2012 Impact of Multinational Corporations in India Business Scenario
Alisha Bhasin University Of Lucknow (I.M.S) M.B.A (I.B) IVth Semester R.NO- 10001117004
Acknowledgement Any accomplishment requires the effort of many people and this work is no different. I would like to thank Prof. Avinash Bajpai for giving me an opportunity for doing the project and for helping and guiding me in completion of the project. I would also like to thank Prof. Tarun Singh Gangwar for mentoring me and Dr. Bimal Jaiswal for their continuous support and guidance. I would like to thank my parents and friends who have supported and helped me in the project and constantly motivated me in doing the project. Regardless of the source, I wish to express our gratitude to those who have contributed to this work even though anonymously.
Alisha Bhasin M.B.A (I.B) IVth Sem. 10001117004
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Index 1. Acknowledgement …………………………………. .02 2. Introduction……………….…………………………04-08 3. Definition & Concept………………………………. 09-10 4. F.D.I…………………………………………………10-11 5. Research Methodology……………………………….12 6. Factors That Contributed for the Growth (MNC)…..13-16 7. Advantages & Disadvantages of MNCs……………17-19 8. Control Over MNCs…………………………………20-24 9. Structure and Relationship………………………….25-30 10.MNCs in India…………………………………….31-40 11. Indianisation of MNCs………………………….41-44 12. Impact Of MNCs (sector wise)..…………………45-46 13. Conclusion………………………………………….57 14. Bibliography…………………………………………58
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MULTINATIONAL CORPORATION Introduction A multinational corporation/ company is an organization doing business in more than one country. Transnational company produces, markets, invests, and operates across the world. It is integrated global enterprise which links global with global market at profit. These companies have sales offices and/ or manufacturing facilities in many countries. A corporation (MNC) engages in various activities like exporting, importing, manufacturing in different countries. MNCs have worldwide involvement and a global perspective in its management and decision- making. 1. MNCs consider opportunities throughout the globe through they do the business in a few countries. 2. MNCs invest considerable portion of their assets internationally. 3. MNCs engage in international production and operate plants in the number of countries. 4. MNCs take managerial decision based on a global perspective. The international operations are integrated into the corporations overall business. MNCs are huge industrial/ business organizations. They extend their industrial/ marketing operations through a network of branches or their majority owned foreign affiliates. MNCs produce the products in one or few countries and sell them in most of the countries. Transnational corporations produce the products in each country based on the specific needs of the customers of that country and market these. A transnational corporation mostly uses the inputs of the host country where it operates unlike a multinational company. Large corporations having investment and business in a number of countries, knows by various names such as multinational corporations, international corporations and global corporations have become a very powerful driving force at the world‘s economy.
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MNC‘s are huge industrial organizations which extend their industrial and marketing operations through a network of their branches or their Majority Owned Foreign Affiliates. MNC‘s are also know as Transnational Corporation (TNC‘s). Till 1991, India was more or less a closed Economy. The rate of growth of the economy was limited. The contribution of the local industries to the country‘s GDP was limited that were the main cause of shortage of funds for various development projects initiated by the government. In an effort to revive the industries and to bring the country back on the right track, the government began to open various sectors such as Infrastructure, Automobile, Tourism, Information Technology, Food and Beverages, etc to the Multinational Corporations. The MNCs slowly but reluctantly began to pour capital investment, technology and other valuable resources in the country causing a surge in GDP and upliftment of the economy as a hole. This was the post 1991 era where the government began to invite and welcome giant MNCs into the country. Opportunities for Developing Economies The opportunities for developing economies are significant as well. Through the application of capital, technology, and a range of skills, multinational companies' overseas investments have created positive economic value in host countries, across different industries and within different 5|Page
policy regimes. The single biggest effect evidenced was the improvement in the standards of living of the country's population, as consumers have directly benefited from lower prices, higher quality goods, and broader selection. Improved productivity and output in the sector and its suppliers indirectly contributed to increasing national income. And despite often-cited worries, the impact on employment was either neutral or positive in two-thirds of the cases. Foreign direct investment is already having a dramatic impact on the way companies do business and developing economies integrate with the global economy. Compared to its potential, however, it's just a drop in the bucket. Impact On Developing Economies & Policy Implications: Investments by multinational companies (MNC) allow developing economies to share in the considerable benefits of the global economy. Official incentives, trade barriers, and other regulatory policies, though, can result in inefficiency and waste. Case studies reveal that in virtually all cases, MNC investment had