smu bba5 bb0023- Multinationals & their Roles solved assignment

Bachelor of Business Administration-BBA Semester 5

BB0023 Multinationals & their Roles

(Book ID: B0102)

Assignment (60 Marks)

 Note: Each question carries 10 Marks. Answer all the questions. 

1. What is a MNC? Discuss the impact of Foreign Direct Investments in at least two sectors of the Indian economy with examples.

Ans. MNC: An enterprise operating in several countries but managed from one country. Generally, any company or group that derives a quarter of its revenue from operations outside of its home country is considered a multinational corporation.

There are four categories of multinational corporations: (1) a multinational, decentralized corporation with strong home country presence, (2) a global, centralized corporation that acquires cost advantage through centralized production wherever cheaper resources are available, (3) an international company that builds on the parent corporation's technology or R&D, or (4) a transnational enterprise that combines the previous three approaches. According to UN data, some 35,000 companies have direct investment in foreign countries, and the largest 100 of them control about 40 percent of world trade.

Foreign direct investment: Foreign direct investment influences the host country’s economic growth through the transfer of new technologies and know-how, formation of human resources, integration in global markets, increase of competition, and firms’ development and reorganization. Empirically, a variety of studies considers that FDI generate economic growth in the host country. However, there is also evidence that FDI is a source of negative effects. Given this ambiguity of results, the present paper makes a review of the existing theoretical and empirical literature on the subject, intending to shed light on the main explanations for the divergence of results in different studies. The main idea that stands out in this review is that the effects of FDI on economic growth are dependent on the existing or subsequently developed internal conditions of the host country (economic, political, social, cultural or other). Thus, the host countries authorities have a key role in creating the conditions that allow for the leverage of the positive effects or for the reduction of the negative effects of FDI on the host country’s economic growth.

Impact in Retail Sector: Growth of the Retail sector in India - Improvement in Retail capability building- About 5-7 years back, the industry was expected to grow at a much faster rate than what it actually has. Lack of retail experience & capability has been one of the primary reasons for this subdued growth. FDI in retail will make way for inflow of knowledge from international experts which can give boost to the overall growth of the industry. Capability building apart from financial investments is extremely important for the industry.

Impact in Infrastructure: Push to Infrastructure - Improvement in management of supply chain- FDI in retail will boost investment in infrastructure from the retail players, 3rd party supply chain companies as well as the Government in the back of a sophisticated front end that international players are likely to bring. This will improve the efficiency of the supply chain, which will bring down the wastage, increase efficiency and reduce the overall cost to the consumer.

2. “The technologies transferred by the MNC to their production units in the underdeveloped countries are appropriate for the latter’s social and economic development needed”. Do you agree or disagree with this statement. Support your answer with relevant examples.

Ans. Technology diffusion in developing nations is dependent on a continuous flow of good training for all users and potential users. Yet relatively little analysis of the results of this training has been done beyond cursory post-course evaluations. Despite the extensive investments in IT training by donors, multilateral organizations and the national governments, the return on investment for these courses and programs is not clear. This study aims to give a more explicit, long term perspective on IT training in developing nations by employing a popular evaluation model used widely in industry. The Kirkpatrick model treats the training event as only a first step in a process that ultimately involves changing attitudes, behaviors and even life styles. The Romanian Internet Academy case is a pilot study aimed at exploring longer term changes in attitudes and behaviors. While many predictor variables are appropriate, only age, gender, academic productivity and academic discipline were used in this preliminary study. Results indicate that this process can yield useful results for determining the true value of these courses and, just as important, can lead to establishing policies for improving results significantly.

Technology transfer follows subsidiary Driven model where its existence depends on intensity in industry i.e. whether it is capital intensive or labor intensive industry. Capital intensive industry includes crude oil extraction, organic chemicals, pharmaceutical products, synthetic fibers, automobiles, computers and aerospace. Labor intensive includes coal extraction, canned food, cotton, silk and woolen textiles, paper processing, and toys. For example in China though the inward FDI defer a negative effect due to strong market power and crowding out effects but majority of MNC investment went to labor-intensive industries for export. Therefore, negative effect didn't decline the domestic productivity. The capital intensive industries are more absorptive capable as local R&D is required to capture technological distribution. Thus the size of spillover is larger in capital intensive and is more responsive to FDI inflows.

