Multinational corporation
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A multinational corporation (MNC) or multinational enterprise (MNE) or transnational corporation (TNC) or multinational organization (MNO) is a corporation or enterprise that manages production establishments or delivers services in at least two countries.
Multinational corporations (MNC) are often divided into three broad groups:
Horizontally integrated multinational corporations manage production establishments located in different countries to produce the same or similar products. (example: McDonalds)
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 manage production establishments located in different countries that are neither horizontally or vertically integrated. (example: Microsoft)
Very large multinationals have budgets that exceed those of many countries. Popular claim is that out of the 100 largest economies in the world, 51 are multinational corporations.[1] Actually the claim is based on miscalculation, where two numbers describing totally different things are compared: the GDP of nations to gross sales of corporations. The problem with the comparison is that GDP takes into account only the final value, whereas gross sales don't measure how much was produced outside the company. According to Swedish economist Johan Norberg, if we were to compare nations and corporations, we should be comparing GDP to goods only produced within the particular company (gross sales do not take into account goods purchased from 3rd party vendors and resold, just as GDP doesn't take into account imported goods). That correction would make only 37 of 100 largest economies corporations and all of them would be in bottom box: only 5 corporations would be in top 50.
Multinational corporations can nevertheless have a powerful influence in international relations, given their large economic influence in politicians' representative districts, as well as their extensive financial resources available for public relations and political lobbying.
Multinationals have played an important role in globalization. Given their international reach and mobility, prospective countries, and sometimes regions within countries, must compete with each other to have MNCs locate their facilities (and subsequent tax revenue, employment, and economic activity) within. To compete, countries and regional political districts offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labor standards. This process of becoming more attractive to foreign investment can be characterized as either a race to the bottom, a push towards greater freedom for corporate bodies, or both.
There is a dispute as to which was the first MNC. Some have argued that the Knights Templar, founded in 1118, became a multinational when it stumbled into banking in 1135. However, others claim that the British East India Company or the Dutch East India Company were in fact the first proper multinationals.
Critiques
In 1974, Richard Barnet published Global Reach: The Power of the Multinational Corporations, one of the first systematic critiques of multinationals. Because of their size, multinationals can have a significant impact on government policy primarily through the threat of market withdrawal. For example, in an effort to reduce healthcare costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee (thereby increasing competition in that drug category and lowering the price). When faced with that threat multinational pharmaceuticals firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In those cases, governments have been forced to back down from their efforts. Similar corporate government confrontations have occured when governments tried to force companies to make their intellectual property public in an effort to gain technology for local entrepreneurs. Essentially, when companies are faced with the option of losing their core competitive advantage (technology) and losing a national market, they choose to withdraw from the national market and that often causes governments to change policy. Countries that have been most successful in this type of battle with corporations are large, such as India and Brazil, and so, have viable indigenous competitors.
Clearly companies also try to affect government policy through lobbying and donations to politicians that management feels will be more supportive of corporate goals. Corporate lobbying on a range of topics, from tariff structures to environmental regulations occurs. There is no unified multinational perspective on any of these issues, however. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary and so, some firms favor tighter import restrictions, while others favor looser ones.
As well, for every effort by companies to affect governments, there are many more actions by governments to affect corporate behavior. From nationalization (forcing a company to sell local assets to the government or to other local nationals) to a host of changes in laws and regulations to which business must respond, it is more realistic to think of business government relations as a constant push-and-pull between adversaries, who periodically make peace and move together in a single direction.
The other general complaint about multinational corporations is that the mobility of capital creates "a race to the bottom". That phrase refers to efforts by countries to change their laws and regulations to become more and more corporate friendly in order to attract multinational investment. As they become more corporate friendly, critics argue, they become less responsive to local constituents, including the populations that they should serve and protect. Examples commonly given would be laws that bar "freedom of association" (unionization) or lax environmental standards. In fact, those laws are often chosen because governments also find the corporate-friendly rules comfortable. China, for example, bars freedom of association in most cases, but the country also bars almost every other civil society organization above the very local level that is not government controlled. The current government bars any group that might be a threat to its dominance (remember the Polish anti-Soviet revolution began with the labor union Solidarity).
Evidence actually suggests that multinational corporations pay higher wages, have significantly better environmental records, etc. than local firms. This is a rational move for the corporations as it allows them to attract better workers and it diminishes the likelihood that they can be held liable for problems that arise in their plants. That is not to say that all multinational corporations are virtuous citizens of all of the nations in which they operate, but studies suggest that on the whole, they are much better than local firms and most US firms transfer their home country standards to foreign markets.
