Essay: The role of multinational corporations in India

Introduction
The modern world is developing very speedily. What currently one of the main issues in the society and government of fast-growing regions is the emergence of new multinational enterprises, its domestic impact on the country where subsidiary companies are supposed to be allocated and its potential consequences of operation on the economic perspective of the host country. One of the examples of fast-developing region is, for sure, South Asia. To be precise, the case of India will be examined in this work. In recent years an increasing tendency of decisions of big corporations (especially American, British and Japanese multinational corporations) to establish their subsidiary firms and companies outside its home country’s foundation has been observed.
A big amount of scientific researches clearly show that there are a lot of macroeconomic and social problems in South-Asia region that influences on prosperity of the nation such as a huge unemployment or recent economic downturn, for instance; as well as social problems such as racial discrimination including gender’s inequality and people’s expectation of high wages or need of welfare payments. The role of MNC, from the government point of view, is that subsidiary companies helps to tackle with problems of development described above by investing new money into the circulation of domestic economy of particular country and organizing new workplaces for domestic workers. Such process of investments called ‘Foreign Direct Investment’ (FDI); in a narrow sense, it is a procedure of investing money into production of subsidiary company for consecutive building new facilities; Furthermore, flows of real capital through FDI increase the money supply of a country in which it is invested. As a result of huge FDI, the economy receives a solid base for consecutive economic growth in terms of Gross Domestic Product (GDP) and sequential development of the region.
Many economists consider particular investments to be the most safest one of the proper shape of external finance for developing countries such as India or China due to the fact that they do not involve a considerable risk and have unlimited liability. Indian case of development is considered from the prospective of vast inflows of FDI that accounts approximately above $44.6 billion in 2012 according to the World Bank Statistics. It is supposed that a big amount of subsidiaries companies of MNC attract more and more FDI that will definitely support to boost up production of outputs, the level of GDP and to increase the economic growth rate not only for India, but also for the whole south-Asia region due to engagement of India in international trade.
Moreover, Indian’s membership of the World Trade Organization apparently demonstrate a lot of advantages that Indians currently experiences: Despite the recent negative impact of the crisis, India still receives a large inflow of investments due to firstly, stability in external economic relationships that leads to getting more stable access to foreign market, secondly, that many consumers wish to use India as its own export platform. Who knows whether India will become the next world biggest exporter after China’s success or not? India also abolishes non tariff barriers and quotas regularly, reduce tariffs and open up its service sectors, which means India liberalizes its regime and create more conducive environment for trade and foreign investment. Investors are not afraid of investing into India indeed. They are pretty sure that foreign markets will be available to them on a continuing basis. Sharp economic growth, structural change played the main role in driving the changes in comparative advantage of India and hence, in the overall economic growth of the country.
Theoretical concept:
Multinational Corporations
Multinational Corporation may be defined as a company, which operates in number of countries and has production or provide services outside the country of its origin. In economic context, it is also called as transnational corporations (TNC). MNC show both negative and positive impact on the economy of the host country. India became a home for a huge amount of subsidiary companies since it started procedure of liberalization. The majority of subsidiary company in India was established by US transnational corporations and they account approximately 38% of turnover of first 22 subsidiary companies that operate in India, the rest is European. MNC play a significant role in globalization and international affairs associated with the global market. MNC has a considerable impact on the host country’s economy as well as the world economy. The turnover of some MNC is extremely high so that it may exceed the GDP of small countries.
What are the reasons of increase in the amount of new multinational corporations? New economic terms such as ‘off-shoring’ and ‘outsourcing’ has recently appeared to show that it is no longer something extraordinary and clearly describing reasons why it is happening on regular basis. The bound between two terms is totally blurred; however, it is easily to be defined: outsourcing implies the purchase goods or subcontract services from an external organization of another country, while off-shoring is procedure of getting work done in another country. Therefore, MNC seem to follow the idea of cost-minimization and profit-maximization more frequently, through process of outsourcing, at the expense of usage of cheap labor of another country, highly-qualified, reliable workers or even workers with specialized skills. Moreover, disposition of input-sources are also taken into criteria of outsourcing as it reduces the cost of transportation and as a result, decrease the cost of production. Another strategy of MNC is off-shoring that is more broad term. The company offshore if they need to have their production getting done much faster through the global talent pool. It helps to lower the cost of goods or services and more easily to hire skilled workers for lesser expanses on wages. Basically, both processes are used on practice in fast-developing countries by MNC.
