INTRODUCTION OF MNC’S:

Generally, any company or group that derives a quarter of its revenue from operations

outside of its home country is considered a multinational corporation.

MNC must have substantial direct investment in foreign countries

MNC must be engaged in the active management of these overseas assets

MNC is also involved in the management integration of operations located in

different countries

It is a corporation/business or entity/enterprise that manages production

establishments or delivers services in at least two countries. MNC’S is an enterprise

that manage production or delivers services more than one country can also be

referred to as international corporation. The term ‘Multinational’ is widely used all

over the world to denote large companies having vast financial, managerial and

marketing resources. MNCs are like holding companies having its head office in one

country and business activities spread within the country of origin and other countries.

Multinational corporations play an important role in globalization some argue that a

new form of MNC is evolving in response to globalization the 'globally integrated

enterprise.

First MNC was Dutch East India Co (1602), granted monopoly in colonial trade.

Today, UN estimates about 62,000 MNCs with 900,000 affiliates. MNC’s have

existed since 1602, in which year the first MNC, the Dutch East India Company, was

established.

Germany, Belgium and Finland that have made a strong footing in India too. They are

well flourishing and earning their share of maximum profit too.

An MNC (Multinational Corporation) is a corporation that has its management

headquarters in one country, known as the home country, and operates in several

other countries, known as host countries.

As the name implies, a multinational corporation is a business concern with

operations in more than one country. These operations outside the company's home

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country may be linked to the parent by merger, operated as subsidiaries, or have

considerable autonomy. Multinational corporations are sometimes perceived as large,

utilitarian enterprises with little or no regard for the social and economic well-being

of the countries in which they operate, but the reality of their situation is more

complicated.

When a company operates in a home nation established its subsidiary in other nation

it becomes an MNC and there starts the process of globalization where in a local

company serves the entire worlds with its products and services. India has

experienced a dramatic increase in the presence of Multinational Corporation having a

tremendous expansion in the amount of foreign direct investment inflows to the

Indian economy. Internet tools like Google, Yahoo, MSN, E-Bay, Skype, and

Amazon make it easier for the MNCs to reach their potential customers in the country

There are over 40,000 multinational corporations currently operating in the global

economy, in addition to approximately 250,000 overseas affiliates running cross-

continental businesses. In 1995, the top 200 multinational corporations had combined

sales of $7.1 trillion, which is equivalent to 28.3 per cent of the world's gross

domestic product. The top multinational corporations are headquartered in the

United States, Western Europe, and Japan; they have the capacity to shape global

trade, production, and financial transactions. Multinational corporations are viewed by

many as favouring their home operations when making difficult economic decisions,

but this tendency is declining as companies are forced to respond to increasing global

competition.

The modern multinational corporation is not necessarily headquartered in a wealthy

nation. Many countries that were recently classified as part of the developing world,

including Brazil, Taiwan, Kuwait, and Venezuela, are now home to large

multinational concerns. The days of corporate colonization seem to be nearing an end.

IBM computer and Pepsi-Cola from U.S.A., Siemens from Germany, Sony and

Honda from Japan Philips from Holland etc., are some of the MNCs operating at

international levels.

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Introduction Since 1991, India has experienced a dramatic increase in the presence of

Multinational Corporation (MNCs), and with it, a tremendous expansion in the

amount of FOREIGN DIRECT INVESTMENT inflows to the Indian economy.

DEFINITION:

According to ILO report (i.e. International Labour Organisation) “The essential

nature of the multinational enterprises lies in the fact that its managerial headquarters

are located in one country, while the enterprise carries out operations in number of

other countries’.

According to Prof. John H. Dunning, "A multinational enterprise is one which

undertakes foreign direct investment, i.e., which owns or controls income gathering

assets in more than one country; and in so doing produces goods or services outside

its country of origin, i.e., engages in international production."

MNCS will have a demand for many services such as meals, transport, raw materials,

maintenance services that will be provided by domestic businesses, indirectly

increasing employment. Wages should increase as MNC’S will want the best people

that the country has to offer.

Wages may be lower on international standards but should be higher than the local

standard, as logically the business will pay its workers more in order to motivate

them. Often MNC’S are criticised for their wage policies but recent research and

statistics prove this wrong.

There are four categories of multinational corporations:

(1) A multinational, decentralized corporation with strong home country presence,

(2) A global, centralized corporation that acquires cost advantage through centralized

production wherever cheaper resources are available,

(3) AN international company that builds on the parent corporation's technology or

R&D,

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(4) A transnational enterprise that combines the previous three approaches. According

to UN data, some 35,000 companies have direct investment in foreign countries, and

the largest 100 of them control about 40 per cent of world trade.

The MNC: The Internalization Process

Foreign involvement

export via agent or distributor

export through sales rep or subsidiary

Local packaging or assembly

FDI

License

Time

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CHARACTERISTICS OF MNC’S

Following are the some of the important features/characteristics of MNCs: 

1. Area of Operation: The MNCs operate in many countries with multiple products

on large scale. A MNC may operate both manufacturing and marketing activities in a

number of countries. Some MNCs operate in several countries, whereas, others may

operate in a few countries. Mostly MNCs from developed countries dominate in the

world markets.

2. Origin: The development of MNCs dates back to several centuries, but their real

growth started after the Second World War Majority of the MNCs are from developed

countries like U.S.A, Japan, UK, Germany and European countries. In recent years

MNCs from countries like Korea, Taiwan, India, China, etc. are operating in the

world markets.

3. Comprehensive term: In general, the term ‘MNC’ is a Comprehensive term and

includes international and transnational corporations. The term global corporation is

also included in the list of ‘MNC’.

4. Profit motive: MNCs are profit oriented rather than social oriented. Such

corporations do not take much interest in the social welfare activities of the host

country.

5. Management: The Parent company works like a holding company. The subsidiary

companies are to operate under control and guidance of parent company. The

subsidiaries functions as per the policies and directions of parent organisation.

6. Manufacture and marketing activities: MNCs undertake both Manufacturing and

Marketing Activities and they are predominantly engaged in hi-tech and consumer

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goods industries. Majority of the MNCs are engaged in pharmaceutical,

petrochemicals, engineering, consumer goods, etc.

7. Quality consciousness: MNCs are quality and cost conscious and managed by

professionals and experts. They have their own organisation culture and systems.

MNCs believe in the concept of total quality management.

8. Branding strategies of mncs in international markets: In today’s global

marketplace, MNCs need to set up effective branding strategies in order to be

competitive. Depending on the structure of the company and the products offered,

MNCs can use different strategies.

9. Their main aim is to obtain the HIGHEST POSSIBLE PROFIT

10. They invest LARGE SUMS OF MONEY

11. THEY AID LOCAL COMPANIES &attain their benefits

12. They operate in more than one country at the same time

13. Big size

14. Huge intellectual capital

15. Operates in many countries

16. Large number of customer

17. Large number of competitors

18. Structured way of decision making

19. Single managerial authority control

20. Worldwide integration, better profitability

21. Global perspective

22. Close coordination in parents & affiliates

23. Worldwide market

OBJECTIVE of MNC’S

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To expand the business beyond the boundaries of the home country.

Minimize cost of production, especially labour cost.

Capture lucrative foreign market against international competitors.

Avail of competitive advantage internationally.

Achieve greater efficiency by producing in local market and then exporting

the products.

Make best use of technological advantages by setting up production

facilities abroad.

