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A PROJECT

ON

“MULTINATIONAL CORPORATIONS IN INDIA”

COMPULSORY SUBJECT: ECONOMICS

SUBMITTED TO

UNIVERSITY OF MUMBAI

FOR SEMESTER – II

OF

MASTER OF COMMERCE (M.COM- 1)

(BANKING & FINANCE)

BY

(KHUNDONGBAM SURESH SINGH)

UNDER THE GUIDANCE OF

DR. KV

ASSOCIATE PROFESSOR

YEAR: 2014 – 2015

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DECLARATION BY THE STUDENT

I KHUNDONGBAM SURESH SINGH student of m.com part – I roll number

_________ hereby declare that the project for the paper “ECONOMICS”

submitted by me for semester- II during the academic year 2014- 2015, is based

on actual work carried out by me under the guidance and supervision of Dr.

KV.

I further state that this work is original and not submitted anywhere else for any

examination

Signature of Student

KH SURESH

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EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project

on “MULTINATIONAL CORPORATIONS IN INDIA” submitted by

KHUNDONGBAM SURESH SINGH Student of M.Com Part-I.

This project is original to the best of our knowledge and has been accepted for

Internal Assessment

Internal Examiner External Examiner Head Of The

department

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Internal Assessment: Project 40 Marks

Name of student Class Division Roll

number

First name : SURESH

Father name: SUBON

Surname : KHUNDONGBAM

M.COM

PART - I

Subject: ECONOMICS

Topic for the Project: MULTINATIONAL CORPORATIONS IN INDIA

Marks Awarded Signature

Documentation

Internal Examiner

(Out Of 10 Marks)

External Examiner

(Out Of 10 Marks)

Presentation

(Out of 10 Marks)

Viva And Interaction

(Out Of 10 Marks)

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Table of Contents

Table of Contents ................................................................................................ 1

Introduction ......................................................................................................... 7

1. Giant Size: ................................................................................................. 7

2. International Operation: .......................................................................... 7

3. Oligopolistic Structure: ............................................................................ 7

4. Spontaneous Evolution: ........................................................................... 8

5. Collective Transfer of Resources: ........................................................... 8

Benefits of MNC .................................................................................................. 9

Growth of MNC in India: ................................................................................... 9

1. Expansion of market territories: - ....................................................... 11

2. Market superiorities: - .......................................................................... 11

3. Financial superiorities: - ........................................................................ 12

4. Technological superiorities: - ............................................................... 12

Role of MNC in India ....................................................................................... 13

Disadvantages of MNCs ................................................................................... 14

The growth of Indian MNC’s help country in following ways: - ................. 15

Top MNCs of India ........................................................................................... 15

Introduction – TATA ........................................................................................ 17

Indian Multinational resulting in the growth of foreign market: - ............. 23

Economic Reforms in India since 1991 ........................................................... 24

1. Devaluation: ................................................................................................ 25

2. Allowing Foreign Direct Investment ......................................................... 25

3. Financial Sector Reform ............................................................................ 27

4. Reforms in Industrial and Trade Policy ................................................... 28

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5. Industrial Policy .......................................................................................... 29

6. Trade Policy................................................................................................. 29

7. Foreign Direct Investment ......................................................................... 30

8. Infrastructure Development ...................................................................... 32

9. Financial Sector Reform ............................................................................ 34

10. Privatization ............................................................................................. 35

11. Social Sector Development in Health and Education .......................... 36

Conclusion .......................................................................................................... 38

Bibliography ...................................................................................................... 40

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Introduction

Multinational corporations are business entities that operate in more than one country. The

typical multinational corporation or MNC normally functions with a headquarters that is

based in one country, while other facilities are based in locations in other countries. In some

circles, a multinational corporation is referred to as multinational enterprise (MBE) or a

transnational corporation (TNC).

The exact model for an MNC may vary slightly. One common model is for

the multinational corporation is the positioning of the executive headquarters in one nation,

while production facilities are located in one or more other countries. This model often

allows the company to take advantage of benefits of incorporating in a given locality, while

also being able to produce goods and services in areas where the cost of production is lower.

The multinational corporations have certain characteristics which may be discussed below:

Giant Size:

The most important feature of these MNCs is their gigantic size. Their assets and sales run

into billions of dollars and they also make supernormal profits. According to one definition

an MNC is one with a sales turnover of f 100 million. The MNCs are also super powerful

organizations. In 1971 out of the top ninety producers of wealth, as many as 29 were MNCs,

and the rest, nations. Besides the operations, most of these multinationals are spread in a vast

number of countries. For instance, in 1973 out of a total of (, 000 firms identified nearly 45

per cent had affiliates in more than 20 countries.

International Operation:

A Fundamental feature of a multi­national corporation is that in such a corporation, control

resides in the hands of a single institution. But its interests and operations sprawl across

national boundaries. The Pepsi Cola Company of the U.S operates in 114 countries. An MNC

operates through a parent corporation in the home country. It may assume the form or a

subsidiary in the host country. If it is a branch, it acts for the parent corporation without any

local capital or management assistance. If it is a subsidiary, the majority control is still

exercised by the foreign parent company, although it is “incorporated in the host country. The

foreign control may range any­where between the minimum of 51 per cent to the full, 100 per

cent. An MNC thus combines ownership with control. The branches and subsi­diaries of

MNCs operate under the unified control of the parent company.

Oligopolistic Structure:

Through the process of merger and takeover, etc., in course of time an MNC comes to

assume awesome power. This coupled with its giant size makes it oligopolistic in char­acter.

So it enjoys a huge amount of profit. This oligopolistic structure has been the cause of a

number of evils of the multinational corporations.

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Spontaneous Evolution:

One thing to be observed in the case of the MNCs is that they have usually grown in a

spontaneous and unconscious manner. Very often they developed through "Creeping

instrumentalism." Many firms become multinationals by accident. Sometimes a firm

established a subsidiary abroad due to wage differen­tials and better opportunity prevailing in

the host country.

Collective Transfer of Resources:

An MNC facilitates multilateral transfer of resources Usually this transfer takes place in the

form of a "package" which includes technical know-how, equipment's and machinery,

materials, finished products, managerial services, and soon, "MNCs are composed of a

complex of widely varied modern technology ranging from production and marketing to

management and financing. B.N. Ganguly has remarked in the case of an MNG "resources

are trans­ferred, but not traded in, according to the traditional norms and practices of

international trade."

Definition of MNC:

A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation that is

registered in more than one country or that has operations in more than one country. It is a

large corporation which both produces and sells goods or services in various countries. It can

also be referred to as an international corporation. They play an important role

in globalization. The first multinational company was the British East India Company,

founded in 1600. The second multinational corporation was the Dutch East India Company,

founded March 20, 1602.

Horizontally integrated multinational corporations manage production establishments

located in different countries to produce similar products. (Example: McDonald's)

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)

Diversified multinational corporations do not manage production establishments located in

different countries that are horizontally, vertically or straight (Example: Microsoft or Siemens

A.G.)

