages innovation, leading to new products, services, and processes.

Dominance of MNCs

1. Control over Markets

o Large MNCs often dominate the global supply chain and key industries.
o They influence prices, standards, and production decisions internationally.
2. Political and Economic Influence
o MNCs can influence government policies through lobbying, trade agreements, and economic
leverage.
o Their investment decisions can impact national economies significantly.
3. Global Branding
o MNCs often own powerful brands recognized worldwide, giving them a competitive edge over
local firms.
o This can sometimes suppress local entrepreneurship.
4. Exploitation of Resources
o In some cases, MNCs dominate by extracting natural resources or cheap labor from developing
countries.
o This dominance can lead to economic dependency.
5. Market Integration
o MNCs integrate different national markets into a global network, standardizing production,
marketing, and management practices.

Summary
MNCs are important because they drive economic growth, technology transfer, and skill development.
However, they are dominant because they control markets, influence policies, and shape global trade, which
can sometimes disadvantage local businesses.

Problems and Criticisms of MNCs-

1. Economic Problems

 Market Domination: MNCs often dominate local markets, reducing competition and harming small
businesses.
 Profit Repatriation: Profits are often sent back to the home country, limiting economic benefits for the
host country.
 Economic Dependence: Host countries may become dependent on MNCs for jobs, capital, and
technology.

2. Exploitation of Resources

 Natural Resources: MNCs sometimes exploit raw materials without sufficient compensation or
sustainability.
 Cheap Labor: They may pay low wages and impose poor working conditions in developing countries.

3. Cultural and Social Concerns

 Cultural Imperialism: MNCs can influence local culture through global products, media, and
advertising, sometimes eroding local traditions.
 Lifestyle Changes: Introduction of foreign products can shift consumption patterns and create
inequality.

4. Environmental Issues

 Pollution and Degradation: Some MNCs operate with lax environmental standards in host countries,
causing pollution and resource depletion.
 Neglect of Sustainability: Short-term profits are often prioritized over long-term environmental care.

5. Political and Legal Concerns

 Influence on Policy: MNCs can lobby governments to pass favorable laws, sometimes at the expense of
the public interest.
 Tax Avoidance: They may exploit loopholes to minimize taxes in host countries, reducing government
revenue.

6. Ethical Concerns
  Exploitation of Labor: Use of child labor, unsafe working conditions, and low wages have been
reported in some countries.
 Unfair Competition: Large MNCs can undercut local firms, making it hard for them to survive.

Future Perspectives on Multinational Corporations (MNCs)-

The future of MNCs looks very promising, given the structural changes in the global economic environment.
The scope for expansion and influence of MNCs is expected to increase significantly due to several
developments:

1. Universal Economic Liberalization

 Many countries, especially in the developing world, are reducing trade barriers, deregulating
industries, and opening up sectors for foreign investment.

2. Rapidly Changing Technologies

 Advances in technology, especially ICT, robotics, AI, and logistics, are transforming how and where
production and services are located.
 MNCs can leverage technology to optimize operations globally, centralize R&D, and decentralize
manufacturing strategically.
 Example: Amazon and Alibaba use advanced logistics and data analytics to coordinate global supply
chains efficiently.

3. Globalization of Firms and Industries

 Firms are becoming truly global, moving beyond their home country to operate seamlessly across
multiple markets.
 Industries are increasingly integrated worldwide, allowing MNCs to standardize products while
adapting to local markets.
 Example: Coca-Cola operates in almost every country, tailoring flavors and marketing strategies to local
tastes.

4. Rise of Services Sector

 Services such as banking, telecommunications, IT, logistics, and healthcare are becoming the largest
component of the global economy.
 MNCs are increasingly investing in service industries, which often have high growth potential and
lower barriers to entry than manufacturing.