Establish an international corporate image

MNC’S STRUCTURE

1. Horizontally integrated multinational corporations: Horizontally

integrated multinational corporations manage production establishments located in

different countries to produce the same or similar products.(example:

McDonald's )

2. Vertically integrated multinational corporations: Vertically integrated

multinational corporations manage production establishment in certain

country/countries to produce products that serve as input to its production

establishments in other country/countries. (example: Adidas )

3. Diversified multinational corporations: Diversified multinational

Corporations do not manage production establishments located in different

countries that are horizontally nor vertically nor straight, nor non-straight

integrated. (example: Hilton Hotels )

ADVANTAGES OF MNCS TO THE HOST COUNTRY:

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Transfer of technology, capital and entrepreneurship.

Increase in the investment level and thus, the income and employment in the

host Country.

Greater availability of products for local consumers.

Increase in exports and decrease in imports.

ADVANTAGES OF MNCS TO THE HOME COUNTRY

Acquisition of raw materials from abroad.

Technology and management expertise acquired from competing in global

markets.

Export of components and finished goods for assembly or distribution in

foreign markets.

Inflow of income from overseas profits, royalties and management contracts.

HOW IS A COMPANY CLASSIFIED AS AN A MNC’S?

Subsidiary in foreign countries

Stakeholders are from different countries.

Operations in a number of countries

High proportion of assets in or/ and revenues from global operations

Multinational Companies in India (MNC)

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About Multinational Companies As the name suggests, any company is referred to as

a multinational company or corporation (M. N. C.) when that company manages its

operation or production or service delivery from more than a single country.

Such a company is even known as international company or corporation. As defined

by I. L. O. or the International Labour Organization, a M. N. C. is one, which has its

operational headquarters based in one country with several other operating branches

in different other countries. The country where the head quarter is located is called the

home country whereas; the other countries with operational branches are called the

host countries. Apart from playing an important role in globalization and international

relations, these multinational companies even have notable influence in a country's

economy as well as the world economy. The budget of some of the M. N. C.s are so

high that at times they even exceed the G. D. P. (Gross Domestic Product) of a

nation. 

These are not the sole prior causes of the Nokia, Vodafone, Fiat, and Ford Motors and

as the list moves on- to flourish in India. As the basic economic data suggest that after

the liberalization in 1991, it has brought in hosts of foreign companies in India and the

share of U.S shows the highest. They account about 37% of the turnover from top 20

companies that function in India.

Why are Multinational Companies in India?

There are a number of reasons why the multinational companies are coming down to

India. India has got a huge market. It has also got one of the fastest growing

economies in the world. Besides, the policy of the government towards FDI has also

played a major role in attracting the multinational companies in India.

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For quite a long time, India had a restrictive policy in terms of foreign direct

investment. As a result, there was lesser number of companies that showed interest in

investing in Indian market. However, the scenario changed during the financial

liberalization of the country, especially after 1991. Government, nowadays, makes

continuous efforts to attract foreign investments by relaxing many of its policies. As a

result, a number of multinational companies have shown interest in Indian market.

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COMPANY PROFILE:

Procter & Gamble Co. (P&G) is an American company based in Cincinnati, Ohio that

manufactures a wide range of consumer goods. In India Proctor & Gamble have two

subsidiaries: P&G Hygiene and Health Care Ltd. and P&G Home Products Ltd. P&G

Hygiene and Health Care Limited is one of India's fastest growing Fast Moving

Consumer Goods Companies with a turnover of more than Rs. 500 crores.

It has in its portfolio famous brands like Vicks & Whisper. P&G Home Products

Limited deals in Fabric Care segment and Hair Care segment. It has in its kitty global

brands such as Ariel and Tide in the Fabric Care segment, and Head & Shoulders,

Pantene, and Rejoice in the Hair Care segment.

Business Growth and Divestitures

Folgers Sale

On June 4, 2008, P&G sold its Folgers coffee unit to J.M. Smucker Co for $2.95

billion. As part of the deal, P&G shareholders will receive a 53.5 percent stake in

Smuckers and the company will assume $350 million of Folger's debt.

Gillette Acquisition

Procter & Gamble acquired Gillette in 2005 for over $50 billion in its largest

acquisition to date. In 2004, the last full year before the acquisition, Gillette generated

over $10 billion in sales, about $6 billion of which came from razors and Duracell and

Braun products and the remainder sourced from the Oral-B brand, which was moved

into the Health & Well-Being segment. A key piece of the acquisition beyond

Gillette's product lines was its distribution network and supply chain. Gillette's

distribution network and supply chain in emerging markets had been extremely

successful for Gillette and, once acquired, has worked to complement P&G's own

distribution network.

Sale of Pharmaceutical Unit

In 2009 P&G sold its pharmaceutical unit to Warner Chilcott Plc for $3.1 billion in

cash. The company expects to book a 43 cent per share earnings boost in Q2 of fiscal

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2010 as a result of the sale. The deal allows P&G to focus on its personal care, beauty,

and household product divisions. In 2006, the company started winding down its

discover-phase pharmaceutical products in favor of licensing late-stage compounds,

and announced in 2008 it would exit the drug industry entirely.

Online Sales

In January 2010, the company announced it would pursue its own online retail store to

sell its consumer products to US end-users, putting it in direct competition with major

retailers in reaching consumers. P&G CEO Bob McDonald said the company could

increase its online sales "substantially" over the next few years. In fiscal 2009, P&G's

existing online sales accounted for $500 million, or 0.6% of total revenue. The

company plans a full scale launch in spring 2010 after a pilot test with 5000

consumers.

Different product price points provide some insulation against recession

Household staples are somewhat protected from the US recession and global

economic downturn. However, in a recession consumers often turn to cheaper private

label or store brands instead of "brand name" products from P&G. To combat private

label encroachment, P&G offers at least two product forms in many product

categories. For example, the company has seen increases sales in Luvs from Pampers

diapers and an increase in Gain detergent sales from Tide. In addition, P&G offers

"Basic" versions of its Charmin toilet paper and Bounty paper towels. The company's

broad offerings, combined with the necessity of household items, provide a degree of

insulation against recession.

Retail Consolidation

The rise of a handful of powerful low-priced retailers has negatively impacted

consumer products companies. A handful of big retailers have captured a large share

of the market. For example, from 1999 to 2004, the top 10 food retailers in the US

increased their share of food retail sales from 53.4% to 58.9%. These large retailers

have shifted the balance of power within the supply chain. For example, the

company's largest customer, Wal-Mart, accounted for 15% of net sales in 2006, 2007,

and 2008. Wal-Mart has exerted its power over other suppliers to their detriment in

the past, such as forcing record companies to produce clean-label CDs and pulling

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adult magazines. A decision by Wal-Mart not to sell a particular P&G consumer

product would prevent P&G from reaching its entire target market. In addition, many

retailers have pushed their own higher margin private label brands in competition with

P&G.

Rise of Private Labels

In the past decade, P&G has faced stiff competition from private label brands or

"store brands" of large retailers such as Wal-Mart, Target, and supermarket chains.

Private label products often sell at lower price points and earn higher margins because

the retailers can control the cost of their production. For example, Wal-Mart offers

5,500 products through its "Great Value" brand, which has increasingly sold as

consumers feel the recession squeeze on their disposable income. From 2003 to 2008,

sales of Target's private label products rose an average of 15% annually.

Large retailers are close to the consumers, have the point of sale data on consumer

behavior and are in better position to understand consumer behavior. These strengths

contribute to better private label product development, which directly compete with

P&G products. Retailers also promote their own brands as they earn higher margins

on them. P&G has addressed this issue by continuously investing in Research &

Development and introducing new products as well as offering different versions of

its own products at different price points.

Developing Markets

P&G has a well-established market presence in developed countries such as the

United States and Western Europe and is looking to its presence in emerging markets.

