Impact , Merits and demerits of Multinational Companies



Multinational companies/corporations are giant firms with their headquarters located in one country, and their business operations in several other countries.

These are also called as Transnational Corporations with their area of business crossing the territorial limits of the country in which they were originally started. During pre-colonial days the East India Company, the Royal African Co. and Hud­son's Bay Co. were such multinational companies which crossed the limits of their home land to search for new markets and secure raw materials for their factories. They helped in the rise of new economic and political order and the rise of colonialism in the world.

During the post-Second World War period majority of these colonies became free and started self-governance. During this period the United States emerged as the industrial giant in the world. Its
multinational companies expanded their domain and started exporting capital in the form of direct foreign investment. So much so that the United States has become more of a foreign investor than the exporter of domestic manufactured goods. Supporters of this policy view this new development a mechanism for the transfer of industrial technology to the develop­ing countries.

On the other hand critics interpret it as a clever move by the advanced nations to capture the economy of the developing nations with a view to gain control over important areas of organised pro­duction. Some political analysts view these multina­tionals as an instrument for establishing neo-colonialism.

Impact of Multinationals

At the time of Independence, most of our industries were concerned with consumer goods. Barring two steel plants, we had hardly any capital goods or intermediate goods industries. Today the industrial scene is dominated by petroleum refining, chemicals and pharmaceuticals, light and heavy engineering, steel, man-made fiber manufacture and several other industries.

These industries would not have come into existence but for the technical know- how and skills obtained from abroad. The gain is not merely in terms of physical output, but in the training of technicians and developing the skills of modern management.

In an interesting study on "the impact of foreign subsidiaries on India's balance of payments" for the year 1975-76 covering 133 companies (total 171) operating in India Dr. S.K. Goyal has drawn out following conclusions:

(i) Majority of foreign subsidiaries operating in India either belong to the U.K. (68%) or the U.S.A. (15%).

(ii) Most of the foreign subsidiaries have raised financial resources from within India, and the transfer of capital from the parent company has been marginal.

(iii) Nearly all the branches and subsidiaries of foreign companies have accepted the Indianization scheme and a large number of them have already taken measures to reduce the degree of foreign shareholding.

(iv) A number of foreign companies in India are acquiring the character of multi-product and multi-industry enterprises. For instance, the Impe­rial (now Indian) Tobacco Company (ITC) has re­cently diversified its activities to hotel industry constructing a chain of hotels all over India.

(v) The assumption that the entry of Transnational Corporation (TNCs) would ensure transfer of sophisticated technology to developing countries has not been found valid in practice.

Merits and Demerits

These include transfer of obsolete technol­ogy, heavy remittances abroad, adverse effect on the balance of payments, myth of Indianisation, damage to indigenous industries etc. According to a study the ESSO has taken away Rs.83 crores in 1968-70 j against the invested capital of Rs.30 crores. The plan of Indianisation is simply a myth because the parent company has the absolute power to appoint the Chairman and the Managing Director. Also due to rebate in the tax it is the government who bears the brunt of Indianisation and not the multinationals.

On the basis of RBI data about the profitabil­ity of 537 foreign controlled companies, it was revealed that average rate of profit was 23.8 percent in 1972-93. This is a huge profit.

Hence, there is a need for the optimisation of the benefit from foreign collaborations, keeping the foreign exchange burden at the minimum possible level. Such subsidiaries generally try to proliferate in non-essential consumption industries. These at­tempts on the part of multinationals should be re­sisted. There is a need for screening the areas in which foreign collaborations have completed their task of transfer of technology. Such industries should be completely Indianised, both in terms of manage­ment and control.