a positive to very positive impact on the host country. Rather than leading to the exploitation of lower-wage workers, as some critics have charged, the investments fostered innovation, productivity, and an improved living standard. Therefore, government seeking those advantages would be advised to favor policies of openness, rather than regulation, when it comes to foreign direct investment. The world's service provider The services sector, which has been growing consistently at a rate of 7 percent per annum, accounts for almost half of the country's GDP. Export revenues from the sector are expected to grow from $8 billion in 2003 to $46 billion in 2007. Global investment banks, brokerages and accounting firms have set up large research establishments in India. A growing number of US companies are hiring Indian mathematics experts to devise models for risk analysis, consumer behaviour and industrial processes. Indian Exports Overview (in Rs. Crore) YEAR 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 6|Page
EXPORTS 32558 44042 53688 69751 82674 106353 118817 130101 139753 159561 203571 209018
GROWTH RATE 17.7 35.3 21.9 29.9 18.5 28.6 11.7 9.5 7.4 14.2 27.6 2.68
2002-03 2003-04 2003-04 (April-Jan) 2004-05(P) (April-Jan)
255137 293367 222863.90 274313.37
22.06 14.98 23.09
Gross Domestic Product (GDP)
Year
Total GDP
1985-86
156566
1990-91
212253
1991-92
213983
1992-93
225268
1993-94
238864
1994-95*
861064
1995-96
926412
1996-97
998978
1997-98
1049191
1998-99
1112206
(In Rs. Crores)
Total GDP
1200000 1000000 800000 600000 400000 200000 0
years
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The world's service provider
The services sector, which has been growing consistently at a rate of 7 percent per annum, accounts for almost half of the country's GDP. Export revenues from the sector are expected to grow from $8 billion in 2003 to $46 billion in 2007. Global investment banks, brokerages and accounting firms have set up large research establishments in India. A growing number of US multinational companies are hiring Indian mathematics experts to devise models for risk analysis, consumer behaviour and industrial processes.
The brick and mortar companies India is not merely a provider of services. Besides being an outsourcing hub, it has grown into a global manufacturing hub. World corporations are now leveraging its proven skills in product design, reconfiguration and customisation with creativity, assured quality and value addition. About 20 percent of Indian automotive production in 2004 is exported to developed countries. India: A Services and Manufacturing Supplier to the World Sector
Company
Outsourcing Client
IT Services
Infosys Tata Consultancy Wipro
Goldman Sachs, Aetna, Northwestern Mutual, Arm Ex, DHL, Verizon GE, Honda, UBS, HSBC Transco, HP-Compaq, Nortel, General Motors, CISCO, Sony
ITES
Mphasis BFL
Citi group, Accenture, AutoZone, Capital One Dell, American Express, Capital one
Spectramind Pharmaceuticals
Cipla Shashun Chemicals Lupin Laboratories
Ivex, Watson Pharma, Eon Labs Eli Lilly, GSK Pharma Apotex, APP, Watson, Pharma
Manufacturing
Bharat Forge Tata Motors Moser Baer Essel Propack
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Meritor, Caterpillar, Toyota, Ford, FAW(China) Rover Imation, BASF P&G, Unilever, Colgate
Definitions and Concepts Global Corporation: it produces in home country or in a single country and focuses on marketing these products globally or produces the products globally and focuses on marketing these products domestically. International Corporation: these corporations conduct the operations in more than one foreign country, but with the domestic orientation. This country believes that the practices adopted in the domestic business, the people and products of the domestic business are superior to those of the other countries. This company extends the domestic product, domestic price, promotions and other business practices to the foreign market. Multinational Corporation: there corporations responds to the specific needs of the different country markets regarding products, promotions and price. Thus MNC operates in more than one country but operates like a domestic company of the country concerned. Transnational Corporations: Transnational Corporations produces, markets, invests, and operates across the world.
A firm which has the power to coordinate and control operations in more than one country, even if it doesn‘t own them. Multinational Corporation (MNC) or transnational corporation (TNC) is a corporation or enterprise that manages production or delivers services in more than one country.
A corporation that has its facilities and other assets in at least one country other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. Very large multinationals have budgets that exceed those of many small countries. Sometimes referred to as a "transnational corporation". A multinational corporation (MNC) or enterprise (MNE) is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation. The International Labour Organization (ILO) has define an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries. The Dutch East India Company was the second multinational corporation in the world (the first, the British East India Company, was founded two years earlier) and the first company to issue stock, and it was the largest of the early multinational companies. It was also arguably the world's first mega corporation, possessing quasi-governmental powers, including the ability to wage war, negotiate treaties, coin money, and establish colonies. Some multinational corporations are very big, with budgets that exceed some nations' GDPs. Multinational corporations can have a powerful influence in local economies, and even the world economy, and play an important role in international relations and globalization.