In fiscal 2009, 32% of total net sales came from developing nations, a figure that has

increased steadily from 2002 when sales in developing nations accounted for only

about 20% of total revenue (approximately $8 billion). ] CEO Bob McDonald said in

2010 that he wants P&G to grow sales in China and India to reach 1 billion more

customers by 2014. In September 2010, PG announced it would bring its Wella hair

color products to India, leading an aggressive push for product expansion. Some

expect the company to bring its Crest or Oral-B toothpaste to the Indian market next.

In China and Russia, P&G's market share has been consistently increasing in the past

five years as Procter & Gamble has put an increased emphasis on establishing its

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products in those markets. In 2008, the company's distribution network reached 800

million people in China and 80% of the population in Russia. P&G has created

products designed specifically to target developing nations. For example, in many

countries consumers wash clothing by hand with limited amounts of water. In

response, P&G has launched Downy Single Rinse in Mexico, China, Philippines, and

9 other countries. While the average Mexican spends about $20 a year on P&G

products, Chinese per-capita spending is only about $3 and India per-capita spending

$1. Increasing sales in China and India to the levels in Mexico would add $40 billion

in sales to the company's overall revenue.

Research & Development focuses both inside and outside the company

In 2009, P&G spent approximately $2.04 billion on Research & Development, nearly

$1 billion more than its closest competitor, Unilever. The two most important factors

in P&G's innovation process are its practice of consumer demand research and its

"Connect and Develop" R&D structure. First, when entering new markets, P&G sets

up in-home visits with consumers in order to fully understand the needs and desires

consumers have for household and personal products. This way, P&G gets directly to

its customers and is able to cater to their needs. P&G also incorporates consumers'

input into the R&D process through its "Connect and Develop" initiative. Through

"Connect and Develop" P&G has an online interface set up where people can submit

product ideas and provide input on topics that P&G places on the web-portal. P&G

staff then sort through the ideas and work with the most promising ones. This process

is not responsible for all of the R&D that P&G does, but approximately 42% of new

products in the last several years were influenced by or originated from "Connect and

Develop."

Early returns on new products released in 2009 are encouraging. Tide Stain Release, a

stain-removing detergent released in July 2009, has garnered 10% market share in the

US as of November 2009. The Bounce Dryer Bar, an automatic laundry freshener

released in August 2009, has captured 7% of the North American fabric sheet market

as of November 2009.

Commodity Prices

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A diversified consumer products manufacturer, P&G depends heavily on a wide

basket of global commodities for manufacturing its goods. Higher commodity costs

subtracted 0.5% from gross margin growth.Nearly half of the company's cost of goods

is directly related to commodity goods. The company has increased prices due to

higher costs of oil and other raw materials. P&G instituted broad price adjustments in

Q1 2010 to close widening price gaps in several businesses, including North

American laundry, tissue, and towel, and several Eastern European markets. Analysts

believe pricing adjustments are largely behind P&G as of Q2 2010, with an impact on

about 10% of P&G's products. Jefferies analyst report, 10 Nov 2009As the market

leader, the company does benefit from pricing power and can moderate commodity

inflation better than its competitors.

P&G Home Products Limited was incorporated as 100% subsidiary of The Procter &

Gamble Company, USA in 1993 and it launched launches Ariel Super Soaker. In the

same year Procter & Gamble India divested the Detergents business to Procter &

Gamble Home Products. In 1995, Procter & Gamble Home Products entered the Hair

care Category with the launch of Pantene Pro-V shampoo.

Procter & Gamble Home Products launches Head & Shoulders shampoo. In 2000,

Procter & Gamble Home Products introduced Tide Detergent Powder - the largest

selling detergent in the world.

Procter & Gamble Home Products Limited launched Pampers - world's number one

selling diaper brand. Today, Proctor & Gamble is the second largest FMCG Company

in India after Hindustan Lever Limited.

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MISSION AND VISION STATEMENT

VISION OF P&G

“To be a leading consumer goods company and to improve the lives of world

consumers by providing valuable and innovative products”. Ten years ago Procter and

gamble started the journey to improve the lives of Indian consumers by providing

them with world famous quality brands. P&G want to be an outstanding organization

with a passion for winning that would felt by everyone everyday; in the office, in the

field every where P&G vision is to lead business growth by proactively identifying

opportunities and positively contributing to volume growth.

We will provide branded products and services of superior quality and value that

improve the lives of the world's consumers. As a result, consumers will reward us

with leadership sales, profit, and value creation, allowing our people, our

shareholders, and the communities in which we live and work to prosper.

VALUES AND PRINICPLES

P&G is its people and the values by which we live.

We attract and recruit the finest people in the world. We build our organization from

within, promoting and rewarding people without regard to any difference unrelated to

performance. We act on the conviction that the men and women of Procter & Gamble

will always be our most important asset.

LEADERSHIP:

We are all leaders in our area of responsibility, with a deep

commitment to deliver leadership results.

We have a clear vision of where we are going.

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We focus our resources to achieve leadership objectives and strategies.

We develop the capability to deliver our strategies and eliminate

organizational barriers.

OWNERSHIP:

We accept personal accountability to meet our business needs, improve

our systems, and help others improve their effectiveness.

We all act like owners, treating the Company's assets as our own and

behaving with the Company's long-term success in mind.

INTEGRITY

We always try to do the right thing.

We are honest and straightforward with each other.

We operate within the letter and spirit of the law.

We uphold the values and principles of P&G in every action and

decision.

We are data-based and intellectually honest in advocating proposals,

including recognizing risks.

PASSION FOR WINNING

We are determined to be the best at doing what matters most.

We have a healthy dissatisfaction with the status quo.

We have a compelling desire to improve and to win in the marketplace.

TRUST

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We respect our P&G colleagues, customers, and consumers, and treat

them as we want to be treated.

We have confidence in each other's capabilities and intentions.

We believe that people work best when there is a foundation of trust.

PRINCIPLES

We Show Respect for All Individuals

We believe that all individuals can and want to contribute to their

fullest potential.

We value differences.

We inspire and enable people to achieve high expectations, standards,

and challenging goals.

We are honest with people about their performance.

The Interests of the Company and the Individual Are Inseparable

We believe that doing what is right for the business with integrity will

lead to mutual success for both the Company and the individual. Our

quest for mutual success ties us together.

We encourage stock ownership and ownership behavior.

We Are Strategically Focused in Our Work

We operate against clearly articulated and aligned objectives and

strategies.

We only do work and only ask for work that adds value to the

business.

We simplify, standardize, and streamline our current work whenever

possible.

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We Value Personal Mastery

We believe it is the responsibility of all individuals to continually

develop themselves and others.

We encourage and expect outstanding technical mastery and

executional excellence.

We Seek to Be the Best

We strive to be the best in all areas of strategic importance to the

Company.

We benchmark our performance rigorously versus the very best

internally and externally.

We learn from both our successes and our failures.

Innovation Is the Cornerstone of Our Success

We place great value on big, new consumer innovations.

We challenge convention and reinvent the way we do business to

better win in the marketplace.

Mutual Interdependency Is a Way of Life

We work together with confidence and trust across business units,

functions, categories, and geographies.

We take pride in results from reapplying others' ideas.

We build superior relationships with all the parties who contribute to

fulfilling our Corporate Purpose, including our customers, suppliers,

universities, and governments.

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HISTORY OF P & G

Procter & Gamble Co. (P&G) is an American company based in Cincinnati, Ohio that

manufactures a wide range of consumer goods. In India Proctor & Gamble has two

subsidiaries: P&G Hygiene and Health Care Ltd. and P&G Home Products Ltd.