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Benefits of MNC

To Home Country:

1) Facilitate inflow of foreign exchange: - MNC’s collect funds from the enterprises of other

countries in the form of fees, royalty, and service charges. This money is taken to the country

of their origin. MNC’s make their home countries rich by facilitating inflow of foreign

exchange from other countries.

2) Promote global co-operations: - MNC’s provide co-operation to poor or developing

countries to develop their industries. The countries of their origin participate in such

international co-operation, which is beneficial to all countries- rich and poor.

3) Ensure optimum utilization of resources: -MNC’s ensure optimum utilization of natural

and other resources available in their home countries. This is possible due to their worldwide

business contacts.

4) Promote bilateral trade relations: -MNC’s facilitate bilateral trade relations between their

home countries and the other countries with which they have business relations.

To Host Countries:

1) Raise the rate of investment: - MNC’s raise the rate of investment in the host countries and

thereby bring rapid industrial growth accompanied by massive employment opportunities in

different sectors of the economy.

2) Facilitate transfer of technology: -Multinationals act as agents for the transfer of

technology to developing countries and thereby help such countries to modernize their

industries. They remove technological gaps in developing countries by providing techno-

managerial skills.

3) Accelerate industrial growth: - multinationals accelerate industrial growth in host countries

through collaborations, joint ventures and establishment of subsidiaries and branches. They

facilitate economic growth through financial, marketing and technological services. MNC’s

are rightly called “messengers of progress”.

4) Promote export and reduce imports: - MNC’s help the host countries to reduce the imports

and promote the exports by raising domestic production. Marketing facilities at global level

are provided by MNC’s due to their global business contacts.

5) Provide services to professionals: - MNC’s provide the services of the skilled professional

managers for managing the activities of the enterprises in which they are involved/interested.

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This raises overall managerial efficiency or enterprises connected with multinationals.

MNC’s bring managerial revolution in host countries.

6) Facilitate efficient utilization of resources: - Multinationals facilitate efficient utilization of

resources available in host countries. This leads to economic development.

7) Provide benefits of R and D activities: -Multinationals has enormous resources at their

disposal. Some are utilized for R and D activities. The benefits of R and D activities are

passed on to the enterprises operating in the host countries.

8) Support enterprises in host countries: - MNC’s support to enterprises in the host countries

in order to support their own operations indirectly. This is how MNC’s support enterprises in

the host countries to grow. Even consumers get new goods and services due to the operations

of MNC’s.

9) Break domestic monopolies: - MNC’s raise competition in the host countries and thereby

break domestic monopolies.

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Growth of MNC in India:

The MNCs share in global investment, production, employment and trade has assumed

considerable proportions.

According to the UN, there are 63,000 MNCs with 6, 90,000 affiliates all over the globe with

2, 40,000 in China and only 1400 in India. The US was the forerunner in giving births to

MNCs. Today, biggest MNC’s are Japanese.

The global liberalization wave, paved the path for faster expansion and growth of MNCs. The

value added by the foreign affiliates of MNCs, as a percentage of global GDP grew from 5%

in the 1980s to about 7% by the end of 90s. The MNCs control about a third of world output

and the total sales of their foreign affiliates is almost equal to the GNP of all developing

countries. The value of the annual sales of the largest manufacturing multinational General

Motors was about $178bn in 1996. The total sales of the 3 largest automobile firms of the

world, namely, General Motors, Ford and Toyota is greater than the value of India’s GDP.

In terms of direct employment, the MNCs accounted for 73mn people worldwide and if

indirect employment is considered, the figure approximates 150mn people. Over 350m

people were employed by the foreign affiliates of MNCs in 1988.

A number of factors have contributed to the phenomenal growth of MNCs. Some of the

important factors are as follows: -

1) Expansion of market territories: -

Rapid economic growth in a number of countries resulting in rising GDPs and per capita

incomes contributed to the growing standards of living. This in turn contributed to the

continuous expansion of market territories. MNCs both contributed to the expansion of

market territories and also grew in size and spread as a result of expansion of market

territories.

2) Market superiorities: -

In many ways, MNCs have an edge over domestic firms, such as: -

a) Availability of reliable and current data,

b) MNCs enjoy market reputation,

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c) MNCs encounter relatively less problems and difficulties in marketing the products,

d) MNCs adopt more effective advertising and sales promotion techniques, and

e) MNCs enjoy faster transportation and adequate warehousing facilities

3) Financial superiorities: -

MNCs also enjoy a number of financial advantages over domestic firms. These are: -

a) Availability of huge financial resources with the MNCs helps them to transform business

environment and circumstances in their favor.

b) MNCs can use the funds more effectively and economically on account of their activities

in numerous countries.

c) MNCs have easy access to international capital markets, and

d) MNCs have easy assessed to international banks and financial institutions.

4) Technological superiorities: -

MNCs are technologically prosperous on account of high and sustained spend on R&D.

developing countries on account of their technological backwardness welcome MNCs to their

countries because of the attendant benefits of technology transfer.

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Role of MNC 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.

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.

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 labor 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

Labor competitiveness

Macro-economic stability

Advantages of the growing MNCs to India

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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.

Disadvantages of MNCs

Roses do not come without thrones. 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

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The growth of Indian MNC’s help country in following ways: -

1) MNC’s help to increases the investment level & thereby the income & employment

in host country.

2) The transnational corporations have become vehicles for the transfer technology,

especially to developing countries.

3) They also kind a managerial revolution in host countries through professional

management and employment of highly sophisticated management techniques.

4) The MNCs enable that host countries to increases their exports & decreases their

import requirements.

5) They work to equalize cost of factors of production around the world.

6) MNC’s provide and efficient means of integrating national economies.

7) The enormous resources of multinational enterprises enable them to have very

efficient research & development systems. Thus, they make a commendable

contribution to inventions & innovations.

8) MNC’s also stimulate domestic enterprise because to support their own operations,

the MNC’s may encourage & assist domestic suppliers.

9) MNC’s help to increase competition & break domestic monopolies.

Top MNCs of India

The country has got many M. N. C.s operating here. Following are names of some of the

most famous multinational companies, who have their headquarters of operational branches

based in the nation:

IBM: IBM India Private Limited, a part of IBM has been operating from this country since

the year 1992. This global company is known for invention and integration of software,

hardware as well as services, which assist forward thinking institutions, enterprises and

people, who build a smart planet. The net income of this company post completion of the

financial year end of 2010 was $14.8 billion with a net profit margin of 14.9 %. With

innovative technology and solutions, this company is making a constant progress in India.

Present in more than 200 cities, this company is making constant progress in global markets

to maintain its leading position.

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Ranbaxy Laboratories Limited: Ranbaxy Laboratories Limited, one of the biggest

pharmaceutical companies in India, started their business in the country from the year 1961.

The company made its public appearance in 1973 though. Headquartered in this nation, this

international, research based, integrated pharmaceutical company is the producer of a huge

range of affordable cum quality medicines that are trusted by both patients and healthcare

professionals all over the world. In the business year 2010, the registered global sales of the

company was US $ 1, 868 Mn. Successful development of business forms the key component

of their trading strategy. Apart from overseas acquisitions, this company is making a

continuous endeavor to enter the new global markets, which have got high potential. For this,

they are offering value adding products as well.