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WHY COMPANIES BECOME MULTINATIONAL COMPANIES
Foreign Direct Investment FDI or Foreign Direct Investment refers to the investment of foreign currency and other valuable resources by Multinationals into the host country. FDI allows the host country to earn valuable foreign exchange that can be used for future imports or to pay off existing loans of the country. The Government of the host country controls the FDI levels in various segments of the economy such as Telecom, Retail, Tourism, Infrastructure, Research and Development, Automobile and so on. Perhaps the biggest advantage of MNCs is the influx of valuable Foreign Exchange. FDI is required by a developing economy such as ours to tap unexplored resources and put them to more productive use. A series of ambitious economic reforms aimed at stimulating foreign investment has moved India into the front ranks of the rapidly growing Asia Pacific region.
The Finance Minister cleared 46 proposals of foreign direct investment (FDI) amounting to Rs 408.22 crore (US$ 93.4 million) in July 2004. With a half-billion strong middle class, consumer demand in India will grow sky high. According to some estimates, 487 million middle-class Indians will spend an additional $420 billion during the next four years.
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It is evident. The investment scenario in India has changed. And the figures say that it is for the better.
There has been a sharp rise in the number of FDIs approved in 2004. During the first seven months of 2004, between January and July, Rs 5,220 crore worth of FDI was approved. This figure, which accounts for only seven months of 2004, amounts to 96 per cent of the total FDI approved during the full year of 2003. The actual FDI inflow too is expected to surpass last year's figure -- during the first seven months of 2004 actual FDI inflow at Rs 9.503 crore was more than 80 per cent of what the country received in 2003.
In a bid to stimulate the sector further, the government is working on a series of ambitious economic reforms.
The Centre has divested some of its own powers of approving foreign investments that it exercised through the Foreign Investment Promotion Board (FIPB) and has handed them over to the general permission route under the RBI. The FDI cap for aviation has been hiked from 40 to 49 per cent through the automatic route. The government has scrapped Press Note 18, which was acting as a deterrent to foreign investors. It has set up an Investment Commission that will garner investments in the infrastructure sector among others, and plans to increase the limit for investment in the infrastructure sector. India's foreign exchange reserves rose $700 million to a record high of $120.78 billion in July 2004. Comparison between India and China with respect to FDI India vs. China FDI Flows
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Chinese reform process 1977
Indian reform process 1991
5 years since 1982 China USD 4508 m
5 years since 1991 India USD 4488 m
10 years since 1982 China USD 13791 m
10 years since 1991 India USD 15483 m
Research Methodology There are two types of method for researching. Primary and Secondary. Primary research consists of collection of primary data. It involves direct contact with the companies and the people associated with it. Be it the owners, employees, suppliers, customers or the government. My research has been carried out on the basis of secondary data i.e. collection of data from internet, magazines, journals, annual reports of the company, etc. it is a descriptive research as well an exploratory research.
The study is based on secondary data and the facts and figures collected from various sources such as Fact Sheets on MNCs, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India (GOI), Reserve Bank of India, World Bank, UNCTAD, Centre for Monitoring Indian Economy (CMIE) and IMF. Relevant statistical techniques have been used in the study along with simple ratios and averages.
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Factors that contributed for the growth of MNCs in India
Expension of the Market Territory
Market Superiorities
Financial Superiorities
Product Innovation
Technological Superiorities
Growth strategies followed by MNC’s:
1. 2. 3. 4.