Procter & Gamble's relationship with India started in 1951 when Vicks Product Inc.

India, a branch of Vicks Product Inc. USA entered Indian market. In 1964, a public

limited company, Richardson Hindustan Limited (RHL) was formed which obtained

an Industrial License to undertake manufacture of Menthol and de mentholated

peppermint oil and VICKS range of products such as Vicks VapoRub, Vicks Cough

Drops and Vicks Inhaler. In May 1967, RHL introduced Clearasil, then America's

number one pimple cream in Indian market. In 1979, RHL launches Vicks Action 500

and in 1984 it set up an Ayurvedic Research Laboratory to address the common

ailments of the people such as cough and cold.

In October 1985, RHL became an affiliate of The Procter & Gamble Company, USA

and its name was changed to Procter & Gamble India. In 1989, Procter & Gamble

India launched Whisper - the breakthrough technology sanitary napkin. In 1991, P&G

India launched Ariel detergent. In 1992, The Procter & Gamble Company, US

increased its stake in Procter & Gamble India to 51% and then to 65%. In 1993,

Procter & Gamble India divested the Detergents business to Procter & Gamble Home

Products and started marketing Old Spice Brand of products. In 1999 Procter &

Gamble India Limited changed the name of the Company to Procter & Gamble

Hygiene and Health Care Limited.

In 1993, Procter & Gamble Home Products is incorporated as a 100% subsidiary of

The Procter & Gamble Company, USA. Procter & Gamble Home Products launches

Ariel Super Soaker.

In 1993, Procter & Gamble India divests the Detergents business to Procter &

Gamble Home Products.

In 1995, Procter & Gamble Home Products enters the Haircare Category with the

launch of Pantene Pro-V.

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In 1997 Procter & Gamble Home Products launches Head & Shoulders shampoo.

In 2000, Procter & Gamble Home Products introduced Tide Detergent Powder - the

largest selling detergent in the world.

In November 2000, Procter & Gamble Home Products Limited presented India in the

first International Hair Styling and Beauty Expert Contest- Hair Asia Pacific 2000 in

collaboration with Sri Lankan Association of Hairdressers and Beautician.

During this period, Procter & Gamble Home Products also re-launched the

international range of Head & Shoulders, best-ever Anti-dandruff shampoo with an

improved formula, new pack-design and logo, in three variants - Clean & Balanced,

Smooth & Silky and Refreshing Menthol, which offers the fine combination of anti-

dandruff efficacy and hair conditioning.

In January 2001, Procter & Gamble Home Products Limited and Whirlpool India Ltd.

launched a special 'Ariel - Whirlpool Superwash' offer, making washing machines

more affordable to the people of Hyderabad.

On purchase of either a 500gms, 1kg or 1.5kg economy pack of New Ariel Power

Compact, consumers are automatically eligible to buy a Whirlpool Washing Machine

for as low as Rs.238/- in Equal Monthly Installments for 24 months, by filling in the

application form that comes with the Ariel pack and contacting any one of the

Whirlpool dealers mentioned on the pack.

In June 2001, Procter & Gamble in partnership with the Association of Beauty

Therapy & Cosmetology (ABTC), India hosted the Pantene Artist 2001 a national

stylist competition, which included categories such as Bridal Dressing, Hair Cutting

and Body Painting. Present at the event was world-renowned hairdresser and stylist

Jun L. Encarnecion, who demonstrated the hottest international haircuts and styles in

vogue via an interesting hairhsow. Mr. Encarnecion has trained students in leading

hairdressing schools like Robert Fielding School of Hair Dressing (U.K), Pierre

Alexander International Academy (U.K), Vidal Sassoon Academy, (U.S.A) among

others and also enjoys the reputation of being the official hairdresser for the 1993

Miss Universe pageant.

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In April 2002, Procter & Gamble Home Products Limited announced the launch of a

special Ariel Bar Refund Offer along with its new Advanced Ariel Compact. Under

the Ariel Bar Refund Offer, consumers could exchange their detergent bar on

purchase of Advanced Ariel Compacts 1kg and 500gms packs, and avail of a Rs.15

and Rs.7 discount respectively on MRP.

Additionally, Procter & Gamble Home Products announced the Beat The Summer

Dandruff offer on which 200ml Head & Shoulders bottle was available for Rs.99/-

only, thus giving a benefit of a Rs.23/- discount to consumers.

In June 2003, Procter & Gamble Home Products Limited launched Pampers - world’s

number one selling diaper brand with sales of US$ 6 billion annually. Pampers

provides superior dryness for uninterrupted overnight sleep, with just one pampers

diaper. In India, Pampers Fresh & Dry is available in a variety of three sizes – 4s, 10s

and 25s.

In July 2003, Procter & Gamble Home Products Limited launched Pantene Long

Black, the ultimate solution for achieving the Long and Black hair look, and Head &

Shoulders Silky Black - the only shampoo in India to offer the dual benefits of 100%

dandruff-free as well as silky black hair.

In January 2004, Procter & Gamble Home Products Limited announced the launch of

Rejoice – Asia’s No. 1 shampoo, in India. Rejoice’s patented Micro-Silicone

conditioning technology gives twice as smooth, and easy to comb hair versus ordinary

shampoos, at affordable prices in 100 ml bottles and 7.5 ml sachets.

In April 2006, Procter & Gamble Home Products Limited announced the launch of

Pantene Hair Fall Control, which is designed to free women of their hair fall concerns

by reducing hair fall due to breakage by up to 50% within just two months, thus

giving them stronger, thicker looking and beautiful hair. The prices of Pantene 100ml

and 200ml bottles were reduced by 16%, offering superior value to consumers.

In August 2007, Procter & Gamble Home Products Limited signed Preity Zinta –

Bollywood's no.1 Actress, as Brand Ambassador for its Head & Shoulders anti-

dandruff shampoo that gives 100% dandruff-free soft beautiful hair.

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In October 2008, Procter & Gamble Home Products Limited launched New Pantene

Amino Pro-V Complex shampoos, which makes hair ten times stronger.

P & G INDIA SUBSIDIARIES

P&G India has three arms -- P&G Hygiene and Health Care, P&G HOME

PRODUCTS and GILLETTE INDIA.

P&G Hygiene and Health Care:

Procter & Gamble Hygiene and Health Care Limited is an India-based fast moving

consumer goods company. The Company is engaged in the manufacturing and

marketing of health and hygiene products. The Company's portfolio includes VICKS,

a healthcare brand and WHISPER, a feminine hygiene brand. Its healthcare product

portfolio includes Vicks VapoRub, Vicks Inhaler, Vicks Formula 44, Vicks Cough

Drops and Vicks Action 500+. Vicks VapoRub is available in five pack sizes of 50

grams jar, 25 grams jar, 10 grams, five grams and two grams dibbi. Under feminine

care, its brands include Whisper Maxi Regular, Whisper Maxi XL Wings, Whisper

Ultra with Wings, Whisper Ultra XL Wings and Whisper Choice. The Procter and

Gamble Company is its ultimate holding company and Procter and Gamble Asia

Holding BV is its holding company.

P&G HOME PRODUCTS:

Procter & Gamble Home Products Limited manufactures and distributes fabric care,

hair care, and baby care products. The company was incorporated in 1989 and is

based in Mumbai, India. P&G Home Products is a subsidiary of Procter & Gamble

Co.

P&G Home Products Limited is one of India's fastest growing Fast Moving Consumer

Goods Companies that has in its portfolio P&G's global brands such as Ariel and Tide

in the Fabric Care segment, and in the Hair Care segment: Head & Shoulders -

world's largest selling anti-dandruff shampoo; Pantene - world's No. 1 beauty

shampoo; and Rejoice - Asia's No. 1 shampoo.