Tata Consultancy Services: Commonly known as T. C. S., this multinational company is a

famous name in the field of I. T. (Information Technology) services, Business Process

Outsourcing (B. P. O.) as well as business solutions. This company is a subsidiary of the Tata

Group. The first center for software researching was established in the country in 1981 in the

city of Pune. Tata Consultancy earned a growth of 8.9 % during the latest quarter of this

financial year, which ended on 30th September, 2011. This renowned company is presently

looking forward to the 10 big deals that they have received besides the Credit Union

Australia's contract as well as Government of Karnataka's Rs. 94 crore deals for a total period

of 6 years. In this current business year, they are about to employ 60, 000 people to meet their

business requirement.

Tata Motors Limited: The biggest automobile company in India, Tata Motors Limited, is

among the leading commercial vehicles manufacturer in the country. They are one of the top

3 passenger vehicle manufacturers. Established in the year 1945, this company, a part of the

famous Tata Group, has got its manufacturing units located in different parts of the nation.

Some of their well known products of the company are categorized in the following heads:

Commercial Vehicles

Defense Security Vehicles

Homeland Security Vehicles

Passenger Vehicles

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Introduction – TATA

Resting on the laurels of being India's top automotive manufacturer is not an option or

for Tata Motors, which is looking to increase its footprint in international markets

Recent years have seen a number of foreign automobile enterprises coming to India,

attracted by a growing economy and an expanding market. The reverse — Indian auto

companies seeking new frontiers abroad — is a trickle, but Tata Motors is working hard to

change the equation.

Tata Motors has come a long way since the 1950s and 1960s, when it needed technical

assistance from Daimler Benz and had just commercial vehicles to power sales. Today, the

company is the country's largest automobile manufacturer and has a passenger vehicle

business that has broken new ground in exemplary fashion. But domestic patronage, hefty

as it may be, is ultimately limiting, particularly with increasing competition. That is why

the exploration of foreign markets is an imperative for ambitious automobile companies

such as Tata Motors.

Besides competition, the automotive business, particularly the commercial vehicle market,

is characterised by its considerably strong link to national economies. Companies looking

to do more than just stay afloat cannot afford to keep their business connected solely to the

fortunes of one country.

Another reason that Tata Motors is looking outwards is cost advantage. Until now Indian

companies, manufacturers in particular, have been protected by high duty structures and a

generally depreciating rupee. But sometime in the near future, if import restrictions are

relaxed or the rupee begins to gain ground, India may not continue to have the low-cost

manufacturing advantage it has enjoyed thus far. In that scenario, a presence in countries

that offer greater cost advantages for manufacturing will pay off.

A third argument for overseas expansion is the fact that the automotive business relies so

much on economies of scale, which translate into price benefits. Tagging along is the

competitiveness factor, where quality and efficiency are directly improved (or should be)

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as a result of the high level of competition in foreign markets.

Discussing the company's plans, Praveen Kadle, Tata Motors' executive director of finance

and corporate affairs, is quick to make the difference between international businesses and

export activity. "A large number of Indian companies began their international operations

with exports, but exports constitute only a segment of international business, and using the

terms interchangeably means taking a very narrow view of things," he says.

Tata Motors is looking to widen its foreign campaign to more than just exports. In 2002,

recognising the need to integrate its international strategy with its domestic one, the

company split its previously independent international business arm into commercial and

passenger segments and, as part of its overall business strategy, merged them with its

commercial and passenger vehicle business units.

As part of its plans, the company has plotted four routes to international expansion. The

first is the traditional method of export, at which the company has been quite successful,

notching up export revenue of Rs969 crore in the first nine months of FY 2004-05,

recording a growth of 41 per cent from sales in Europe, Africa, the Middle East and Asia.

The second is setting up assembly operations abroad. This does not necessarily involve

establishing a full-scale manufacturing unit, but an operation where kits are sent in semi

knocked down or completely knocked down assemblies, or as a fully assembled vehicles

and sold in that market. Tata Motors worked this into its strategy when it set up its first

assembly operation in Malaysia in 1974. Since then the company has similarly expanded

into Malaysia, Bangladesh, Senegal, South Africa and Ukraine. All these assembly

operations are set up by the distributors of Tata Motors for these countries.

The third scenario would be actual acquisition, the route Tata Motors took with Daewoo

South Korea. Here, Tata Motors bought the full-fledged heavy vehicle-manufacturing unit

and, in the process, gained not just a manufacturing asset base, but access to the market

through an already strong brand identity. The company was also presented a wide choice in

terms of the markets in which it could use the Daewoo brand and, more importantly, access

to R&D capability in the area of commercial vehicles.

In the short period of six years since the launch of passenger cars, Tata Motors has already

achieved the No.2 position in the domestic car market in India. The company has

successfully launched Indica in South Africa and Turkey and is marketing it under its own

brandname.

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An independent international effort will call for the company to dig deep into its pockets.

"The automobile business is a resource-intensive one," explains Mr Kadle. "There needs to

be consistent profitability and a proven track record. Businesses have to contribute, on an

ongoing basis, a significant amount of cash for their survival and future growth. You need

this winning combination: a track record of profitability, cost competitiveness, global

sourcing for components/aggregates, effective capital-base management, and the ability to

raise resources from international capital markets at the right time."

Expanding on the company's globalisation plans, Mr Kadle explains, "Tata Motors does

not plan to be all over the world. Supply will follow demand and the company will need to

address the markets for different vehicles as stand-alone projects. For example, the

compact-sized Indica will be marketed in countries where the company perceives a

substantial market for it, like it did in Europe. The same goes for our commercial vehicles

business."

He adds that China is a distinct possibility for expansion, an opinion that is justified by just

a glance at the dragon's consumption patterns. Right from commodities to automobiles,

annual demands are phenomenal. "China is a big market and, I think, if you want to be a

successful auto company then you may have to have some presence there. But, at the same

time, one must keep in mind that no major auto company, except maybe Volkswagen, has

made serious money in China. One has to be very careful in one's approach to the Chinese

market."

Tata Motors' immediate goal is to achieve a 20 per cent contribution to its overall revenue

from its international businesses by 2006. This seems to be realistic enough following the

Daewoo acquisition, and its own products getting into more than 70 countries. Looking at

successful global auto majors, for whom anywhere from 30 to 50 per cent of their business

accrues from overseas sales, Tata Motors is still a long way off, but Mr Kadle believes that

with its aggressive growth strategy a contribution of around 35 per cent may be achievable

in five-six years. The trickle factor will by then begin to gather force.

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Illustration of Tata steels global strategy with the use of global strategy

framework:

1. Identify business unit: Amongst the various SBU of Tata groups, I have selected

Tata steel company (with special reference to their take over of Corus) as the SBU for

the study of global strategy framework.

