Multinational Companies (MNCs) are also known as Transnational Corporations (TNCs).
There is, however, according to some, a difference between the MNCs and the TNCs. According to some experts, MNCs produce commodities/products for domestic consumption of the countries in which they operate. The TNCs, on the other hand, concentrate on producing products/commodities to meet the markets of third countries. This difference is not normally made while referring to either MNCs or TNCs. Therefore, an MNC can also be called TNC. In this paper we refer to these international companies as MNCs.
It is important to understand the nature of these companies, and their main features before undertaking any detailed discussion of their culture in the context of host countries in which they operate. For the purpose of this paper an MNC has been defined as one which has its producing and trading activities in a number of countries and which has a central organization regulating the activities of its units, across national frontiers, with specific global objectives.
It may be added here that recently some MNCs have decentralized their decision-making. Some large MNCs with a wide variety of products operating in a large number of countries are organizing their subsidiaries, branches and affiliates on the basis of regional and product based profit centers. This, however, has not radically altered the importance of central decision making in the concerned MNCs. The final decisions on a number of issues of vital importance in such situation still rests with the center i.e the parent organization.
It is important in this context to also refer to the recent debate whether MNCs are losing their national character, that is, the parent company does not belong to a country. For, it is argued by some that the parent company sheds its national character and becomes a global one because the ownership of the company is diverse since a large number of share holders belonging to various countries own the equity shares and multinational banks of various countries finance their operations. Moreover, even the boards of directors of the parent companies have different nationals as their member. It is, therefore, argued that there is no such thing as USA’s MNCs, Japan’s MNSs and the UK’s MNCs etc.
However, the evidence goes against this understanding. It has been found that MNC do retain their national character, because of two important reasons: First, the critical level of ownership of equity shares is still with the original parent. The overwhelming majority of directors on the Board are nationals of the country of origin of the parent company. It is therefore vital to recognize that these companies still retain their national character. Hence even now we have what we can describe as USE’s MNCs, UK’s MNCs and Japan’s MNCs.
It is also important to clarity in this context what one means when one talks of MNC’s culture and the host country. In this paper in MNC’s culture has been totally identified with its corporate objectives, management practices and procedures. A host country is an independent nation state where an MNC has established its business operations through either subsidiaries or branches and affiliates. It is also important here to make a distinction between a developed host country and a developing host country. All the countries of the organization for Economic Cooperation and Development (OECD) are treated as developed host countries and countries treated by the UN as developing countries are treated as developing host countries in this unit. The latter include countries in Asia, Africa and Latin America, excluding of course members of the OECD such as Japan.
The corporate objectives, management practices and procedures of MNCs will differ from country to country. For instance, corporate objectives, management practices and procedures of MNCs from the US differ from those from Japan and Germany. The fact, however, remains that despite a number of variations, MNCs of all Major developed countries possess some common elements which cannot be lost sight of. This understanding will help us to generalise about their business culture.
The main features can be classified as follows:
• MNCs are normally very large in size as measured by the value of their total sales. The average MNC has billions of US dollars as its total sales value which is often equivalent to ormore than the national income of one, two or three large developing countries. In fact, it has been said that such companies form a ‘billion dollar club’. In the eighties, however, there has been growth of small and medium-sized companies which have become MNCs. For instance, 58.4 per cent of all MNCs from Canada, 23 per cent from Japan, 78 per cent from the UK, 43.3 per cent from the USA and 80 per cent from France are small and medium-sized MNCs. No doubt there is a threshold – a certain minimum size which is required for affirm to become an MNC.
• Many MNCs depend more on their foreign sales than on domestic sales. There has been a steady growth of the share of foreign sales to total sales (Table)
• The strength of MNCs lies in the fact that they operate in many product lines. Occasionally, we do have MNCs such as automobile giants and the IBM which have confined to a narrow line of products. But such cases are exceptions. Diversification into various product lines was earlier confined to the MNCs from the US in the sixties and early seventies. But now MNCs of all counties have accepted product diversification as a corporate objective (Table)
• MNCs often preside over a broad range of products with vastly different technical and strategic requirements. This range adds to the complexity of managers’ problems. While one line of business may be pressed hard by competition, another may be discovering newer and greener pastures. While some of the activities of MNCs make great demands as the resource of the network, others may be providing supply of funds. This diversity provides MNCs with extraordinary flexibility in managing their corporations globally.
• The MNCs have yet another advantage, their geographical diversity. When an enterprise takes its first plunge into foreign waters, it normally moves with some caution. Once committed to the international pattern, MNCs expand their geographical reach with great rapidity. This applies to MNCs were operating in 170 countries and the Europe-based companies in more than 114 countries (Table)
• Most of the MNCs have great strength in the realm of technology. They spend billions of dollars on research and development. They also possess management and marketing technologies.
Now, we shall discuss the issues related with the MNCs culture and host countries.
Source: UNCTC, Transnationals Corporations in World Development Trends and Prospects (U.N., N.Y., 1988), p.36.
Source: Raymond Vernon, Storm over the Multinationals: The Issues (Macmillan, London, 1977).
MNCs AND HOST COUNTRIES’ GOVERNMENT POLICIES
One of the most important areas of debate has been the MNCs and host government policies. The objectives of MNCs and host countries’ governments have a number of areas where conflict may occur. First, whose jurisdiction have the MNCs to accept in the event of conflicts between the host country and the home country of the MNCs. There are a number of cases where the MNCs have asserted the home government’s rights. This had led to conflict among all the three – the MNC, the host government and the home government.