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P&G Home Products Limited is a 100% subsidiary of The Procter & Gamble

Company, USA, that in India, has carved a reputation for delivering superior quality,

value-added products to meet the needs of consumer.

GILLETTE INDIA:

Gillette India Limited (GIL) is one of India's well-known FMCG Companies that has

in its portfolio GILLETTE MACH 3 TURBO, ORAL-B and DURACELL - world's

leading brands and has carved a reputation for delivering high quality, value-added

products to meet the needs of consumers.

Incorporated in the year 1985 as Indian Shaving Products Limited, now Gillette India

Limited, its products speak for themselves. The company is always been known for

the strength of its brands, and always continues to penetrate deeper into the hearts of

Indian Consumers.

In the year 1990-91, the company launched two products, first was 7 0'Clock EJTEK

PII Shaving System and second was shaving cream with three variants. This was the

First time that a shaving cream was introduced in Indian markets with special

features.

Company successfully relaunched Gillette Foam in 4 Variants .Duracell also launched

its Ultra M 3 AA batteries, which was well received by consumers. Oral Care

launched Power Oral Care brushes, which were well received in the market. Towards

the End of 2003, Company launched Gillette Vector Plus.

The Company launched Storm Force, a revolutionary after shave splash and New

Ultra Comfort Shaving Gel .In the fourth Quarter, Company launched two new

Gillette Series Tube Shave Gel variants, namely for Sensitive skin and Moisturizing,

to suit different skin types.

Company launched ?New Improved Gillette Vector Plus featuring all new

contemporary look. The Gillette Company, USA was acquired worldwide through

merger in October, 2005 by Procter& Gamble Company, USA creating the largest

Consumer products Company in the World.

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In the year 2006-2007, Company launched Gillette Presto Plus for more discerning

consumers. Oral B brand launched Oral B Vision and Kid in Premium Market

Segment.

In the year 2007-2008, Company launched The Gillette Winners program that had

sports legends Roger Federer, Thierry Henry and Tiger Woods and Rahul Dravid. An

innovative program "Free Dental Check up" was organized to enable consumers to

benefit from expertise of professional dentists at no cost. Oral-B brand launched a

new variant "Shiny Clean" targeted at the value segment.

PRODUCTS LINE

Fabric Care:

Procter & Gamble has two of its world-leading detergents – Tide and Ariel, in India to

cater to the main concerns of the Indian households, namely, outstanding whiteness

and stain-removal.

Ariel Front-O-Mat

Ariel 2 Fragrances

Tide Detergent

Tide Bar

Hair Care:

P&G’s Beauty Business is over US$ 10 Billion in Global Sales, making it one of the

world’s largest beauty companies. The P&G beauty business sells more than 50

different beauty brands including Pantene®, Olay®, SK-II®, Max Factor®, Cover

Girl®, Joy®, Hugo Boss®, Herbal Essences® and Clairol Nice ’n’ Easy®. In India,

P&G’s beauty care business comprises of Pantene, the world’s largest selling

shampoo, Head & Shoulders, the world’s No. 1 Anti-dandruff shampoo and Rejoice –

Asia’s No. 1 Shampoo.

Procter & Gamble is committed to making every day in the lives of its consumers

better through the superior quality of its products and services.

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Panteen Pro V

Head & Shoulders

Rejoice

Baby Care:

Pampers

CORPORATE STRUCTURE

P&G’s corporate structure has contain four pillars which are as follows:

Four pillars — Global Business Units, Market Development Organizations, Global

Business Services and Corporate Functions — form the heart of P&G's organizational

structure.

Global Business Units (GBU) build major global brands with robust business

strategies.

Market Development Organizations (MDO) build local understanding as a

foundation for marketing campaigns.

Global Business Services (GBS) provide business technology and services that

drive business success.

Corporate Functions (CF) work to maintain our place as a leader of our

industries.

P&G approaches business knowing that we need to Think Globally (GBU) and Act

Locally (MDO). This approach is supported by our commitment to operate efficiently

(GBS) and our constant striving to be the best at what we do (CF). This streamlined

structure allows us to get to market faster.

P &G ACQUISITION AND MERGERS

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Procter & Gamble (P&G), the number one US consumer goods company, and

Gillette, the world's largest manufacturer of shaving products, announced the merger

of their operations in January 2005. The $57 billion merger was the ninth largest in

the US corporate history. Post-merger, the new company would dethrone Unilever as

the world's largest producer of consumer goods and is expected to have bargaining

power rivaling that of global retailers like Wal-Mart and Carrefour. The merger,

scheduled to be completed in late 2005, is expected to reap cost synergies of up to $22

billion for the new company. But the problems encountered by Daimler-Chrysler and

Hewlett Packard-Compaq's mergers showed that size could be a potential hindrance to

the success of a merger.

In the 1940s and 1950s, P&G embarked on a series of acquisitions. It acquired Spic

and Span (1945), Duncan Hines (1956), Chairman Paper Mills (1957), Clorox (1957;

sold in 1968) and Folgers Coffee (1963)...

The AcquisitionAs per the P&G and Gillette merger deal, P&G would exchange

0.975 shares of P&G common stock for each share of Gillette. It represented an 18%

premium to Gillette shareholders based on the closing share prices on January 27,

2005. However, the merger was subject to approval by the shareholders of both

Gillette and P&G. The merger was expected to get regulatory clearance by 2005.

P&G planned to buy back $18-22 billion of its common stock immediately after the

merger. The buy back process could take around 18 months to complete. This would

make the deal structure a 60% stock and 40% cash deal, although on paper it was a

pure stock-swap.

According to marketing guru, Al Ries, "The extra 18% premium paid by P&G for Gillette's stock is going to make it 18% more difficult for the deal to pay dividends to stock holders."P&G would have to borrow funds to finance the planned repurchase of its stock. In light of this move, credit rating agencies put both companies under a review for a possible downgrade. S&P placed all ratings for P&G on Credit Watch with negative implications based on the likelihood that P&G's leverage would increase significantly due to the merger. As of September 30, 2004, P&G had debts of $21.4 billion and Gillette of $3.1 billion.

CORPORATE SOCIAL RESPONSIBILITY

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At P&G, Social Responsibility stems from our Corporate PVP (Purpose, Values and

Principles). Social Projects are in keeping with P&G’s credo of ‘Business with a

Purpose’. P&G has always demonstrated its commitment to the community not just

through the quality of its products and services, but also through socially responsible

initiatives for the community. We believe in building the community in which we live

and operate by supporting its ongoing development.

Project Shiksha II: Educating Underprivileged Children(2007)

Project Shiksha: Secure Your Child’s Future (2003)

Rebuilding Lives In Earthquake Hit Bhuj (2001/2002)

Project Poshan: Fighting Malnutrition in India (2000)

Project Open Minds: Educating India’s Working Youth (1999)

Project Future Focus: The First-Ever Round Write-In Career Guidance Service

(1998)

Project Peace: Environment Education Programme (1996)

SWOT ANALYSIS

STRENGTH:

New Management

Gross Margin 15 Times the Industry Average

One of the best marketers in the world

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Diversified brand portfolio: more than 300 brands with more than 79 billion in

Revenue

Tightly integrated with the largest retailers in the US and around the world

Product innovation

Talented management

Distribute to 80 Countries

Distribution channels all over the world

New Billion Dollar brands

WEAKNESS:

Top Brands Losing Market Share

Health and Beauty Women Only

Lagging behind in online media presence & leadership

Missing opportunity: Refuses to manufacture private label products for its

retail customers

Slow Process Heavy Culture

Views Product Performance only

Expansion for brands is limited

THREATS:

Substitute brands that have a cheaper price

Private label growth

Slowdown in consumer spending in the US & globally

Key competitors expanding their product portfolios through acquisitions

Increase in raw material price.