2. Evaluate Industry potential for globalization: Market factors pushed for

globalization. The market needs for steel was homogeneous and they had global

customers. Because of homogeneity of needs, the brands and advertising were

transferable. Economic factors were also favourable for globalization. Because of

standardization of core products, the company was able to enjoy economies of scale in

manufacturing. Since the company is ninety nine years old, they also enjoy the benefit

of steep learning curve. Again, the raw material cost in U.K. is high. This can be

offset by sourcing from India, where raw materials are comparatively

cheaper.Environmental factors increased the potential for global strategy. Since Corus

had good sales network at various countries, the transportation costs of Tata steel will

be reduced. Again, government policies like easing foreign currency restrictions both

in UK and India were favourable for global strategy. Global moves of competitor i.e.

Mittal acquiring Arcelor also forced the Tata steel to go for global strategy.

3. Evaluate current extent of globalization: The current extent of globalization is

measured under 5 dimensions.

Market participation: Tata steel has sales in various countries like USA, Srilanka,

Nepal, Shanghai etc but it lacked global identity or image.

Product standardization: The basic product was standardized throughout the world.

At final stages the product was customized as per the requirements.

Activity concentration: Tata steels technological and integration, finance, strategy etc

were concentrated only in India whereas the manufacturing activities were dispersed

in India, USA, UK, Thailand, Vietnam, Malaysia etc. Trading was done in

Bangladesh, Srilanka, Nepal, South Africa, Hong Kong, etc.

Marketing uniformity: The market positioning and marketing mix strategy were

uniform throughout the world.

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Integration of competitive moves: Tata steel has taken an integrated approach to

global competitors. They have tough competition with Mittal steels in almost all

countries.

4. Identify strategic need for change in the extent of globalization: From the previous

analysis, Tata steel concluded that its extent of globalization was significantly lower

than the industry potential and lower than its competitor’s global strategy. The Mittal

Arcelor is ranked number one in steel industry in the world whereas the Tata steel

ranked fifty sixth (before acquiring Corus). Furthermore, the industry potential for

Tata steel had a strong need to develop a more global strategy. The next issue was

whether Tata steel would be able to implement such a strategy.

5. Evaluate organisational / internal factors: To internal ability of Tata steel to

implement global strategy is tested under the following factors:

Structure: The head quarter of Tata steel was located in India. The five main

functions such as technological and integration, finance, strategy, corporate relation

and communication and global minerals were centralized. While the production,

selling and distribution was decentralized and the divisions heads were given

autonomy to take decisions.

Management processes: The management processes were favourable for global

strategy. Since the strategy and corporate communication was centralized, there was

well cross- border co-ordination.

People: There were no foreign nationals working in India either at corporate or

divisional levels. There were many foreign nationals overseas, but these were mostly

in their home countries and there was little movement between international and

domestic jobs. But the leader Ratan Tata, through his action and statements had a

global approach.

Culture: Tata steel had a strong Indian national identity than a global identity. But

some SBU of Tata group like Tetley Tea, Taj group of Hotels had created global

identity.

6. Identify organizational ability to implement globalization: Tata steel had the

ability to implement globalization because of its rich experience of 99 years of

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running a business successfully in India. Hence it had the ability to acquire big steel

company like Corus.

7. Diagnose scope and direction of required changes: The most important change, the

Tata steel has to do is to encourage the transfer of people between nations. According

to IISI data, the average hourly rate of pay in UK steel was 6 times that of Brazil and

10 times that of India. So by movement of people, the company can reduce the cost

and strengthen its competitive advantage of low cost leadership.

Tata groups in foreign countries should blend into the adopted corporate culture. For better

brand visibility, more Tata companies will have to go abroad and learn to flourish abroad.

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Indian Multinational resulting in the growth of foreign market: -

India Inc. is flying high. Not only over the Indian sky. Many Indian firms have slowly and

surely embarked on the global path and lead to the emergence of the Indian multinational

companies.

With each passing day, Indian businesses are acquiring companies’ abroad, becoming world-

popular suppliers and are recruiting staff cutting across nationalities. While an Asian Paint is

painting the world red, Tata is rolling out Indicas from Birmingham and Sundram Fasteners

nails home the fact that the Indian company is an entity to be reckoned with.

Tata Motors sells its passenger-car Indica in the UK through a marketing alliance with

Rover and has acquired a Daewoo Commercial Vehicles unit giving it access to

markets in Korea and China.

Ranbaxy is the ninth largest generics company in the world. An impressive 76 percent

of its revenues come from overseas.

Dr Reddy's Laboratories became the first Asia Pacific pharmaceutical company

outside Japan to list on the New York Stock Exchange in 2001.

Asian Paints is among the 10 largest decorative paints makers in the world and has

manufacturing facilities across 24 countries.

Small auto components company Bharat Forge is now the world's second largest

forgings maker. It became the world's second largest forgings manufacturer after

acquiring Carl Dan Peddinghaus a German forgings company last year. Its workforce

includes Japanese, German, American and Chinese people. It has 31 customers across

the world and only 31 percent of its turnover comes from India.

Essel Propack is the world's largest manufacturers of lamitubes - tubes used to

package toothpaste. It has 17 plants spread across 11 countries and a turnover of Rs

609.2 crore for the year ended December 2003. The company commands a staggering

30 percent of the 12.8 billion-units global tubes market.

About 80 percent of revenues for Tata Consultancy Services come from outside India.

This month, it raised Rs 54.2 billion ($1.17 billion) in Asia's second-biggest tech IPO

this year and India's largest IPO ever.

Infosys has 25,634 employees including 600 from 33 nationalities other than Indian. It has 30

marketing offices across the world and 26

24 | P a g e

Economic Reforms in India since 1991

Economic reforms were introduced by the Rajiv Gandhi government (1985-89), it was the

Narasimha Rao Government that gave a definite shape and start to the new economic reforms

of globalization in India. Presenting the 1991-92 Budgets, Finance Minister Manmohan

Singh said: “After four decades of planning for industrialization, we have now reached a

stage where we should welcome, rather fear, foreign investment. Direct foreign investment

would provide access to capital, technology and market.”

In the Memorandum of Economic Policies dated August 27, 1991 to the IMF, the Finance

Minister submitted in the concluding paragraph: “The Government of India believes that the

policies set forth in the Memorandum are adequate to achieve the objectives of the program,

but will take any additional measures appropriate for this purpose. In addition, the

Government will consult with the Fund on the adoption of any measures that may be

appropriate in accordance with the policies of the Fund on such consultations.” Era of 1991

Indian economy had experienced major policy changes in early 1990s. The new economic

reform, popularly known as, Liberalization, Privatization and Globalization (LPG model)

aimed at making the Indian economy as fastest growing economy and globally competitive.

The series of reforms undertaken with respect to industrial sector, trade as well as financial

sector aimed at making the economy more efficient.

With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has

dawned for India and her billion plus population. This period of economic transition has had

a tremendous impact on the overall economic development of almost all major sectors of the

economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks

the advent of the real integration of the Indian economy into the global economy.