Growth is a way of life. Almost all organizations plan to expand. This strategy is followed when an organization aims at higher growth by broadening its one or more of its business in terms of their respective customer groups, customers functions, and alternative technologies singly or jointly – in order to improve its overall performance. There are five types of expansion (Growth) strategies Expansion through concentration Expansion through integration Expansion through diversification Expansion through cooperation 1. Expansion through concentration It involves converging resources in one or more of firms businesses in terms of their respective customer needs, customer functions, or alternative technologies either singly or jointly, in such a manner that it results in expansions. A firm that is familiar with an industry would naturally like to invest more in known business rather than unknown business. Concentration can be done through Market Penetration: It involves selling more products to the same market by focusing intensely on existing markets with its present products, increasing usage by existing customers and increasing market share and restructures a mature market by driving out competitors E.g.: Low pricing strategies
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Market Development: It involves selling the same products to new markets by attracting new users to its existing products. Market development can be geographic wise and demographic wise. E.g.: XEROX Company educated small business entrepreneurs to create new markets. Product Development: It involves selling new products to the same markets by introducing newer products in existing markets. E.g.: the tourism industry in India has not been able to attract new customers in significant numbers. New products such as selling India as a golfing or ayuerveda-based medical treatment destination are some of the product development efforts in the tourism industry to attract more tourists. Advantages of concentration strategies Involves minimal organizational changes and is less threatening. Enables the firm to specialize by gaining the in-depth knowledge of the businesses. Enables the firm to develop competitive advantage. Decision-making can be made easily as there is a high level of productivity. Systems and processes within the firm become familiar to the people in the organization. Disadvantages of concentration strategies It is dependent on one industry if there is any worse condition in the industry the firm will be affected. Factors such as product obsolescence, fickleness of market, emergence of newer technologies are threat to concentrated firm Mangers may not be able to sustain interest and find the work less challenging. It may lead to cash flow problems. 2. Expansion through Integration It is done where the company attempts to widen the scope of its business definition in such a manner that it results in serving the same set of customers. The alternative technology of the business undergoes a change. It is combing activities related to the present activity of a firm. Such a combination may be done through value chain. A value chain is a set of interrelated activity performed by an organization right from the procurement of basic raw materials down to the marketing of finished products to the ultimate customers. E.g.: Several process based industry such as petro chemicals, steel, textiles of hydrocarbons have integrate firm A make or buy decision is then made when firms wish to negotiate with the suppliers or buyers. The cost of making the items used in the manufacture of ones owns products are to be evaluated against the cost of procuring them from suppliers. If the cost of making is less that the cost of procurement then the firm moves up the value chain to make the item itself. Like wise if the cost of selling the finished products is lesser than the price paid to the sellers to do the same thing then the firm would go for direct selling. Among the integration strategies are of two type‘s vertical and horizontal integration. Vertical Integration: when an organization starts making new products that serve its own needs vertical integration takes place. Vertical integration could be of two types Back ward and forward integration. Backward integration means moving back to the source of raw materials while forward integration moves the organization nearer to the ultimate customer. Generally when firms vertically integrate they do so in a complete manner that is they move backward or forward decisively resulting in a full integration but when a firm does not commit it fully it is possible to have partial vertical integration strategies too. Two such partial vertical integration strategies are ‗taper‘ integration and ‗quasi‘ integration. Taper integration requires firms to make a part of their own requirements and to buy the rest from outsiders. Through quasi integration strategies firm purchase most of their requirements from other firms in which they
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1.
2.
3.
1. 2. 3. 4.
have an ownership stake. Ancillary industrial units and outsourcing through sub contracting are adapted forms of quasi integration. Horizontal Integration: when an organization takes up the same type of products at the same level of production or marketing process, it is said to follow a strategy of horizontal integration. When a luggage company takes over its rival luggage company, it is horizontal integration. Horizontal integration strategy may be frequently adopted with a view to expand geographically by buying a competitors business, to increase the market share or to benefit from economics of scale. 3. Expansion through Diversification Diversification is a much used and much talked about set of strategies. It involves a substantial change in the business definition – singly or jointly- in terms of customer groups or alternative technologies of one or more of a firm‘s businesses. . There are two categories, concentric and conglomerate diversification. Concentric Diversification: when an organization takes up an activity in such a manner that is related to the existing business definition of one or more of firms businesses, either in terms of customer groups, customer‘s functions or alternative technologies, it is called concentric diversification. Concentric diversification may be of three types: Marketing related concentric diversification: when a similar type of product is offered with a help of unrelated technology for e.g., a company in the sewing machine business diversifies in to kitchen ware and household appliances, which are sold to house wives through a chain of retails stores. Technology- related concentric diversification: when a new type of product or service is provided with the help of related