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OPPORTUNITIES:

Health and Beauty for Men

Doubling Environmental Goals for 2012

Adding Value for the Conspiracy

Utilizing online social networks

Going Green/Eco Friendly

Capitalizing on online media

Continue to divest brands that don't align with the company's long-term goals

(i.e., Folgers)

Emerging markets

New acquisition opportunities

Selling directly to consumers

Design for better product experience

Role of Multinational Corporations in the Indian Economy:

Prior to 1991 Multinational companies did not play much role in the Indian economy.

In the pre-reform period the Indian economy was dominated by public enterprises. To

prevent concentration of economic power industrial policy 1956 did not allow the

private firms to grow in size beyond a point. By definition multinational companies

were quite big and operate in several countries.

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While multinational companies played a significant role in the promotion of growth

and trade in South-East Asian countries they did not play much role in the Indian

economy where import-substitution development strategy was followed. Since 1991

with the adoption of industrial policy of liberalisation and privatisation rote of private

foreign capital has been recognised as important for rapid growth of the Indian

economy.

Since source of bulk of foreign capital and investment are Multinational Corporation,

they have been allowed to operate in the Indian economy subject to some regulations.

The following are the important reasons for this change in policy towards

multinational companies in the post-reform period.

1. Promotion of Foreign Investment:

In the recent years, external assistance to developing countries has been declining.

This is because the donor developed countries have not been willing to part with a

larger proportion of their GDP as assistance to developing countries. MNCs can

bridge the gap between the requirements of foreign capital for increasing foreign

investment in India.

The liberalised foreign investment pursued since 1991, allows MNCs to make

investment in India subject to different ceilings fixed for different industries or

projects. However, in some industries 100 per cent export-oriented units (EOUs) can

be set up. It may be noted, like domestic investment, foreign investment has also a

multiplier effect on income and employment in a country.

2. Non-Debt Creating Capital inflows:

In pre-reform period in India when foreign direct investment by MNCs was

discouraged, we relied heavily on external commercial borrowing (ECB) which was

of debt-creating capital inflows. This raised the burden of external debt and debt

service payments reached the alarming figure of 35 per cent of our current account

receipts.

This created doubts about our ability to fulfil our debt obligations and there was a

flight of capital from India and this resulted in balance of payments crisis in 1991. As

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direct foreign investment by multinational corporations represents non-debt creating

capital inflows we can avoid the liability of debt-servicing payments.

Moreover, the advantage of investment by MNCs lies in the fact that servicing of non-

debt capital begins only when the MNC firm reaches the stage of making profits to

repatriate Thus, MNCs can play an important role in reducing stress strains and on

India’s balance of payments (BOP).

3. Technology Transfer:

Another important role of multinational corporations is that they transfer high

sophisticated technology to developing countries which are essential for raising

productivity of working class and enable us to start new productive ventures requiring

high technology.

Whenever, multinational firms set up their subsidiary production units or joint-

venture units, they not only import new equipment and machinery embodying new

technology but also skills and technical know-how to use the new equipment and

machinery.

As a result, the Indian workers and engineers come to know of new superior

technology and the way to use it. In India, the corporate sector spends only few

resources on Research and Development (R&D). It is the giant multinational

corporate firms (MNCs) which spend a lot on the development of new technologies

can greatly benefit the developing countries by transferring the new technology

developed by them. Therefore, MNCs can play an important role in the technological

up-gradation of the Indian economy.

4. Promotion of Exports:

With extensive links all over the world and producing products efficiently and

therefore with lower costs multinationals can play a significant role in promoting

exports of a country in which they invest. For example, the rapid expansion in China’s

exports in recent years is due to the large investment made by multinationals in

various fields of Chinese industry.

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Historically in India, multinationals made large investment in plantations whose

products they exported.

5. Investment in Infrastructure:

With a large command over financial resources and their superior ability to raise

resources both globally and inside India it is said that multinational corporations could

invest in infrastructure such as power projects, modernisation of airports and posts,

telecommunication.

The investment in infrastructure will give a boost to industrial growth and help in

creating income and employment in the India economy. The external economies

generated by investment in infrastructure by MNCs will therefore crowd in

investment by the indigenous private sector and will therefore stimulate economic

growth.

In view of above, even Common Minimum Programme of the present UPA

government provides that foreign direct investment (FDI) will be encouraged and

actively sought, especially in areas of

(a) infrastructure,

(b) high technology

(c) exports, and

(d) where domestic assets and employment are created on a significant scale.

FDI POLICY AND ITS IMPACT ON MNC’S

FOREIGN DIRECT INVESTMENT POLICY

MNCs are source of FDI, the movement of capital across national borders that grants

the investor control over an acquired asset.

FDI may comprise > 20% of global GDP.

In its recent foreign direct investment (FDI) policy, the Government of India had

announced additional methods for issue of shares for consideration other than cash,

such as: (a) import of capital goods/ machinery/ equipment (including second-hand

33

machinery); (b) pre-operative/ pre-incorporation expenses (including payments of

rent, etc.). The RBI has now implemented these schemes by prescribing the detailed

conditions on which this share issuance facility will be available to Indian

companies.)

Foreign direct investment (FDI) has become a key battleground for emerging markets

and some developed countries. Government-level policies are needed to enable FDI

inflows and maximize their returns for both investors and recipient countries.

Foreign direct investment (FDI) has become a key battleground for emerging markets

and some developed countries. Government-level policies are needed to enable FDI

inflows and maximize their returns for both investors and recipient countries.

Foreign direct investment (FDI) policies play a major role in the economic growth of

developing countries around the world. Attracting FDI inflows with conductive

policies has therefore become a key battleground in the emerging markets.

Developed countries also seek to bring in more FDI and use various policies and

incentives to attract overseas investors, particularly for capital-intensive industries and

advanced technology.

The primary aim of these policies is to create a friendly business environment where

foreign investors feel comfortable with the legal and financial framework of the

country, and have the potential to reap profits from economically viable businesses.

The prospect of new growth opportunities and outsized profits encourages large

capital inflows across a range of industry and opportunity types.

Investors tend to look for predictable environments where they understand how

decision-making processes work. Governments therefore are incentivized to build up

a track record of rational decision making. The business environment often requires

work to remove onerous regulations, reduce corruption and encourage transparency.

Governments often also seek to improve their domestic infrastructure to meet the

operational needs of investors.

Providing fiscal incentives for attracting FDI is a subject of controversy – analysts

have argued both in favour and against the idea. A general consensus is developing in

favour of certain incentives which have been proven historically to grow profits and

therefore foreign investments.

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When policies are effective, significant FDI investments are injected into countries

that help the domestic economy to grow. Different countries and regions offer various

kinds of fiscal incentives, with a related variance in the level of FDI investments

attracted.

Governments are increasingly setting up promotional agencies to foster foreign direct

investment. These agencies promote FDI-friendly policies, identify prospective

sectors and investors, and structure specific deals and incentives for major foreign

investors such as multi-national corporations (MNCs).

Global trade associations also play a major role in some of these investment activities.

These associations are tasked with creating a positive environment for foreign direct

investors and ensuring that both investors and recipient countries enjoy a favourable

environment.

The formation of human capital is vital for the continued growth of FDI inflows. To

enable the most beneficial, technology and IP-driven FDI, highly skilled personnel are

necessary. Governments must therefore enact policies to provide training and skills

upgrading to develop their workforce and meet the employment needs of foreign

investors.