Host government policies may encourage or discourage MNCs. What policies host government would follow are linked directly with the business objectives and culture of the MNCs.
In the present context, the developed host countries have broadly similar policies that provide relatively free operation of MNCs in their economies. This can be seen in the expansion of foreign direct investment made by the MNCs largely in developed countries with the US receiving nearly 40 per cent of foreign direct investment mainly by the MNCs.
The emergence of ‘Europe 1992’ has specific policy orientations to encourage MNCs’ operations in European Community. Even Japan is liberalizing. The Great Shift has taken place in developing host countries. A large number of developing countries are using their policies to attract MNCs. Before analyzing the policy shifts it is useful to identify various elements of developing host countries’ policies towards MNCs which ere in the center of the debate in the eighties. It has often been argued that developing countries which have selective foreign direct investment (FDI) and transfer of technology policies create disincentives to MNCs. The selective policies may be manifested in one or more of the following:
• Treatment of MNCs under the laws of the country which may deprive them of national or equal treatment;
• Administrative rules and regulations governing MNCs’ ventures may result in a high degree of discretion and lack of transparency in decision making;
• Imposition of management and labour policies;
• Imposition of management and labour policies;
• Equity restrictions;
• Lack of continuity or uncertainty of FDI and technology collaboration policies; and
• Threat of nationalization and expropriation and limitations set on remittances of profits and capital.
Many developing countries in the eighties have made a large number of policy changes to attract MNCs. A few chief elements have been highlighted in the following pages.
Many African states have enacted “Investment Codes” designed to promote both domestic and foreign investment. Such usually provide for the grant of certain general guarantee against expropriation or nationalization without fair compensation and non-discriminatory treatment and repatriation of capital and profits. A number of African countries have established investment coordination agencies with a view to promoting investment by TNCs.
It is notable that African socialist countries also appear to be moving, albeit in a manner best suited to their specificities, in the general direction of acceptance of FDI from MNCs.
In Asia severalcountries have amended to varying extents their foreign investment policies. South Korea which had a rather restrictive foreign investment policy had liberalized by streamlining and simplifying procedures. A foreign investor who does not seek majority ownership seeks no concessions and in fact has less than $ 1 million investment, gets automatic approval. Service sectors are getting open to MNCs.
Malaysia has postponed the condition requiring participation of Bhumiputras in the equity of foreign ventures. China has also permitted foreign investors and MNCs and simplified procedures and thus emerged as the largest recipient of foreign direct investment. Within seven years of opening its door to foreign investors, China has become one of the largest recipients of foreign direct investment. Among all developing countries China was earlier particularly interested in acquiring advanced technology, management skills and international distribution channels. Between 1979 andmid-1987, the cumulative inflows of FDI to China amounted to about $ 9 billion. Approved investment projects over this period totaled nearly $ 20 billion. It is important to recognize the 2/3rds of the investment has been in the service sector. Since 1986 however, due to certain difficulties, FDI flows to China have, however, declined.
Even the Middle Eastern Countries have liberalized the codes concerning foreign direct investment. The Algerian code strikingly illustrates the trend towards liberalization, primarily because it amends an earlier law that was considerably more restrictive. While equity participation is still subject to restrictive clauses other procedures and restrictions have been relaxed.
The most dramatic changes have taken place in the FDI laws in the Latin American countries. These countries, especially the Andean group of countries, Brazil, and Chile had predominance of control rather than encouragement in their FDI policies. They have effected a number of changes in their laws and policies. For example, Columbia, a member of the Andean group, acting within its basic provision of Decision 24, raised the ceiling of profit remittances.
It is important to recognize that some developing countries had nationalized MNCs’ subsidiaries in their countries. This measure was taken as a last resort when the conflicts arose with MNCs. The approach of developing countries to the nationalization issue is an indication of the change that has taken in the attitude of the developing countries to MNCs. It is significant that while during the period 1970-75 nearly 336 companies in developing countries were nationalized, accounting for 58.5 per cent of the total nationalizations, during the period 1980–85 only 15 companies 2.6 per cent of the total were nationalized.
Apart from relaxation of foreign direct investment policies, a large number of developing countries have entered into bilateral investment treaties. The developed countries in a bid to secure assurance for the protection of investments originating from their respective home countries have sought to negotiate these agreements which provide security to their MNCs . On the other hand, the developing countries, faced with a number of difficulties onforeign exchange account, have themselves resorted to bilateral investment measures.
Some 100 bilateral investment treaties have been concluded since 1980 bringing the total number of these agreements to approximately 270. Majority of these countries are in Africa and South-East Asia. Latin American countries have not concluded such agreements.
These agreements cover issues such as fair and equitable treatment, national treatment and most favoured nation treatment, nationalization/expropriation modalities of compensation and dispute settlement.
At the multilateral level, efforts are being made to assure protection to MNCs. An important endeavour has been the Multilateral Investment Guarantee Agency (MIGA), a new member of the World Bank group which has a specialized mandate to encourage equity investment and other direct investment flows to developing countries through the mitigation of non-commercial investment barriers especially political risks. To carry out this mandate the MIGA offers investment guarantees against non-commercial risks. A large number of developing countries including India have become its members.
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