technology, for e.g., a leasing firm offering hire- purchase services to institutional customers also starts consumer financing for the purchase of durable sot individual customers. Marketing- technology related concentric diversification: when a similar type of product is provided with the help of related technology, for e.g., a rain coat manufacturer makes other rubber based items, such as water proof shoes and rubber gloves sold through the same retail outlets Conglomerate Diversification: when an organization adopts a strategy which requires taking of those activities which are unrelated to the existing businesses definition of one or more of its businesses either in terms of their respective customer groups, customer functions or alternative technologies. Example of Indian company which have adopted apart of growth and expansion through conglomerate diversification the classic examples is of ITC, a cigarette company diversifying into the hotel industry 4. Expansion through Cooperation The term cooperation expresses the idea of simultaneous competition and cooperation among rival firms for mutual benefits. Cooperative strategies could be of the following types: Mergers Takeovers Joint ventures Strategic alliances Mergers Strategies: A merger is a combination of two or more organizations in which one acquires the assets and liabilities of the other in exchange for shares or cash or both the organization are dissolved and the assets and liabilities are combined and new stock is issued. For the organization, which acquires another, it is an acquisition. For the organization, which is acquired, it is a merger. If both the organization dissolves their identity to create a new 15 | P a g e
organization, it is consolidation. There are different types of mergers they are horizontal merger, vertical merger, concentric merger and conglomerate merger. Horizontal Mergers: it takes place when there is a combination of two or more organizations in the same business. E.g: A company making footwear combines with another footwear company, or a retailer of pharmaceutical combines with another retailer in the same businesses. Vertical Mergers: It takes place when there is a combination of two or more organizations, not necessarily in the same business, which create complementarities either in terms of supply of raw materials (input) or marketing of goods and services (outputs). E.g: A footwear company combines with a leather tannery or with a chain shoe retail stores Concentric Mergers: It takes place when there is a combination of two or more organizations related to each other either in terms of customer functions, customer groups, or the alternative technologies used. E.g: A footwear company combining with a hosiery firm making socks or another specialty footwear company, or with a leather goods company making purse, hand bags and so on Conglomerate Mergers: It takes place when there is a combination of two or more organizations unrelated to each other, either in terms of customer functions, customer groups, or alternative technologies used. E.g: A footwear company combining with a pharmaceutical firm. Takeover Strategies: Takeover or acquisition is a popular strategic alternative adopted by Indian companies. Acquisitions usually are based on the strong motivation of the buyer firm to acquire. Takeovers are frequently classified as hostile takeovers (which are against the wishes of the acquired firm) and friendly takeovers (by mutual consent) Friendly takeovers are where a takeover is not resisted or opposed, by the existing management or professionals. E.g: Tata Tea‘s takeover of Consolidated Coffee (a grower of coffee beans) and Asian Coffee (a processor) is an example of a friendly takeover. Hostile takeovers is where a takeover is resisted, or expected to be opposed, by the existing management or professionals. Joint Venture Strategies: Joint ventures are a special case of consolidation where two or more companies from a temporary form a temporary partnership (also called a consortium) for a specified purpose. They occur when an independent firm is created by at least two other firms. Joint ventures may be useful to gain access to a new business mainly under these conditions When an activity is uneconomical for an organization to do alone. When the risk of business has to be shared. When the distinctive competence of two or more organization can be brought together. When the organization has to overcome the hurdles, such as import quotas, tariffs, nationalistic – political interests, and cultural roadblocks. Strategic alliances: They are partnership between firms whereby their resources, capabilities and core competencies are combined to pursue mutual interest to develop, manufacture, or distribute goods or services. There are various advantages: Two or more firms unite to pursue a set of agreed upon goals but remain independent subsequent to the formation of the alliances. A pooling of resources, investment and risks occurs for mutual gain The partner firms contribute on a continuing basis in one or more key strategic areas, for example, technology, product and so forth. Strategic alliances offer a growth route in which merging one‘s entity, acquiring or being acquired, or creating a joint venture may not be required
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Global partners can help local firms by developing global quality consciousness, creating adherence to international quality standards, providing access to state of the art technology, gaining entry to world wide mass markets, and making funds available for expansions.
Advantages of MNC’s:
To the Host country:
(1) Research and development activities: Developing countries lack in research and development areas. Expenditure on research and development is essential for the promotion of technology. Multinational corporations have greater capability for research and development activities in comparison to national companies. Multinationals survive in the international market through their advanced research and development activities. (2) Far-reaching effects on the economic, social and political conditions of the host country: Multinational corporations provide a number of benefits to the host country in the form of (a) Economic growth; (b) increased profits ; (c) Developing of new products; (d) Reduced operational costs; (e) Reduced labour costs; (f) Changing social and political structure, etc. Thus, it helps in the exploitation of resources of host countries for their own economic advancement. (3) Product innovation: Multinational corporations have research and development departments engaged in the task of developing new products, diversification in the product line, etc. Their production opportunities are far greater as compared to national companies.