5. Regional Economic Integration

 Economic blocks like the EU, ASEAN, NAFTA, and African Continental Free Trade Area
(AfCFTA) facilitate trade, investment, and mobility of capital and labor.
 MNCs benefit from reduced tariffs, coordinated regulations, and access to larger markets within
these regions.
 Example: European automakers like Volkswagen and Renault benefit from EU regulations and free
movement of goods and labor across member states.
Code of Conduct for MNCs-
As multinational corporations (MNCs) have grown in size and influence, there has been a wide recognition of
the need for a code of conduct to guide their operations, protect host countries’ interests, and promote ethical
business practices.

1. Brandt Commission Recommendations

The Brandt Commission emphasized the creation of an international regime for investment with the
following key elements:

1. Fair Investment Framework

o Both developing countries and MNCs should benefit from foreign direct investment (FDI) based
on mutually agreed terms.
o Home countries should avoid restrictive practices such as export controls, restrictions on
technology transfer, and limits on profit repatriation.
2. Regulation and Legislation
o Home and host countries should coordinate laws on ethical behavior, anti-competitive practices,
labor standards, disclosure of information, and cartel activities.
o International codes and guidelines are recommended as steps toward regulation.
3. Tax Cooperation
o Governments should cooperate to monitor transfer pricing and eliminate tax evasion via tax
havens.
4. Harmonization of Policies
o Fiscal incentives and foreign investment policies should be harmonized regionally to prevent
undercutting the tax base and competitive positions of host countries.
5. International Consultation
o A formal international procedure should be established for discussions on measures affecting
FDI and MNC activities.

2. UN Recommendations (Code of Conduct for MNCs)

The UN Commission on Transnational Corporations set out a code requiring MNCs to:

1. Respect National Sovereignty

o Follow the laws, regulations, and administrative practices of host countries.
2.
o Support host nations’ economic objectives, development plans, and sociocultural values.
3. Respect Human Rights
o Avoid violations of basic rights of citizens and employees.
4. Non-Interference
o Avoid meddling in domestic politics or international relations of host countries.
5. Avoid Corruption
o No bribery or unethical business practices.
6. Good Practices in Business Operations
o Fair taxation, consumer protection, environmental responsibility, and employee welfare.
7. Transparency
o Disclose relevant information to host governments regarding operations and financial matters.

3. OECD Code of Practice for MNCs (1976)

The OECD code focused on promoting economic and social progress in host nations. Key provisions include:

1. Technology Transfer
o Contribute to host countries’ scientific and technological development by enabling rapid
diffusion of technology.
2. Fair Competition
o Avoid abusing dominant market positions or restricting competition.
3. Transparency for Tax Purposes
o Provide complete information to host country tax authorities.
4. Employee Considerations
o Consult employee representatives on major operational changes.
o Avoid discrimination and provide fair working conditions.
5. Balance of Payments
o Consider the host country’s external economic objectives in decision-making.
6. Public Disclosure
o Regularly report financial and operational information.
o Host countries retain the right to nationalize foreign assets with proper compensation.

1. Examine the pros and cons of the growth of the multinational corporation.

2. Discuss the role of MNCs in the global economic integration.

3. Discuss the role of MNCs in developing countries.

4. Analyse the reasons for the growing dominance of the MNCs.

5. Explain the organisational characteristics of multinational, global,

international and transnational corporations.

6. Write notes on the following. (a) Meaning of multinational corporation

(b) MNCs and international trade

(c) Investment motives and patterns of MNCs

(d) Code of conduct for MNCs.

1. Pros and Cons of the Growth of Multinational Corporations

(MNCs)
Pros / Benefits

1. Economic Growth and Investment

o MNCs increase investment levels in host countries, generating income, employment, and
industrial development.
2. Technology Transfer
o Facilitate transfer of advanced technologies, modern production techniques, and management
practices.
3. Managerial Development
o Introduce professional management, training, and innovative corporate strategies.
4. Export Promotion and Trade Benefits
o Boost exports of host countries and reduce import dependency.
5. Global Integration
o Help integrate national economies with global markets.
 6. Research & Development
o Large resources allow MNCs to conduct R&D, promoting innovation.
7. Support Domestic Enterprises
o Encourage local suppliers and stimulate competition, breaking domestic monopolies.