Indian economy was in deep crisis in July 1991, when foreign currency reserves had

plummeted to almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal

deficit was very high and had become unsustainable; foreign investors and NRIs had lost

confidence in Indian Economy. Capital was flying out of the country and we were close to

defaulting on loans. So in order to over situation follow policies and steps were initiated by

then UPA government under the leadership of Narasimha Rao.

25 | P a g e

1. Devaluation:

In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the

value of a basket of currencies of major trading partners. India started having balance of

payments problems since 1985, and by the end of 1990, it found itself in serious economic

trouble. The government was close to default and its foreign exchange reserves had dried up

to the point that India could barely finance three weeks’ worth of imports. As in 1966, India

faced high inflation and large government budget deficits. This led the government to devalue

the rupee. At the end of 1999, the Indian Rupee was devalued considerably.

Therefore the first steps towards globalization were taken with the announcement of the

devaluation of Indian currency by 18-19 percent against major currencies in the international

foreign exchange market. In fact, this measure was taken in order to resolve the BOP crisis.

Disinvestment-In order to make the process of globalization smooth, privatization

and liberalization policies are moving along as well. Under the privatization scheme,

most of the public sector undertakings have been/ are being sold to private sector.

Company such as Modern Foods India Ltd., BALCO an aluminum company and very

recent example is coal.

Dismantling of the Industrial Licensing Regime: at present, only six industries are

under compulsory licensing mainly on accounting of environmental safety and

strategic considerations. A significantly amended locational policy in tune with the

liberalized licensing policy is in place. No industrial approval is required from the

government for locations not falling within 25 kms of the periphery of cities having a

population of more than one million.

2. Allowing Foreign Direct Investment

With the initiation of new economic policy in 1991 and subsequent reforms process, India

has witnessed a change in the flow and direction of foreign direct investment (FDI) into the

country. This is mainly due to the removal of restrictive and regulated practices such as

The removal of quantitative restrictions on imports

Trade policy reform has also made progress, though the pace has been slower than in

industrial liberalization. Before the reforms, trade policy was characterized by high tariffs and

26 | P a g e

pervasive import restrictions. Imports of manufactured consumer goods were completely

banned. For capital goods, raw materials and intermediates, certain lists of goods were freely

importable, but for most items where domestic substitutes were being produced, imports were

only possible with import licenses. The criteria for issue of licenses were nontransparent;

delays were endemic and corruption unavoidable. The economic reforms sought to phase out

import licensing and also to reduce import duties.

Quantitative restrictions on imports of manufactured consumer goods and agricultural

products were finally removed on April 1, 2001, almost exactly ten years after the reforms

began, and that in part because of a ruling by a World Trade Organization dispute panel on a

complaint brought by the United States, the reduction of the peak customs tariff from over

300 per cent prior to the 30 per cent rate that applies now.

Throwing Open Industries Reserved For The Public Sector to Private

Participation.

The list of industries reserved solely for the public sector -- which used to cover 18

industries, including iron and steel, heavy plant and machinery, telecommunications and

telecom equipment, minerals, oil, mining, air transport services and electricity generation and

distribution -- has been drastically reduced to three: defense aircrafts and warships, atomic

energy generation, and railway transport. Industrial licensing by the central government has

been almost abolished except for a few hazardous and environmentally sensitive industries.

The requirement that investments by large industrial houses needed a separate clearance

under the Monopolies and Restrictive Trade Practices Act to discourage the concentration

of economic power was abolished and the act itself is to be replaced by a new competition

law which will attempt to regulate anticompetitive behavior in other ways for instance power

generation, transmission and distribution in Mumbai (Tata and reliance power) foreign direct

investment in India increased from US $ 129 million in 1991-92 to US$ 2,214 million in

April 2010. The cumulative amount of FDI equity inflows from August 1991 to April 2010

stood at US$ 134,642 million, according to the data released by the Department of Industrial

Policy and Promotion (DIPP). Today, India provides highest returns on FDI than any other

country in the world. Therefore, India is evolving as one of the 'most favored destination' for

FDI in Asia and the Pacific.

27 | P a g e

Non Resident Indian Scheme

The general policy and facilities for foreign direct investment as available to foreign

investors/ Companies are fully applicable to NRIs as well. In addition, Government has

extended some concessions especially for NRIs and overseas corporate bodies having more

than 60% stake by NRIs

Wide-ranging financial sector reforms

In the banking, capital markets, and insurance sectors, including the deregulation of interest

rates, strong regulation and supervisory systems, and the introduction of foreign/private

sector competition.

3. Financial Sector Reform

India’s reform program included wide-ranging reforms in the banking system and the capital

Markets relatively early in the process with reforms in insurance introduced at a later stage.

Banking sector reforms included:

a. measures for liberalization, like dismantling the complex system of interest

rate controls, eliminating prior approval of the Reserve Bank of India for large

loans, and reducing the statutory requirements to invest in government

securities;

b. measures designed to increase financial soundness, like introducing capital

adequacy requirements and other prudential norms for banks and

strengthening banking supervision;

c. Measures for increasing competition like more liberal licensing of private

banks and freer expansion by foreign banks. These steps have produced some

positive outcomes. There has been a sharp reduction in the share of non-

performing assets in the portfolio and more than 90 percent of the banks now

meet the new capital adequacy standards. However, these figures may

overstate the improvement because domestic standards for classifying assets

as non-performing are less stringent than international standards. India’s

banking reforms differ from those in other developing countries in one

important respect and that is the policy towards public sector banks which

dominate the banking system. The government has announced its intention to

28 | P a g e

reduce its equity share to 33-1/3 percent, but this is to be done while retaining

government control. Improvements in the efficiency of the banking system

will therefore depend on the ability to increase the efficiency of public sector

banks.

The above factors are some of the important factors which have robust the growth of Indian

mnc’s

India was a latecomer to economic reforms, embarking on the process in earnest only in

1991, in the wake of an exceptionally severe balance of payments crisis. The need for a

policy shift had become evident much earlier, as many countries in East Asia achieved high

growth and poverty reduction through policies which emphasized greater export orientation

and encouragement of the private sector. India took some steps in this direction in the 1980s,

but it was not until 1991 that the government signaled a systemic shift to a more open

economy with greater reliance upon market forces, a larger role for the private sector

including foreign investment, and a restructuring of the role of government.

India’s economic performance in the post-reforms period has many positive features. The

average growth rate in the ten year period from 1992-93 to 2001-02 was around 6.0 percent,

as shown in Table 1, which puts India among the fastest growing developing countries in the

1990s. This growth record is only slightly better than the annual average of 5.7 percent in the

1980s, but it can be argued that the 1980s growth was unsustainable, fuelled by a buildup of

external debt which culminated in the crisis of 1991. In sharp contrast, growth in the 1990s

was accompanied by remarkable external stability despite the East Asian crisis. Poverty also

declined significantly in the post-reform period, and at a faster rate than in the 1980s

according to some studies (as Ravalli on and Datt discuss in this issue).