[edit] Examples
Main article: List of multinational corporations
The Coca-Cola Company
DaimlerChrysler AG
General Electric
Honda Motor Company
International Business Machines
McDonalds Corporation
Microsoft Corporation
Nintendo Company, Limited
Nokia Corporation
Siemens AG
Sony Corporation
Texas Instruments
Toyota Motor Corporation
Wal-Mart Stores, Inc
Can Indian software firms hold their own against MNCs?
While MNCs position India on the global map by their continued investment in the country, they also pose competition to the local firms in segments like consulting and software services. Pankaj Mishra pits Indian software firms against the MNCs and tries to find out if it’s a ‘win-win’ or a ‘win-lose’ situation for the Indian software industry
Jack Welch, former CEO of General Electric, the world’s most respected company, in his autobiography describes how he met Wipro’s Azim Premji for the first time in India. That was the time when GE was looking for strategic partners in India and Welch was perhaps one of the first to identify India as the outsourcing hub. “The quiet one, Azim Premji came in and gave a thoughtful presentation as to why his company, Wipro, was the right partner for GE.”
Microsoft’s Koppolu says Indians have the expertise to build products on par with that of MNCs
Later Welch forged a JV with Wipro for medical systems and also became one of the largest outsourcers to the Indian software industry. GE accounts for more than two percent of the software outsourced to India. Wipro benchmarked GE’s ‘six sigma’ process and became what Welch describes as “the poster child of the Indian hi-tech industry”. Since then, Indian software firms —essentially services firms—have not only benchmarked the best practises, but have also started competing with the IBMs of the world.
But there is a school of thought which believes that with the MNC software house presence increasing in India, the outsourcing pie shared by the domestic firms is in danger. The traditional outsourcers like Cisco, Ford and GE are moving more work to their own development centres in the country.
What are the strengths, weaknesses, opportunities and threats that Indian software firms face in light of the MNC presence? Is it a win-win situation for both sides or will the local outfits be badly affected in the long run?
Strengths
Infosys’ Gopalkrishnan says with Indian brand equity increasing in the software space, it is only a matter of time
It all started with the great ‘Y2K’ boom when ‘India’ brand became popular in the global software services arena. While the Indian firms went through a kind of ‘identity crisis’, firms like Infosys, TCS, Wipro and HCL Technologies helped the Indian software industry graduate to a mature and reliable option for the outsourcers.
“In the software services arena, Indian brand equity is very high. Not only because of the cost effectiveness, but also because the Indian firms are now looked upon as quality-driven organisations,” says S Gopalakrishnan, co-founder and member of the Board, Infosys.
It would not be fair to expect Indian firms to undertake marketing investments anywhere near to what firms like Microsoft do. Microsoft invests nearly $1 billion annually in promoting and enhancing Windows. Similarly, it could take a few more years to build ‘high value’ equity in the consulting segment but in the services arena, Indian firms enjoy an enviable reputation. Today, India is perceived as the hub for offshore development and firms like Wipro have already started branding their Offshore Development Centres (ODC).
“ODCs in India today are commoditised, branding is the only logical option. Wipro is trying to define brand attributes by branding its ODCs,” says Sangita Singh, vice president of marketing at Wipro Technologies. Everything boils down to the kind of positioning Indian firms have been striving to achieve. Till now, the positioning has been the 35 percent cost advantage and around 10-15 percent production improvement. It is high time the likes of Wipro, TCS and Infosys change gears and position their services at a better overall value proposition.
Weaknesses
Oracle’s Chak says competition aside, India owes a lot to MNCs for getting them the exposure
The Indian software industry has traditionally been software services oriented, which ironically has become one of the weaknesses for Indian firms who want to move up the value chain by developing products. We have players like HCL Technologies, TCS, Infosys, Wipro and NIIT who have now started to move up the value chain of the software development cycle and enhance focus on R&D services. The flip side however, is that most of these Indian players are also aggressively tapping the IT enabled services arena, which according to many analysts is not ‘high value’ work.
But there is a fundamental difference in the type of software development done by the likes of Oracle and Microsoft as compared to, say, Wipro or Infosys. “At Oracle, we are not involved in any kind of custom development or software services. We only undertake product development and designing,” says Ranjan Chak, executive director of the Oracle India Development Centre.
Microsoft, Oracle, Adobe and SAP are all doing product-oriented development. “We have to understand that these MNCs are exploiting Indian talent to use it as their R&D base. The type of development undertaken is very different,” admits Gopalakrishnan.
The services tag is like a double-edged sword. While on one hand it has become a ‘cash cow’ for the Indian firms, on the other hand it acts as a stumbling block for companies like Talisma and ITTIAM when they go to sell products. But when it comes to high-end consulting and productised solutions, Indian firms have a daunting task ahead in terms of shedding the ‘cost-effective services’ image.