The advantages of FDI are as follows.

1. It supplements the meagre domestic capital available for investment and helps set

up productive enterprises.

2. It creates employment opportunities in diverse industries.

3. It boosts domestic production as it generally comes in a package - money,

technology etc.

4. It paves the way for internationalisation of markets with global standards and

quality assurance and performance based budgeting.

5. It pools resources productively - money, manpower, technology.

6. It creates more and new infrastructure.

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7. For the home country it a good way to take advantage in a favourable foreign

investment climate (e.g. low tax regime).

8. For the host country FDI is a good way of improving the BoP position.

FDI is prohibited in only the following activities:

1. Retail Trading (except single brand product

2. retailing);

3. Atomic Energy;

4. Lottery Business;

5. Gambling and Betting;

6. Business of chit fund;

7. Vi.Nidhi Company;

8. Trading in Transferable Development Rights

9. (TDRs); and

10. Activities/sectors not open to private sector

11. Investment.

GROWTH IN FDI

FDI equity inflows into India:

Thirteen-fold growth between 2003-04 and 2009-10

FDI inflows into India:

In terms of international practices of calculating FDI (i.e. by taking into

account re-invested earnings and other capital), FDI inflows were nearly US $

37.18 billion during 2009-10

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Stable pace of inflows:

FDI inflows have somewhat flattened out over the course of the last three

years However, the pace of inflows has been stable This is including during

2009-10, at the height of the global economic slowdown

This is despite a significant fall in global FDI inflows

EFFECTS OF MNC’S:

The case against MNCs has been spearheaded by radical-structuralists. At the most

general level, they argue that MNCs integrate poor nations into an unequally

structured world system, with poor countries languishing on the periphery, heavily

dependent for their development on the decisions and actions of capitalists ensconced

in MNC headquarters in rich core nations. The policy implications of the most radical

of the dependency school arguments is for poor countries to cut their dependence by

closing their doors to MNCs.

We examine at a lower level of analysis, some of the possible specific negative effects

of MNC investment on, first, the host, and then the home countries.

HOST COUNTRY EFFECT

In several caces, MNCs may borrow the Money for foreign investment in the local

host market rather than transfer it from its home base. MNCs may squeeze out young,

potentially viable local firms from the local market and retard the independent

development of indigenous businessess.

Doubts have also been raised about the benefits of the transferred technology,

especially for poorer developing countires. First the vast bulk of the research and

development capability of MNCs remains at home in the parent company. Very little

is carried out in developing countires. Therefore, MNCs, it is argued, do not help

develop an independent capacity to generate new technology in the host countries.

Since locals receive little training and experience developing new products and

processess, when the MNCs leave, little that was of lasting benefit remains. This

would be particularly true for MNCs producing for export in low labor-cost locations,

fort hey are likely to be short-term residents in these countires.

37

Second, there is the question of the appropriateness or suitability of the transferred

technology fort he host nation. MNCs that set up subsidiaries in host countries

primarily to service the local market, as is often the case with FDI in developed

nations, are likely to develoıp contractual linkages with local firms. Those primarily

interested in outsourcing-that is, producing in overseas locations for export, usually

back to the home market then not to develop extensive lingages with local firms.

Critics charge that MNCs tend to exploit workers in developing countries by paying

them low wages and by providing them with inadequate benefits and unsafe working

conditions. Some MNCs have also been accused of transferring enviromentally unsafe

production processes to poorer countries to escape strict U.S. or European

environmental regulations.

Finally, we need to consider briefly the effects of MNCs on the political conditions in

host countries. What is certainly the case is that MNCs are not in the business of

promoting democracy or any other human rights. MNCs have operated quite happily

in countires ruled by left-wing and right-wing authoritarian regimes.

Sometimes, when their interest were threatened, some MNCs have pressed their home

governments to intervene in the internal political affiars of other nations. It is only fair

to point out that MNCs are also subject to political pressures.

HOME COUNTRY EFFECTS

Foreign direct investment means a loss of jobs in the home country and the gradual

deindustrialization of the nations economy.

Governments of both home and host countires are also interested in the tax revenues

MNCs generate. An MNC operating in several countries typically should pay taces to

each government on the profits it earns doing business in that country.

Given that many countires have different tax rates, one can see why MNCs might be

tempted to manipulate transfer prices so as to minimize their total tax burden.

Profit of MNCs in India

38

It is too specify that the companies come and settle in India to earn profit. A company

enlarges its jurisdiction of work beyond its native place when they get a wide scope to

earn a profit and such is the case of the MNCs that have flourished here. More over

India has wide market for different and new goods and services due to the ever

increasing population and the varying consumer taste. The government FDI policies

have somehow benefited them and drawn their attention too. The restrictive policies

that stopped the company's inflow are however withdrawn and the country has shown

much interest to bring in foreign investment here.

Besides the foreign directive policies the labour competitive market, market

competition and the macro-economic stability are some of the key factors that

magnetize the foreign MNCs here.

Following are the reasons why multinational companies consider India as a preferred

destination for business:

Huge market potential of the country

FDI attractiveness

Labour competitiveness

Macro-economic stability

Advantages of the growing MNCs to India

There are certain advantages that the underdeveloped countries like and the

developing countries like India derive from the foreign MNCs that establishes. They

are as under:

Initiating a higher level of investment.

Reducing the technological gap

The natural resources are utilized in true sense.

The foreign exchange gap is reduced

Boosts up the basic economic structure.

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Disadvantages of having MNCs in a developing country like India

are as under-

Competition to SMSI

Pollution and Environmental hazards

Some MNCs come only for tax benefits only

Exploitation of natural resources

Lack of employment opportunities

Diffusion of profits and Forex Imbalance

Working environment and conditions

Slows down decision making

Economical distress

A Critique of Multinational Corporations:

In recent years foreign direct investment through multinational corporations has vastly

increased in India and other developing countries. This vast increase in investment by

multinational corporations in recent years is prompted by factors (1) the liberalisation

of industrial policy giving greater role to the private sector, (2) opening up of the

economy and liberalisation of foreign trade and capital inflows. In this economic

environment multinational corporations which are in search for global profits are

induced to make investment in developing countries.

As explained above, foreign direct investment by multinational firms bring many

benefits to the recipient countries but there are many potential dangers and

disadvantages from the viewpoint of economic growth and employment generation.

Therefore, role of multinational corporations in India and other developing countries

have been criticised on several grounds. We discuss below some of the criticisms

levelled against multinational corporations.

1. Capturing Markets:

40

First, it is alleged that multinational corporations invest their capital and locate their

manufacturing units on their own or in collaboration with local firms in order to sell

their products and capture the domestic markets of the countries where they invest

and operate. With their vast resources and competitive strength, they can weed out

their competitive firms.

For example, in India if corporate multinational firms are allowed to sell or produce

the products presently produced by small and medium enterprises, the latter would not

be able to compete and therefore would be thrown out of business. This will lead to

reduction in employment opportunities in the country.

2. Use of Capital-intensive Techniques:

It has been seen that increasing capital intensity in modern manufacturing sector is

responsible for slow growth of employment opportunities in India’s industrial sector.

These capital-intensive techniques may be imported by large domestic firms but

presently they are being increasingly used by multinational corporations which bring

their technology when they invest in India.

Emphasising this factor, Thirwall rightly writes, “In this case the technology may be

inappropriate not because there is not a spectrum of technology or inappropriate

selection is made but because the technology available is circumscribed by the global

profit maximising motives of multinational companies investing in the less-developed

country concerned

3. Encouragement to Inessential Consumption:

The investment by multinational companies leads to overall increase in investment in

India but it is alleged that they encourage conspicuous consumption in the economy.