4. Reforms in Industrial and Trade Policy

Reforms in industrial and trade policy were a central focus of much of India’s reform effort in

the early stages. Industrial policy prior to the reforms was characterized by multiple controls

over private investment which limited the areas in which private investors were allowed to

operate, and often also determined the scale of operations, the location of new investment,

and even the technology to be used. The industrial structure that evolved under this regime

was highly inefficient and needed to be supported by a highly protective trade policy, often

providing tailor-made protection to each sector of industry. The costs imposed by these

29 | P a g e

policies had been extensively studied (for example, Bhagwati and Desai, 1965; Bhagwati and

Srinivasan, 1971; Ahluwalia, 1985) and by 1991 a broad consensus had emerged on the need

for greater liberalization and openness. A great deal has been achieved at the end of ten years

of gradualist reforms.

Industrial Policy

Industrial policy has seen the greatest change, with most central government industrial

controls being dismantled. The list of industries reserved solely for the public sector -- which

used to cover 18 industries, including iron and steel, heavy plant and machinery,

telecommunications and telecom equipment, minerals, oil, mining, air transport services and

electricity generation and distribution -- has been drastically reduced to three: defense

aircrafts and warships, atomic energy generation, and railway transport. Industrial licensing

by the central government has been almost abolished except for a few hazardous and

environmentally sensitive industries. The requirement that investments by large industrial

houses needed a separate clearance under the Monopolies and Restrictive Trade Practices Act

to discourage the concentration of economic power was abolished and the act itself is to be

replaced by a new competition law which will attempt to regulate anticompetitive behavior in

other ways.

5. Trade Policy

Trade policy reform has also made progress, though the pace has been slower than in

industrial liberalization. Before the reforms, trade policy was characterized by high tariffs and

pervasive import restrictions. Imports of manufactured consumer goods were completely

banned. For capital goods, raw materials and intermediates, certain lists of goods were freely

importable, but for most items where domestic substitutes were being produced, imports were

only possible with import licenses. The criteria for issue of licenses were nontransparent;

delays were endemic and corruption unavoidable. The economic reforms sought to phase out

import licensing and also to reduce import duties.

Import licensing was abolished relatively early for capital goods and intermediates which

became freely importable in 1993, simultaneously with the switch to a flexible exchange rate

regime. Import licensing had been traditionally defended on the grounds that it was necessary

to manage the balance of payments, but the shift to a flexible exchange rate enabled the

government to argue that any balance of payments impact would be effectively dealt with

through exchange rate flexibility. Removing quantitative restrictions on imports of capital

30 | P a g e

goods and intermediates was relatively easy, because the number of domestic producers was

small and Indian industry welcomed the move as making it more competitive. It was much

more difficult in the case of final consumer goods because the number of domestic producers

affected was very large (partly because much of the consumer goods industry had been

reserved for small scale production). Quantitative restrictions on imports of manufactured

consumer goods and agricultural products were finally removed on April 1, 2001, almost

exactly ten years after the reforms began, and that in part because of a ruling by a World

Trade Organization dispute panel on a complaint brought by the United States.

6. Foreign Direct Investment

Liberalizing foreign direct investment was another important part of India’s reforms, driven

by the belief that this would increase the total volume of investment in the economy, improve

production technology, and increase access to world markets. The policy now allows 100

percent foreign ownership in a large number of industries and majority ownership in all

except banks, insurance companies, telecommunications and airlines. Procedures for

obtaining permission were greatly simplified by listing industries that are eligible for

automatic approval up to specified levels of foreign equity (100 percent, 74 percent and 51

percent). Potential foreign investors investing within these limits only need to register with

the Reserve Bank of India. For investments in other industries, or for a higher share of equity

than is automatically permitted in listed industries, applications are considered by a Foreign

Investment Promotion Board that has established a track record of speedy decisions. In

1993, foreign institutional investors were allowed to purchase shares of listed Indian

companies in the stock market, opening a window for portfolio investment in existing

companies.

These reforms have created a very different competitive environment for India’s industry

than existed in 1991, which has led to significant changes. Indian companies have upgraded

their technology and expanded to more efficient scales of production. They have also

restructured through mergers and acquisitions and refocused their activities to concentrate on

areas of competence. New dynamic firms have displaced older and less dynamic ones: of the

top 100 companies ranked by market capitalization in 1991, about half are no longer in this

group. Foreign investment inflows increased from virtually nothing in 1991 to about 0.5

percent of GDP. Although this figure remains much below the levels of foreign direct

investment in many emerging market countries (not to mention 4 percent of GDP in China),

31 | P a g e

the change from the pre-reform situation is impressive. The presence of foreign-owned firms

and their products in the domestic market is evident and has added greatly to the pressure to

improve quality.

These policy changes were expected to generate faster industrial growth and greater

penetration of world markets in industrial products, but performance in this respect has been

disappointing. As shown in Table 1, industrial growth increased sharply in the first five years

after the reforms, but then slowed to an annual rate of 4.5 percent in the next five years.

Export performance has improved, but modestly. The share of exports of goods in GDP

increased from 5.7 percent in 1990-91 to 9.7 percent, but this reflects in part exchange rate

depreciation. India’s share in world exports, which had declined steadily since 1960,

increased slightly from around 0.5 percent in 1990-91 to 0.6 percent in 1999-2000, but much

of the increase in world market share is due to agricultural exports. India’s manufactured

exports had a 0.5 percent share in world markets for those items in 1990 and this rose to only

0.55 percent by 1999. Unlike the case in China and Southeast Asia, foreign direct investment

in India did not play an important role in export penetration and was instead oriented mainly

towards the domestic market.

One reason why export performance has been modest is the slow progress in lowering import

duties that make India a high cost producer and therefore less attractive as a base for export

production. Exporters have long been able to import inputs needed for exports at zero duty,

but the complex procedure for obtaining the necessary duty-free import licenses typically

involves high transactions cost and delays. High levels of protection compared with other

countries also explains why foreign direct investment in India has been much more oriented

to the protected domestic market, rather than using India as a base for exports. However, high

tariffs are only part of the explanation for poor export performance. The reservation of many

potentially exportable items for production in the small scale sector (which has only recently

been relaxed) was also a relevant factor. The poor quality of India’s infrastructure compared

with infrastructure in east and Southeast Asia, which is discussed later in this paper, is yet

another.

Inflexibility of the labor market is a major factor reducing India’s competitiveness in exports

and also reducing industrial productivity generally (Planning Commission, 2001). Any firm

wishing to close down a plant, or to retrench labor in any unit employing more than 100

workers, can only do so with the permission of the state government, and this permission is

32 | P a g e

rarely granted. These provisions discourage employment and are especially onerous for labor-

intensive sectors. The increased competition in the goods market has made labor more willing

to take reasonable positions, because lack of flexibility only leads to firms losing market

share. However, the legal provisions clearly remain much more onerous than in other

countries. This is important area of reform that has yet to be addressed. The lack of any

system of unemployment insurance makes it difficult to push for major changes in labor

flexibility unless a suitable contributory system that is financially viable can be put in place.