Impact of multinational companies and its investment on the host country
It is quite obvious that disposition of subsidiary company in the host developing country provides the region with a renewed financial foundation for further social and economic growth. Nevertheless, the host country may undergo through the sophisticated period of dramatic decrease of codes of ethical conduct induced by establishment of a big amount of subsidiary companies. Basically, codes of ethical conduct are involved to operate the demand of developing nation, rather than ensure marginal assistance of economic and social evolution. To attract the foreign investments into country, government frequently offer additional impulses to work on their market or to use their territory as an export platform by providing procedure of subsidies under easy conditions or naturally reduces taxes for multinational subsidiary’s enterprises. As a result, the companies constantly enhance the amount of investments and the host country operates within new capital that is being accumulated through the time. The main advantages and disadvantages of MNC and the impact of FDI must be appropriately identified in order to avoid economic and social misunderstandings.
Advantages
From the financial perspective, the most significant favor is the new capital that ??an be rendered inside the country. The deficit of balance of payment can be reduced or even removed due to inflow of new capital. New enterprises constantly raise inward investments and if the government is capable to fill savings or inflationary gap with the foreign investments, it may achieve its target of economic growth. Trade balance is also changing; the country that was the biggest importer can probably become the biggest exporter in a short run. Moreover, as a consequence of capital inflow, the country receives import substitution and also getting their export promoted. Money that is collected from taxes that are paid by MNC will be one of the valuable sources of tax revenue for the local government.
Secondly, subsidiary company provides new work places and opportunities (rarely, professional trainings) to the host country’s employees, which mean that the government can tackle with the problem of unemployment more easily. Thence, the government oftentimes attracts companies to locate their subsidiary in a place where the substantial labor supply is resided in order to make employees being locally recruited.
Thirdly, new technologies and renewed methods of production appear regularly due to the fact that multinational corporations transfer a new assets, entrepreneurial knowledge and management experience into the host country. It also means that employees will be trained to work with new technologies and the local companies will see the benefits. Moreover, multinationals in the host country create a competitive environment on the domestic market; hence, domestic traders and market intermediaries increase their business activities. Multinational corporations may also manufacture for domestic market, thus, people may get goods and services at a price that is much lower than it is established on imported one, while the variety of goods also increases.
Finally, the last benefit is reputation of the host country. If subsidiary company of one of biggest MNC already exists in the country, the host country’s market will definitely be in demand by a wide audience of other MNC as they may start following the idea of setting-up their subsidiaries there.
Disadvantages
Threats and disadvantages of MNC to the host country must also be properly analyzed. First of all, multinationals do not take into consideration environmental problems obviously because they only follow the aim to minimize the cost of production and to increase their efficiency
Secondly, the government policies are more likely to be enslaved by MNC due to their economic power, which lead the country to the wrong course of control inauspicious to development. MNC are provided with a wide range of indulgences from the side of the government, for instance, low taxes, excessive protection, subsidized inputs.
Thirdly, sometimes, when the country has a lot of significant resources, MNC invest into country for the purpose of getting access to RAW-materials, as a result of it; it may cause depletion of the resources.
Finally, MNC may potentially monopolize the host country’s market and impose a menace to the sovereignty of host country in economic and social spheres. Moreover, it may also occur in the long-run, when impact of investment may reduce foreign exchange earnings on the current account.
Impact of multinational corporations on Indian economy:
Multinational Corporations in India
The world economy accounts roughly 40,000 MNCs performing on the global market; the full list of MNCs keeps around a quarter of the world economic performance, which counts approximately 29% in terms of GDP. Inflows of FDI crossed $1.6 trillion in 2012, with over than $500 billion reported as mergers and acquisitions. There are a lot of reasons why MNC decided to ‘invade’ into India. The main reason that Indian market develops unbelievably fast; India has recently become one of the fastest growing economies in the world.