These companies cater to the wants of the already well-to-do people. For example, in

India very expensive cars (such as City Honda, Hyundai’s Accent, Mercedes, Opal

Astra, etc.) the air conditioners, costly laptops, washing machines, expensive fridges,

29″ and Plasma TVs are being produced/sold by multinational companies.

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Such goods are quite inappropriate for a poor country like India. Besides, their

consumption has a demonstration effect on the consumption of others. This tends to

raise the propensity to consume and adversely affects the increase in savings of the

country.

4. Import of Obsolete Technology:

Another criticism of MNCs is based on the ground that they import obsolete machines

and technology. As mentioned above, some of the imported technologies are

inappropriate to the conditions of Indian economy. It is alleged that India has been

made a dumping ground for obsolete technology.

Moreover, the multinational corporations do not undertake Research and

Development (R&D) in India to promote local technologies suited to the Indian

factor-endowment conditions. Instead, they concentrate R&D activity at their head

quarters.

5. Setting up Environment-Polluting Industries:

It has been found that investment by multinational corporations in developing

countries such as India is usually made for capturing domestic markets rather than for

export promotion. Moreover, in order to evade strict environment control measures in

their home countries they set up polluting industrial units in India.

A classic example of this is a highly polluting chemical plant set up in Bhopal

resulting in gas tragedy when thousands of people were either killed or made

handicapped due to severe ailments. “With the tightening of environmental measures

in the such countries, there is a tendency among the MNCs to locate the polluting

industries in the poor countries, where environmental legislation is non-existent or is

not properly implemented, as exemplified in the Bhopal gas tragedy”.

6. Volatility in Exchange Rate:

42

Another major consequence of liberalised foreign investment by multinational

corporations is its impact on the foreign exchange rate of the host country. Foreign

capital inflows affect the foreign exchange rate of the Indian rupee.

A large capital inflow through foreign investment brings about increase in the supply

of foreign exchange say of US dollars. With demand for foreign exchange being

given, increase in supply of foreign exchange will lead to the appreciation of

exchange rate of rupee.

This appreciation of the Indian rupee will discourage exports and encourage imports

causing deficit in balance of trade. For example, in India in the fiscal years 2004-05

and 2005-06, there were large capital inflows by FII (giant financial multinationals) in

the Indian economy to take advantage of higher interest rates here and also booming

of the Indian capital market.

On the other hand, when interest rates rise in the parent countries of these

multinationals or rates of return from capital markets go up or when there is loss of

confidence in the host country about its capacity to make payments of its debt as

happened in case of South-East Asia in the late nineties there is large outflow of

capital by multinational companies resulting in the crisis and huge depreciation of

their exchange rate. Thus, capital inflows and outflows by multinationals have been

responsible for large volatility of exchange rate.

Then there is the question of repatriation of profits by the multinationals. Though a

part of profit is reinvested by the multinational companies in the host country, a large

amount of profits are remitted to their own parent countries.

This has a potential disadvantage for the developing countries, especially when they

are facing foreign exchange problem. Commenting on this Thirwall writes “FDI has

the potential disadvantage even when compared with loan finance, that there may be

outflow of profits that lasts much longer.

7. Transfer Pricing and Evasion of Local Taxes:

Multinational corporations are usually vertically integrated. The production of a

commodity by multinational firm comprises various phases in its production the

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components used in the production of a final commodity may be produced in its

parent country or in its affiliates in other countries.

Transfer pricing refers to the prices a vertically integrated multinational firm charges

for its components or parts used for the production of the final commodity, say in

India. These prices of components or parts are not real prices as determined by

demand for and supply of them.

They are arbitrarily fixed by the companies so that they have to pay less taxes in

India. They artificially inflate the transfer prices for intermediate products (i.e.,

components) produced in their parent country or their overseas affiliates so as to show

lower profits earned in India. As a result, they succeed in evading corporate income

tax.

MNC IN INDIA ARE ATTRACTED TOWARDS:

India’s large market potential

India presents a remarkable business opportunity by virtue of its sheer size

and growth

Labour competiveness

FDI attractiveness

GOVERNMENT SUPPORT:

Both revenue and capital expenditure on R&D are 100% deductible from

taxable income under the Income Tax Act.

A weighted tax deduction of 125% is allowed for sponsored research in

approved national laboratories and institutions of higher technical education.

A weighted tax deduction of 150% is allowed on R&D expenditure by

companies in government-approved in- house R&D centres in selected

industries.

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A company whose principal objective is research and development is exempt

from income tax for ten years from its inception. Accelerated depreciation is

allowed for investment in plant and machinery made on the basis of

indigenous technology.

Customs and excise duty exemptions for capital equipments and consumables

required for R&D.

Excise duty exemption for three years on goods designed and developed by a

wholly owned Indian company and patented in any two countries out of: India,

the United States, Japan and any country of the European Union.

POLICIES THAT HELPED MNCs GROW IN INDIA

FDI Policy : Most sectors including manufacturing activities permitted 100%

FDI under automatic route (No prior approval required)

Industrial Licensing : Licensing limited to only5 sectors (security, public

health & safety considerations)

Exchange Control:  All investments are on repatriation basis.

Taxation:  Companies incorporated in India treated as Indian companies for

taxation

Original investment, profits and dividend can be freely repatriated

Convention on Avoidance of Double Taxation with 71 countries including

Korea.

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WHAT IS THE FUTURE OF MNCS IN INDIA?

Current trends in the international marketplace favour the continued development of

multinational corporations. Countries worldwide are privatizing government-run

industries, and the development of regional trading partnerships such as the North

American Free Trade Agreement (a 1993 agreement between Canada, Mexico, and

United States) and the European Union have the overall effect of removing barriers to

international trade. Privatization efforts result in the availability of existing

infrastructure for use by multinationals seeking to enter a new market, while removal

of international trade barriers is obviously a boon to multinational operations.

Perhaps the greatest potential threat posed by multinational corporations would be

their continued success in a still underdeveloped world market. As the productive

capacity of multinationals increases, the buying power of people in much of the world

remains relatively unchanged; this could lead to the production of a worldwide glut of

goods and services. Such a glut, which has occurred periodically throughout the

history of industrialized economies, can in turn lead to wage and price deflation,

contraction of corporate activities, and a rapid slowdown in all phases of economic

life. Such a possibility is purely hypothetical, however, and for the foreseeable future

the operations of multinational corporations worldwide are likely to continue to

expand.

CONCLUSION:

We have seen above foreign investment by multinational companies have both

advantages and disadvantages. Therefore, they need regulation and should be

permitted in selected sectors and also subject to a cap on their investment in particular

fields. If objective of economic growth with stability and social justice is to be

achieved, there should not be complete open door policy for them.

It is true that multinational corporations take risk in making investment in India, they

bring capital and foreign exchange which are non-debt creating, they generally

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promote technology and can help in raising exports. But they must be regulated so

that they serve these goals.

They should be allowed to invest in infrastructure, high-technology areas, and in

industries whose products they can export and if they help in generating net

employment opportunities. We agree with Colman and Nixon who write:

“Transnational corporations cannot be directly blamed for lack of development (or the

direction development is taking) within less developed countries. Their prime

objective is global profit maximisation and their actions are aimed at achieving that

objective, not developing the host less developed country. If the technology and

products that they introduce are inappropriate, if their actions exacerbate regional and

social inequalities, if they weaken the balance of payments position, in the last resort

it is up to the government of less developed country to pursue policies which will

eliminate the causes of these problems.”

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