The government has recently announced its intention to amend the law and raise the level of

employment above which firms have to seek permission for retrenchment from 100 workers

at present to 1000 while simultaneously increasing the scale of retrenchment compensation.

However, the amendment has yet to be enacted.

These gaps in the reforms provide a possible explanation for the slowdown in industrial

growth in the second half of the 1990s. It can be argued that the initial relaxation of controls

led to an investment boom, but this could have been sustained only if industrial investment

had been oriented to tapping export markets, as was the case in East Asia. As it happened,

India’s industrial and trade reforms were not strong enough, nor adequately supported by

infrastructure and labor market reforms to generate such a thrust. The one area which has

shown robust growth through the 1990s with a strong export orientation is software

development and various new types of services enabled by information technology like

medical transcription, backup accounting, and customer related services. Export earnings in

this area have grown from $100 million in 1990-91 to over $6 billion in 2000-01 and are

expected to continue to grow at 20 to 30 percent per year. India’s success in this area is one

of the most visible achievements of trade policy reforms which allow access to imports and

technology at exceptionally low rates of duty, and also of the fact that exports in this area

depend primarily on telecommunications infrastructure, which has improved considerably in

the post-reforms period.

7. Infrastructure Development

Rapid growth in a globalized environment requires a well-functioning infrastructure

including especially electric power, road and rail connectivity, telecommunications, air

transport, and efficient ports. India lags behind east and Southeast Asia in these areas. These

services were traditionally provided by public sector monopolies but since the investment

needed to expand capacity and improve quality could not be mobilized by the public sector,

33 | P a g e

these sectors were opened to private investment, including foreign investment. However, the

difficulty in creating an environment which would make it possible for private investors to

enter on terms that would appear reasonable to consumers, while providing an adequate risk-

return profile to investors, was greatly underestimated. Many false starts and disappointments

have resulted.

The greatest disappointment has been in the electric power sector, which was the first area

opened for private investment. Private investors were expected to produce electricity for sale

to the State Electricity Boards, which would control of transmission and distribution.

However, the State Electricity Boards were financially very weak, partly because electricity

tariffs for many categories of consumers were too low and also because very large amounts

of power were lost in transmission and distribution. This loss, which should be between 10 to

15 percent on technical grounds (depending on the extent of the rural network), varies from

35 to 50 percent. The difference reflects theft of electricity, usually with the connivance of

the distribution staff. Private investors, fearing nonpayment by the State Electricity Boards

insisted on arrangements which guaranteed purchase of electricity by state governments

backed by additional guarantees from the central government. These arrangements attracted

criticism because of controversies about the reasonableness of the tariffs demanded by private

sector power producers. Although a large number of proposals for private sector projects

amounting to about 80 percent of existing generation capacity were initiated, very few

reached financial closure and some of those which were implemented ran into trouble

subsequently.i

Civil aviation and ports are two other areas where reforms appear to be succeeding, though

much remains to be done. Two private sector domestic airlines, which began operations after

the reforms, now have more than half the market for domestic air travel. However, proposals

to attract private investment to upgrade the major airports at Mumbai and Delhi have yet to

make visible progress. In the case of ports, 17 private sector projects involving port handling

capacity of 60 million tons, about 20 percent of the total capacity at present, are being

implemented. Some of the new private sector port facilities have set high standards of

productivity.

India’s road network is extensive, but most of it is low quality and this is a major constraint

for interior locations. The major arterial routes have low capacity (commonly just two lanes

in most stretches) and also suffer from poor maintenance. However, some promising

34 | P a g e

initiatives have been taken recently. In 1998, a tax was imposed on gasoline (later extended

to diesel), the proceeds of which are earmarked for the development of the national highways,

state roads and rural roads. This will help finance a major program of upgrading the national

highways connecting Delhi, Mumbai, Chennai and Calcutta to four lanes or more, to be

completed by the end of 2003. It is also planned to levy modest tolls on these highways to

ensure a stream of revenue which could be used for maintenance. A few toll roads and

bridges in areas of high traffic density have been awarded to the private sector for

development.

The railways are a potentially important means of freight transportation but this area is

untouched by reforms as yet. The sector suffers from severe financial constraints, partly due

to a politically determined fare structure in which freight rates have been set excessively high

to subsidize passenger fares, and partly because government ownership has led to wasteful

operating practices. Excess staff is currently estimated at around 25 percent. Resources are

typically spread thinly to respond to political demands for new passenger trains at the cost of

investments that would strengthen the capacity of the railways as a freight carrier. The Expert

Group on Indian Railways (2002) recently submitted a comprehensive program of reform

converting the railways from a departmentally run government enterprise to a corporation,

with a regulatory authority fixing the fares in a rational manner. No decisions have been

announced as yet on these recommendations.

8. Financial Sector Reform

India’s reform program included wide-ranging reforms in the banking system and the capital

markets relatively early in the process with reforms in insurance introduced at a later stage.

Banking sector reforms included: (a) measures for liberalization, like dismantling the

complex system of interest rate controls, eliminating prior approval of the Reserve Bank of

India for large loans, and reducing the statutory requirements to invest in government

securities; (b) measures designed to increase financial soundness, like introducing capital

adequacy requirements and other prudential norms for banks and strengthening banking

supervision; (c) measures for increasing competition like more liberal licensing of private

banks and freer expansion by foreign banks. These steps have produced some positive

outcomes. There has been a sharp reduction in the share of non-performing assets in the

portfolio and more than 90 percent of the banks now meet the new capital adequacy

standards. However, these figures may overstate the improvement because domestic

35 | P a g e

standards for classifying assets as non-performing are less stringent than international

standards.

India’s banking reforms differ from those in other developing countries in one important

respect and that is the policy towards public sector banks which dominate the banking

system. The government has announced its intention to reduce its equity share to 33-1/3

percent, but this is to be done while retaining government control. Improvements in the

efficiency of the banking system will therefore depend on the ability to increase the

efficiency of public sector banks.

9. Privatization

The public sector accounts for about 35 percent of industrial value added in India, but

although privatization has been a prominent component of economic reforms in many

countries, India has been ambivalent on the subject until very recently. Initially, the

government adopted a limited approach of selling a minority stake in public sector enterprises

while retaining management control with the government, a policy described as

“disinvestment” to distinguish it from privatization. The principal motivation was to mobilize

revenue for the budget, though there was some expectation that private shareholders would

increase the commercial orientation of public sector enterprises. This policy had very limited

success. Disinvestment receipts were consistently below budget expectations and the average

realization in the first five years was less than 0.25 percent of GDP compared with an average

of 1.7 percent in seventeen countries reported in a recent study (see Davis et.al. 2000). There

was clearly limited appetite for purchasing shares in public sector companies in which

government remained in control of management.