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(4) Marketing superiority: Multinational corporations enjoy market reputations and face less difficulties in selling their products by adopting effective advertising and sales-promotion techniques. (5) Financial superiority: Multinational corporations generate funds in one country and use such funds in another country. They have huge financial resources at their disposal as compared to national companies. Moreover, multinational corporations have easier access to external capital markets. (6) Technological superiority: Multinational corporations can participate in the industrial development programmes of underdeveloped countries because of their technological superiority. They can produce goods having international standards and quality specifications by adopting the latest technology. Generally, multinationals transfers technology through joint venture projects. (7) Potential source of capital and advanced technology: Economically backward countries invite multinational corporations as a potential source of capital and advanced technology to generate economic growth and to create employment opportunities. (8) Expansion of market territory: Multinational corporations enjoy extension of activities beyond the geographical boundaries of their countries. Multinational corporations can enhance their international image by expanding their operations activities. (9) Creating employment opportunities: Increase in the scale of operations results in more job opportunities. The entry of multinational corporations helps in creating employment opportunities in production and marketing activities. (10) Lower cost of production: Multinational corporations carry on operations on a large-scale, which ensure economics in material, labour and overhead costs.
Disadvantages of MNC's To the Host country: 1.
MNC's may transfer technology which has become outdated in the home country. Obsolete technology may be used in the host country.
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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 indiscriminately 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 payments towards profits, dividends and royalty.
6.
Remittance of dividends and profits that can result in a net outflow of capital.
7.
MNCs engage in anticompetitive activities such as formation of cartels and dumping.
8.
MNCs offer higher wages to its employees in the host countries, which is much more than any other domestic firm.
On the home country:
1.
Loss of jobs.
2.
Loss of tax revenue.
3.
Flexibility of operation is reduced in a foreign political system and thus causes instability.
4.
Competitive advantage of multinationals over domestic firms.
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Control over MNC The new Industrial and Foreign Investment Policy announced on May 31, 1990proclaims to release the Indian industry from "unnecessary bureaucratic shackles by reducing the number of clearances required from the Government". As a part of this objective it is proposed to allow foreign investment upto 40 per cent on an automatic basis subject to a 30 per cent restriction on import of capital goods. Similarly, larger freedom to Indian entrepreneurs in the matter of technology imports is in the offing. The policy explains that these and other proposals would be applicable to all manufacturing units in a specified list' to be announced later. Predictably the announcement generated a great deal of discussion at various fora. However, neither the policy statement nor the subsequent official clarifications throw light on the empirical basis for the decisions with regard to foreign investment and technology. Nor do they reveal any understanding of the nature of foreign private capital already existing in India. Significantly, the likely impact on the balance of payments, self-reliance, indigenous R&D, employment, India's stand on MNCs in the Third World fora and India's social and political spheres have not been spelt out clearly. Is it because the policy makers are not aware of the basic characteristics of the institution of MNC and the long term implications of the open door policy for foreign private capital and technology? The answer might be in the affirmative for the political leaderships but could not be so for the high profile economic advisers. When it is decided to invite, permit or encourage large private corporations from outside the country to find a solution to Indian societal problems on the belief that MNCs would help solve India's major problems -- may it be foreign exchange, inflation, unemployment, interpersonal inequities or regional imbalances it is of importance to discuss direct and indirect implications of the new policy initiatives. First of all, one must recognize that MNCs are private corporations primarily guided by the philosophy of profit maximisation. MNCs are not in social service. There is a need to understand that societal problems cannot be the concern of private business. If one places faith on a wrong institution or instrument one has only to wait for the day of dis-illusionment. Secondly, we need to recognise that MNCs operate world-wide. Most of the largest MNCs originated from the U.S., U.K. and West Germany and have their headquarters located in one or the other part of the industrialised world with market orientation. In operational terms, however, no large MNC has one nationality. MNCs may not be country specific but are economic system specific. It would be difficult to say in India if Nestle (Food Specialities) should be treated as a Swiss Company or a Bahamas' one. Similar would be the case with Pfizer whose foreign shareholder is registered in Panama, while the ultimate parent is located in the U.S. Legal provisions differ from one country to another. It could be that a large MNC is treated as an Indian national company in India, but a foreign one in U.K., France or Japan. MNCs are not nationality specific. Therefore, the top executives have no national hang-ups.2 MNCs represent a network of private business enterprises having operations in large many geographic locations. For any network the success or failure is not judged by the performance or profit of any single wing or business in a 20 | P a g e