“Indian firms don’t have sufficient brand equity in high-end consulting, but then if we look at the MNC subsidiaries in the country, they are all employing Indian professionals,” says Gopalakrishnan. He adds that it is not realistic to expect products like operating systems and databases to come from the Indian firms at present, because the Indian IT industry is not mature enough. But Gopalakrishnan feels that developing products is not a ‘capability issue’ for Indian firms. “Let’s not forget that even the Indian subsidiaries of these MNCs are employing Indian talent only,” he says.
However, this argument seems weak when one considers that firms like TCS and HCL Technologies have been around for almost two decades and yet no significant product offering has emerged.
Opportunities
Developing world-class products or offering high-end consulting services like the Big Five consulting firms are the two routes available for the Indian software industry in its efforts to move up the value chain. The opportunity for the Indian IT industry lies in the success of firms like Sasken, ITTIAM, Talisma, Trivium and i-flex, who are capable of establishing the ‘India brand’ in the global product arena. The ‘big five’’ who are services oriented should now be looking at growing fast in the consulting space either by acquiring companies, or by developing those competencies in-house.
Threats
According to Sunil Mehta, vice-president, Nasscom, the MNC firms account for a mere 15 percent of the total software exports done from India. “Indian firms will continue to get outsourcing deals and the multinational vendors are no threat,” he says. The only MNC development house posing a direct threat to the Indian firms is IBM Global Services. Other vendors like Oracle, Microsoft, SAP and Cisco are oriented towards their in-house product development efforts. Competition is very intense in the A-PAC region, which has emerged as a new geographic market for the Indian firms.
IBM Global Services has an established brand equity, which helps it command premium rates. “With IBM Global Services India (IGSI) business growing in the A-PAC region and diversification into new business segments like AMS, we see IGSI becoming the cornerstone of service delivery for IBM worldwide—specifically the A-PAC region,” says IBM Global Services India director Uday Shukla.
However, an important point to note is that IGSI also has the same Indian talent pool. “The market for software services is competitive and globally IBM Global Services operates in the same sphere as other Indian companies. Every organisation that competes for business brings to the table a certain value proposition. Our value proposition is proven IBM technology and expertise coupled with the best from the Indian talent pool,” says Shukla.
Undoubtedly, as the Indian firms try to move up the value chain and pitch for consulting projects, competition from IBM Global Services will get more intense. “We are now competing more and more with IGSI and there are instances wherein we have lost contracts to them,” says Gopalakrishnan of Infosys.
MNC’s presence conducive
A close look at the first generation of Indian IT entrepreneurs reveals that most of them, at some point in their career, worked for an MNC. “There is no doubt that the Indian software industry owes a lot to MNC vendors, who not only gave them international exposure, but also cultivated the entrepreneurial spirit in them,” says Chak of Oracle. He further adds that the presence of players like Microsoft and Oracle has helped local players.
Most of the MNCs have a ‘leadership’ program in place, which enhances the entrepreneurial skills of their Indian executives. Microsoft’s India Development Centre is also developing managers who can take on responsibilities at the company’s headquarters in Redmond.
When the MNCs like Microsoft and Oracle started telling the world that their Indian subsidiaries were rolling out new products aimed at the global market, an awareness was created that India was a good place to do business in the field of software, and the ‘India brand’ gained further equity.
As Srini Koppolu, director of Microsoft’s India Development Centre proudly puts it, “Today, the IDC is a self-contained unit with program managers, testing professionals and developers. We usually wait for the charter to come from Redmond for working on any new product or solution. With the kind of expertise we have garnered, we are now even in a position to suggest our own products. Everyone from Bill (Gates) to Steve (Ballmer) is excited about the group.”
Achieving synergy
Although the MNCs account for a mere 15 percent of total software exports from India, the kind of work done by them endorses the fact that high-end research and development can be done right here in India. But it is very unlikely that the likes of Oracle and Microsoft will ever outsource product development to Indian firms.
If we take a close look, the Indian software industry has two options—it can either take the product route aggressively or the likes of Wipro and Infosys should move up the value chain by offering end-to-end consulting like, for instance, PriceWaterhouse Coopers. It’s high time the ‘big five’ of the Indian software industry steer away from low-billing-rate maintenance projects that are detrimental to the objective of establishing the Indian IT industry at the higher end of the value chain. Software India has to shift to high-value strategic outsourcing or Business Intelligence projects which could result in huge, sustainable revenue streams that could see the industry through to its ambitious revenue projection estimates.
And for a ‘win-win’ relationship to emerge between the MNCs and Indian firms, the latter would have to achieve more strategic proximity with the former. JVs on the lines of Wipro-GE Medical Systems should be pursued more intently, while at the same time continuing with the usual work being outsourced by the MNCs.