Cons / Problems

1. Technology Mismatch
o Imported technology may not suit local needs, resources, or market size.
2. National Interests
o MNCs can influence or undermine economic autonomy and policy decisions.
3. Monopoly Power
o May dominate markets, limiting competition in host countries.
4. Political Risks
o Could interfere in politics, support corrupt regimes, or destabilize governments.
5. Employment Impact
o Might reduce employment growth in the home country and focus labor-intensive jobs elsewhere.
6. Environmental Issues
o Can exploit natural resources, pollute, and ignore environmental regulations.
7. Profit Repatriation / Transfer Pricing
o Shift profits to low-tax countries, evading local taxation.
8. Cultural Influence
o Can undermine local traditions, promote consumerism, and introduce harmful products.

2. Role of MNCs in Global Economic Integration

1. Trade Expansion
o MNCs account for a large portion of world trade and intra-firm transactions.
2. Investment Networks
o Establish international production systems and connect multiple countries through FDI.
3. Technology Diffusion
o Spread advanced technology and management practices globally.
4. Market Efficiency
o Equalize factor costs and resources across countries.
5. Standardization and Integration
o Integrate national economies with global supply chains and international business norms.

3. Role of MNCs in Developing Countries

1. Investment and Employment
o Provide capital, create jobs, and increase GDP.
2. Technology and Skills Transfer
o Bring in modern machinery, production processes, and managerial expertise.
3. Export Development
o Facilitate participation in global trade and foreign exchange earnings.
4. Stimulation of Domestic Firms
o Encourage domestic suppliers and create local business opportunities.
5. Economic Modernization
o Introduce efficient business practices and global management standards.
Limitations / Risks

 MNCs may prioritize global profits over local development, exploit resources, or negatively impact
domestic industries.

4. Reasons for the Growing Dominance of MNCs

1. Economic Clout
o Annual turnover of MNCs often exceeds the GNI of many countries.
2. Global Liberalization
o Reduced trade barriers and deregulation facilitate international expansion.
3. Technological Advantage
o Ability to innovate and implement advanced technology worldwide.
4. Scale and Efficiency
o Economies of scale, R&D, and centralized management allow global competitiveness.
5. Integration of Production Systems
o Efficient movement of goods, capital, people, and information across borders.
6. Strategic Expansion
o Growth through mergers, acquisitions, and strategic alliances enhances market control.

6.

(b) MNCs and International Trade

 MNCs are major players in global trade, linking home and host countries.
 Trade contributions:
1. Foreign affiliates’ sales often exceed total world exports.
2. Facilitate intra-firm trade, such as transfer of goods, services, technology, and capital between
parent and subsidiaries.
3. Help countries increase exports and reduce import dependence.
 Export intensity:

o Percentage of exports to total sales varies by country:

 Developed countries: ~40% for US MNC affiliates.
 Developing countries: lower in India, higher in China (>50%).
 Other trade effects:
o Intra-company transactions can involve transfer pricing, sometimes affecting taxation and
balance-of-payments.
o Promote standardization of products and integration of global markets.

(c) Investment Motives and Patterns of MNCs

 Investment Motives:
1. Market Seeking: Access new consumers and expand market share.
2. Resource Seeking: Secure raw materials, labor, and energy resources.
 3. Efficiency Seeking: Reduce production costs through economies of scale or cheaper labor.
4. Strategic Asset Seeking: Acquire technology, patents, or brand recognition.
5. Risk Diversification: Spread operations to multiple countries to reduce political, economic, or
market risks.
 Investment Patterns:
1. Greenfield Investment: Establishing new plants or facilities abroad.
2. Mergers and Acquisitions (M&A): Buying or merging with existing foreign companies.
3. Joint Ventures: Collaborating with local firms to share resources and risks.
4. Strategic Alliances: Partnerships for research, marketing, or technology sharing.
 Trends:

o Increasing investment in services, e.g., banking, telecommunications, and finance.

o Developing countries (e.g., India, China) are seeing a rise in inward FDI.
o MNCs focus on core businesses, divesting non-core operations to improve efficiency.