  

3. Briefly discuss the advantages and disadvantages of MNCs.

Ans. Advantages of MNC's for the home country

MNC's home country has the following advantages.

1. MNC’s create opportunities for marketing the products produced in the home country throughout the world.

2. They create employment opportunities to the people of home country both at home and abroad.

3. It gives a boost to the industrial activities of home country.

4. MNC’s help to maintain favorable balance of payment of the home country in the long run.

5. Home country can also get the benefit of foreign culture brought by MNC’s.

Disadvantages of MNC’s for the home country

1. MNC’s transfer the capital from the home country to various host countries causing unfavorable balance of payment.

2. MNC’s may not create employment opportunities to the people of home country if it adopts geocentric approach.

3. As investments in foreign countries is more profitable, MNC’s may neglect the home countries industrial and economic development

Advantages of MNC’s for the host country

MNC’s help the host country in the following ways

1. The investment level, employment level, and income level of the host country increases due to the operation of MNC’s.

2. The industries of host country get latest technology from foreign countries through MNC’s.

3. The host country's business also gets management expertise from MNC’s.

4. The domestic traders and market intermediaries of the host country gets increased business from the operation of MNC’s.

5. MNC’s break protection, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness.

6. Domestic industries can make use of R and D outcomes of MNC’s.

7. The host country can reduce imports and increase exports due to goods produced by MNC’s in the host country. This helps to improve balance of payment.

8. Level of industrial and economic development increases due to the growth of MNC’s in the host country.

Disadvantages of MNC’s for the host country

1. MNC’s may transfer technology which has become outdated in the home country.

2. As MNC’s do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries.

3. MNC’s may kill the domestic industry by monopolizing the host country's market.

4. In order to make profit, MNC’s may use natural resources of the home country indiscriminately and cause depletion of the resources.

5. A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty.

4. Write short notes on the following:

(a) FERA: The Foreign Exchange Regulation Act (FERA) was legislation passed by the Indian Parliament in 1973 by the government of Indira Gandhi and came into force with effect from January 1, 1974. FERA imposed stringent regulations on certain kinds of payments, the dealings in foreign exchange and securities and the transactions which had an indirect impact on the foreign exchange and the import and export of currency. The bill was formulated with the aim of regulating payments and foreign exchange.

FERA: Regulated in India by the Foreign Exchange Regulation Act(FERA),1973.

·         Consisted of 81 sections.

·         FERA Emphasized strict exchange control.

·         Control everything that was specified, relating to foreign exchange.

·         Law violators were treated as criminal offenders.

·         Aimed at minimizing dealings in foreign exchange and foreign securities.

FERA was introduced at a time when foreign exchange (Forex) reserves of the country were low, Forex being a scarce commodity. FERA therefore proceeded on the presumption that all foreign exchange earned by Indian residents rightfully belonged to the Government of India and had to be collected and surrendered to the Reserve bank of India (RBI). FERA primarily prohibited all transactions, except one’s permitted by RBI.

OBJECTIVES:

·         To regulate certain payments.

·         To regulate dealings in foreign exchange and securities.

·         To regulate transactions, indirectly affecting foreign exchange.

·         To regulate the import and export of currency.

·         To conserve precious foreign exchange.

·         The proper utilization of foreign exchange so as to promote the economic development of the country.

(b) Obstacles of foreign capital in developing economies: These are a few factors

Political Instability: In most of the developing countries, the governments are not stable. A new government comes into power overnight; either through coup defeat or army takeover. The new government introduces a new system of rules for the operation of business which causes frustration and discontentment among the people.

Corruption: Corruption is another obstacle to economic development in developing countries. The bribery or gift of money has becomes institutionalized. The govt. officials think bribery is built into their pay structure. The businessmen, if they are to stay in business, have to pay bribes to different departments of the govt. The employees give gift of money to their superiors. When bribery is an acceptable practice, it then becomes difficult for businessmen and industrialists to take part stay and grow in business. Bribery thus limits economic development.