country. MNC's business perspective has to be global. It does not fall in the realm of objectivity to expect that MNCs would promote interests of any one nation. It is just not in their character. However, to the extent promotion of exports from a country served their objective of global profit maximisation the MNCs would most certainly do so. Thirdly, MNCs are in private business; and business means all activities that give a net advantage to them. Their choice of activity would depend on their understanding and assessment of market potential. MNCs would engage themselves in any activity that requires investment, market knowledge and experience, business connections, legal rights in tangible or non-tangible assets (ownership of patents, trade marks or monopoly rights) where from the corporation can extract economic return. MNCs, therefore, are not activity or industry specific either. Anything would do. If it was a tobacco company initially, it could take up hotel business or sale of vegetable oils later on. To shift the nature of business operations is normal as long as the new business offers higher return than the traditional industry. If the policy makers of the country develop a misplaced belief that MNCs would help India bridge technology gaps in hi-tech areas or any other industry, the fault does not lie with MNCs. For lack of one's own understanding of business logic and reality the business enterprises cannot be justifiably accused. In the modern age it is well accepted that the institution of state has direct responsibility to lay down rules of the game even for the private business. Public interventions are a pre-requisite for smooth functioning of even the market oriented economies. In the Third World countries, however, the state has to play even a more important role. Many of the Third World countries have adopted regulatory mechanisms. From the view point of business promotion MNCs are bound to take measures that would reduce the intensity of regulations for them. It would be considered a very legitimate action if an MNC decides to cultivate `mutually profitable' relationships with those who control levers of political and administrative power. Investment in politics could be risky but also extremely remunerative. World history is full of instances when MNCs have not hesitated to sponsor coups against political leaderships who posed a threat to MNC business interests. MNCs must aim at diversification in the long run though. Thus, to gain entry if the host country insists on the MNC manufacturing certain products such conditions would be acceptable as long as the host country regulations do not forbid diversification, new investments and expansion. If the host country, on its own awards them Indian nationality and help build their business image why should an MNC object? The policy makers in India have made the people believe that enactment of FERA, imposing export obligations and insistence on diversification is some sort of an unpleasant conditionality. Let anyone examine the record of large private corporations in India or abroad to find out how MNCs have been itching to engage themselves in export; of course, combined with rights to3 import. No MNC would like to invest in a country for the sake of dividends, technology payments, or high salaries to the host country executives. MNCs being a part of international network of business activities cannot afford any one country unit (company or a branch) to live in isolation of the rest. Business autonomy is not a rule of the MNCinstitution.
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MNCs can certainly be depended upon to promote exports as well as imports. Movement towards globalisation is their business philosophy. Can one place a faith in an international private business institution (the MNC) to earn net surplus of foreign exchange for India or any one country? To the extent exports are of raw materials and products that can only be produced in India, comparatively at cheaper prices, MNCs would export from India. The question, however, is not of sheer exports, an equally important issue is of the export prices. If an MNC is buying from five countries, it is but natural that it would buy from the country that offers the lowest price. It has been widely recognised that the buying locations can shift as a business strategy to take advantage of the lowest price. To have a better appreciation of this aspect of international trade and capacity of MNCs, one needs to understand today's reality where in a number of commodities MNCs enjoy a near monopsony status. in absence of producer country alliances buyers dictate the prices. MNCs can comfortably pitch one country suppliers against another. Yet another fact to be understood is that MNCs are large international business networks with control over vast finances, massive framework of distribution and sales outlets in industrially advanced countries, advertising resources, press and communication systems; employing the best and the largest army of attorneys and lawyers, auditors and accountants, researchers and public relations men; and enjoying legal protection to monopoly rights on thousands of basic inventions, industrial processes, patents, trademarks and designs. The network of international information and the speed at which it operates cannot be matched by any one governmental system including the U.S. not to speak of India or any other Third World country. While formulating policies with regard to such a powerful business institution policy makers cannot be casual and project their own illusions. The national costs can be high. MNCs belong to a category of giants in relation to individual governments of many a country like India. If India wishes to harness and benefit from the powerful, we need to understand the natural aptitudes, the motivations, the capacity and other characteristics of MNCs. What we need to also appreciate is that MNCs are invariably aware of their own weakness and incapacity to fight against nationalism and ideologically committed national public systems. The only thing the MNCs yield to is public pressure. To them public means consumers and consumers cannot be