In 1998, the government announced its willingness to reduce its shareholding to 26 percent

and to transfer management control to private stakeholders purchasing a substantial stake in

all central public sector enterprises except in strategic areas.ii The first such privatization

occurred in 1999, when 74 percent of the equity of Modern Foods India Ltd. (a public sector

bread-making company with 2000 employees), was sold with full management control to

Hindustan Lever, an Indian subsidiary of the Anglo-Dutch multinational Unilever. This was

followed by several similar sales with transfer of management: BALCO, an aluminum

company; Hindustan Zinc; Computer Maintenance Corporation; Lagan Jute Machinery

Manufacturing Company; several hotels; VSNL, which was until recently the monopoly

service supplier for international telecommunications; IPCL, a major petrochemicals unit and

36 | P a g e

Maruti Udyog, India’s largest automobile producer which was a joint venture with Suzuki

Corporation which has now acquired full managerial controls.

An important recent innovation, which may increase public acceptance of privatization, is the

decision to earmark the proceeds of privatization to finance additional expenditure on social

sector development and for retirement of public debt. Privatization is clearly not a permanent

source of revenue, but it can help fill critical gaps in the next five to ten years while longer

term solutions to the fiscal problem are attempted. Many states have also started privatizing

state level public sector enterprises. These are mostly loss making enterprises and are

unlikely to yield significant receipts but privatization will eliminate the recurring burden of

financing losses.

10. Social Sector Development in Health and Education

India’s social indicators at the start of the reforms in 1991 lagged behind the levels achieved

in Southeast Asia 20 years earlier, when those countries started to grow rapidly (Dreze and

Sen, 1995). For example, India’s adult literacy rate in 1991 was 52 percent, compared with

57 percent in Indonesia and 79 percent in Thailand in 1971. The gap in social development

needed to be closed, not only to improve the welfare of the poor and increase their income

earning capacity, but also to create the preconditions for rapid economic growth. While the

logic of economic reforms required a withdrawal of the state from areas in which the private

sector could do the job just as well, if not better, it also required an expansion of public sector

support for social sector development.

Much of the debate in this area has focused on what has happened to expenditure on social

sector development in the post-reform period. Dev and Moolji (2002) find that central

government expenditure on towards social services and rural development increased from 7.6

percent of total expenditure in 1990-91 to 10.2 percent in 2000-01, as shown in Table 4. As a

percentage of GDP, these expenditures show a dip in the first two years of the reforms, when

fiscal stabilization compulsions were dominant, but there is a modest increase thereafter.

However, expenditure trends in the states, which account for 80 percent of total expenditures

in this area, show a definite decline as a percentage of GDP in the post-reforms period.

Taking central and state expenditures together, social sector expenditure has remained more

or less constant as a percentage of GDP.

37 | P a g e

Closing the social sector gaps between India and other countries in southeast Asia will

require additional expenditure, which in turn depends upon improvements in the fiscal

position of both the central and state governments. However, it is also important to improve

the efficiency of resource use in this area. Saxena (2001) has documented the many problems

with existing delivery systems of most social sector services, especially in rural areas. Some

of these problems are directly caused by lack of resources, as when the bulk of the budget is

absorbed in paying salaries, leaving little available for medicines in clinics or essential

teaching aids in schools. There are also governance problems such as nonattendance by

teachers in rural schools and poor quality of teaching.

Part of the solution lies in greater participation by the beneficiaries in supervising education

and health systems, which in turn requires decentralization to local levels and effective

peoples’ participation at these levels. Nongovernment organizations can play a critical role in

this process. Different state governments are experimenting with alternative modalities but a

great deal more needs to be done in this area.

While the challenges in this area are enormous, it is worth noting that social sector indicators

have continued to improve during the reforms. The literacy rate increased from 52 percent in

1991 to 65 percent in 2001, a faster increase in the 1990s than in the previous decade, and the

increase has been particularly high in the some of the low literacy states such as Bihar,

Madhya Pradesh, Uttar Pradesh and Rajasthan.

38 | P a g e

Conclusion

In conclusion, MNCs are beneficial to less developed countries. They improve the

foundations of a "backwards" economic environment through the diffusion of capital,

technology, skills, and exports. MNCs have a direct effect on the development of a more

citizen welfare conscious government. Accordingly, the number of jobs increases, consumer

spending increases, the tax base grows and health care is more widely accessible. They also

have an apparent lasting effect on the values and institutions of the host country. The values

of the country change to reflect a country committed to staying in pace with a rapidly

changing global environment; extending to political norms and nationalistic tendencies. Once

there is openness to capitalism, or a more developed capitalist society emerges then there will

be a more stable global society. However, in the end there really is no other more reliable

way to improve the social, economic, and political environment of a state than by allowing a

MNC to invest. The MNCs is fascinating and important for understanding economic

globalization. There has been substantial progress in the literature in the past couple of

decades.

As a consequence, the government policy was progressively tightened in the following

1) Some industries were not allowed to import technology at all, the underlying principles of

the policy being that

a) No ‘inessential’ article should be produced with fresh imports of technology (this gave the

exiting domestic and foreign producers automatic protection against fresh imports of technol-

ogy).

b) Where domestic capacity was ‘adequate’ no technology should be imported;

2) Among industries where technology imports were allowed, the maximum rate of royalty

was laid down;

3) In some designed industries, foreign investment was allowed in principle, but sanction in

individual cases was a matter of administrative decision;

4) The normal permissible period of agreements was reduced from ten years to five, and

renewals were generally frowned upon;

5) Exports and other marketing restriction were generally not allowed, and often an

obligation to export a certain proportion of the output was insisted upon;

6) A clause was often inserted in the agreements granting permission to the importer to sub-

license the technology;

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7) The CSIR was allowed to look at applications for approval of technology imports, and if it

expressed willingness to supply the technology, approval was withheld or at least delayed.

The most effective curb on the activities of foreign companies, especially MNCs, was

supposed to come with the passing of the Foreign Exchange Regulation Act (FERA) in 1973

to which we now turn.

Multinational companies are not disadvantage to our country. India needs MNCs to become

developed country. But employees of these companies should not take responsibility

for overloaded work just for high salary. So that, there can have fulfillment of passion and

also fulfillment of personal life.

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Bibliography

Books:

1. Introduction To International Economics Author: Dominick Salvatore

Publisher: John Wiley& Sons, 2011

2. Economics Of Global Trade And Finance, Johnson Mascarenhas

3. Mithani&Jhingan, International Economics, S.Chand& Co.

Newsletters and Articles:

1. The Hindu

2. Economic Times

3. Business Line

4. Times Of India

Websites:

1. http://www.weikipedia.com/

2. http://www.tatamotors.com/

3. http://discuss.itacumens.com/index.php?topic=21961.0

4. http://www1.ximb.ac.in/users/fac/Amar/AmarNayak.nsf/dd5cab6801f17235

85256474005327c8/060eac2cc3faa40265256c78003ff893/$FILE/Indian%2

0companies-colloquium.pdf

5. http://www.docstoc.com/docs/22877979/TATA-CASE-STUDY

6. http://www.improvementandinnovation.com/features/article/case-study-

how-tata-steels-created-a-global-strategy-framework/

7. http://www.americanessays.com/study-aids/free-essays/business/india-

attractive-destination-to-the-world.php

8. http://business.mapsofindia.com/india-company/multinational.html

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