The population of India is tremendous accounting more than 1billion of people with a quite a small level of density (approximately 377.8/km). It means that there are different types of consumer’s taste that can be satisfied by the Indian market with a wide range of new products and services provided by multinationals.
Since the beginning of the 1980s, the history of the foundation of Indian multinationals companies and tendencies that describe their later enhancement started being explored by researchers. Investigators agreed that the procedure of evolution of corporations in India more fully and accurately describes the concept of planning. The term from 1960 to 1990 depicts the first stage of development of Indian MNCs and the second stage is determined by the period from 1990 to the present day. Over the years the process of exporting FDI made by MNCs from India, has incurred divers changes in domestic economy of India. Amendments in Indian economy is frequently considered to be emanated from 1990 when India finally arrived at a decision to liberalize its regime and to change its restrictive policy concerning FDI to conservative one that currently shows enhancement on the Indian investment climate. These amendments have influenced on all aspects of the activities of MNCs, including structural and geographical distribution of their investment, the sundry shapes of ownership and business activities over and above the impulses for further globalization and internationalization of Indian companies and potential ways to attain their aims. Briefly, MNCs show an interest in investing in Indian market, while government attempts to liberalize many of its polices to attract a foreign capital by providing subsidies, reducing taxes and creating more loyal laws for MNCs.
The new stage of the development of Indian multinationals took place in 1990s when an increase in the amount of MNCs has been observed. Multinationals became an opportunity to compete with successful companies from developed countries. This time is specified by a considerable increase in FDI made by Indian multinationals. The total number of companies producing the exported goods has increased from roughly 140 in 1990 to approximately 2200 at the end of 2009. The total volume of Indian FDI hit 111.3 billion dollars in 2011. Nowadays, the majority of MNCs consider the region of India as the platform for consecutive establishment of a new subsidiary company as it became popular region among the wide audience of other corporations in the era of economic globalization.
The second stage of the enhancement represents a true agiotage of investment climate of Indian MNCs and extra attempts to achieve technological independence of Indian companies. MNCs in India very quickly managed the basic tools of the global market and successfully implemented in their activities applying the opened cross-border business opportunities in international trade engagement. Subsidiaries are being established In different sectors of the Indian economy corporation with a higher level of competitive advantage, based on the use of modern technology, skills, interest management dilemmas as well as high product quality and scale of production. Moreover, corporations are beginning to invest abroad to ensure their access to sources of RAW-materials and natural resources (gas, oil, copper, aluminum and steel).
The biggest structural acquisitions of India
Liberalization of Indian policies concerning FDI, including measures of the provision of automatic permission for the export of capital and permit raising funds for acquisitions abroad, gave new impulses to the expansion of operations of Indian companies.
If we consider the sectoral structure of acquisitions, there is a major role played by MNCs from high-tech industries such as IT and pharmaceuticals. The share of IT-companies accounted for 56% of all acquisitions in the last decade, the share of pharmaceuticals – 10%. Now let’s take a look at the 3 largest corporate acquisitions in the history of Indian economy that are not inferior to any leading MNCs in terms of volume, nor according to their significance:
The largest acquisition is a transaction between the Indian company Tata Steel and Corus British in 2006. Transaction capacity was estimated to be an incredible sum that accounted $ 13 billion. Tata Steel is the second largest steel producer in India and one of the market leaders.
On the second place is acquirement of Bharti Airteil – the largest provider of mobile and tele-communications in India. In 2010 the company acquired the African provider Zain Africa for $ 10.7 billion, hereby, increasing the number of its customers to approximately 180 million people.
3) The third place is hold by the absorption of Canadian company Novelis by Indian aluminum producer Hindalco Industries in 2007. This acquisition appraised to Indian investors around $ 6 billion.
Statistics of these particular acquisitions involving Indian capital once again proves that Indian MNCs successfully boost up its investment activities and becoming important trader on the world market.
Impact of foreign direct investment (FDI) on India
Despite the fact that the investment activity of multinational corporations in India are considerably lower than in developing countries such as China or Russia, Indian companies continue to expand rapidly in the global economy, using modern tools and strategies for internationalization. Due to the fact that the formation and subsequent development of Indian MNCs happened in quite specific conditions dictated by national treatment and domestic policy, they are characterized by some of the features that will be discussed in detail below.