Right Education:  The provision of right education to the citizens of a country is a necessary component of any successful development strategy. In developing countries, the educational system is defective. There is mush-room growth of English medium schools in cities. The syllabus taught to the students at each level of education reflects the Western culture and not the culture and requirements of their own country. The result is that the students holding degrees remain jobless which creates discontent and frustration among them. The brilliant students of the developing countries go outside the country. 

5. Write a brief note on international HRM strategy.

Ans. Human Resource Management is becoming more and more important for multinationals as it is believed to be an important mechanism for co-ordination and control of international operations. At the same time it has been acknowledged that HRM constitutes a major constraint when MNCs try to implement global strategies, mainly because of the different cultural and institutional framework of each county the MNC operates. The national context affects the way people are managed in different countries and MNCs are facing pressures to adapt HRM practices accordingly. The present paper constitutes an investigation into how HRM practices in subsidiaries of MNCs in Greece differ from those in local companies. The descriptive analysis reveals both differences and similarities. It indicates that Greek companies are highly embedded in their local regulatory framework and cultural environment, but there are also sings of change. At the some time, there is evidence that subsidiaries are using hybrid HRM practices, shaped by both local forces and their parent company’s practice.

6. Discuss the organizational structures for multinational strategies.

Ans. Multinational companies are faced with two opposing forces when designing the structure of their organization. They are faced with the need for differentiation that allows them to be specialized and competitive in their local markets. They are also faced with the need to integrate. The structures adopted therefore have to find a balance between these opposing needs and also remain in strategic alignment for the company to thrive. Multinational companies have therefore evolved many structural permutations to suit their business needs.

Subsidiary Model: Owning foreign subsidiaries is one of the most basic structural models of a multinational company. The subsidiaries are self-contained units with their own operations, finance and human resource functions. Thus the foreign subsidiaries are autonomous allowing them to respond to local competitive conditions and develop locally responsive strategies. The major disadvantage of this model however is the decentralization of strategic decisions that makes it difficult for a unified approach to counter global competitive attacks.

Product Division: Organizational structure of the multinational company in this case is developed on the basis of its product portfolio. Each product has its own division that is responsible for the production, marketing, finance and the overall strategy of that particular product globally. The product organizational structure allows the multinational company to weed out product divisions that are not successful. The major disadvantage of this divisional structure is the lack of integral networks that may increase duplication of efforts across countries.

Area Division: Organization using this model is again divisional in nature, and the divisions are based on the geographical area. Each geographical region is responsible for all the products sold within its region. Therefore all the functional units for that particular region namely finance, operations and human resources are under the geographical region responsibility. This structure allows the company to evaluate the geographical markets that are most profitable. However communication problems, internal conflicts and duplication of costs remain an issue.

Functional Structure: Functions such as finance, operations, marketing and human resources determine the structure of the multinational company in this model. For example, all the production personnel globally for a company work under the parameters set by the production department. The advantage of using this structure is that there is greater specialization within departments and more standardized processes across the global network. The disadvantages include the lack of inter department communication and networking that contributes to more rigidity within the organization.

Matrix Structure: Matrix organizational structure is an overlap between the functional and divisional structures. The structure is characterized by dual reporting relationships in which employees report both to the functional manager and the divisional manager. Work projects involve cross-functional teams from multiple functions such as finance, operations and marketing. The members of teams would report both to the project manager as well as their immediate supervisors in finance, operations and marketing. The advantage of this structure is that there is more cross-functional communication that facilitates innovation. The decisions are also more localized. However there can more confusion and power plays because of the dual line of command.

Transnational network: Evolution of the matrix structure has led to the transnational network. The emphasis is more on horizontal communication. Information is now shared centrally using new technology such as "enterprise resource planning (ERP)" systems. This structure is focused on establishing "knowledge pools" and information networks that allow global integration as well local responsiveness.