easily brushed aside. With fast changes in the global system of production the MNCs would change their business strategies. For instance, instead of seeking to engage themselves directly in production (and make investments) MNCs may increasingly go in for marketing of goods manufactured by others. This could help avoid direct conflicts with labour. What the MNCs, however, insist upon would be the right to brand names. To strengthen this, MNCs would tend to emerge as the biggest patrons of mass media -- TV, Radio and the Press. To remain dominant, it would be only expected that MNCs would insist on having legal and administrative support for patents and other forms of intellectual property rights. Trade and trading activity is a service industry. Expansion of specialised services in the new area; and it should surprise none if the U.S. and other advanced economies are asking for grant of entry of foreign private capital into insurance, construction, banking, consultancy and trade--external and internal. Given these likely trends, the pressure on the Third World countries would be mounted for lowering of regulations on national currencies. 22 | P a g e
To meet the challenge of nationalism and related sensitivities MNCs invariably try hard to wear related host country nationality caps and project their enterprises as promoters of local culture, music and traditions. It helps. Of late MNCs have become more conscious that while avoiding direct political patronage in any host country it is far more effective to find local partners who have high political clout and influence on national governments. This probably explains the recent growth of Birla-Yamaha, Tata-Unisys and Modi-Xerox type of joint ventures. (See Annexure - I for an illustrative list). No wonder, today the very Indian big business who opposed British capital and took a nationalist stance with the Congress and Gandhiji is finding it more profitable to be associates of MNCs. Can one be surprised if FICCI and ASSOCHAM have become the most vocal and loud supporters of MNC entry into India? Who controls FICCI or ASSOCHAM? While these are some of the main characteristics of MNCs, we in India in general and policy makers in particular seem to have felt shy in recognising them. We did not attempt to debate and understand the multifaceted institution known as MNC. It is also possible that we preferred to ignore the reality and chose to follow haunches, beliefs and motivated suggestions. The state of affairs with regard to policy towards MNCs is best illustrated by the fact that the Indian legislations do not recognise even the concept of multinational corporation. While the Government has not found it necessary to undertake an exercise on the identity of the institution of MNC, it is has not hesitated to take the 40 per cent equity limit, fixed for the applicability of the foreign exchange regulation Act, 1973 (FERA) to permit open entry. As a result associates of a number of well known multinationals are treated on par with wholly owned Indian companies. The beneficiaries include: Unilever, Philips, Kodak, BAT Industries, Swedish Match, Nestle, Hoechst, CibaGeigy, Alcan Aluminium, Pfizer, Singer, etc. The fact also remains that --- control is being exercised by the MNCs not only through the ownership of equity capital but also with the help of management rights which they bestowed upon themselves with the Government's explicit consent and legal stamp of approval. In many cases the MNCs wield 100 per cent control while owning far less than 40 per cent foreign equity. (See Annexure - II). Given such extensive control over the affairs of the company it is obvious that the foreign shareholder would decide what to produce, where and to whom to sell and at what price, where to import from and at what price, which technologies to pursue and which products to promote. One needs to ask: would such a high degree of control in foreign hands be beneficial or inimical to self-reliant and independent development? If not, do we have the necessary instruments to make them work to the advantage of the country or, are we voluntarily surrendering nationa regulatory rights to intervene? Coming back to the recent policy announcement, even if one accepts the official explanation that automatic entry of foreign investment up to 40 per cent is allowed only in specific areas, would such a policy continue to be applicable to the existing MNCs? In other words, would such 40 per cent foreign equity companies be restricted to product areas for which they apply to enter India initially or they would have the same freedom as enjoyed by non-FERA national companies? The scenario is not very difficult to imagine. Since the foreign equity would not exceed 40 per cent, the new entrants would straight away qualify to be non-FERA national companies. It is quite a common knowledge how ex-FERA companies are now expanding into a variety of consumer goods both through direct 23 | P a g e
manufacturing and through marketing of products manufactured by small scale units in the former's brand names. There is no instrument with the Government to restrict non FERA companies (whether old or new entrants to India) to `specified lists'. Annexure-III gives an illustrative list of low technology/low priority consumer products manufactured/marketed by MNCs who are otherwise supposed to be engaged in hi-tech production processes. Another anomaly which has not been given the due attention it deserves is with regard to the small scale sector. The policy relaxations are in contradiction with the expectations from the sector. Given the freedom to conclude foreign collaborations would the small scale or for that matter any entrepreneur insist on exports which the foreign collaborator is known to resist? Secondly, wouldn't the resultant excessive dependence on foreign technology alter the character of the small scale sector to make it more capital intensive and reduce its potential for employment generation? Thirdly, can we rule out the possibility of MNCs entering directly in the small scale sector in the absence of any clearcut guidelines with regard to foreign equity in the small scale sector? Would an MNC owned small scale company satisfy in any way the objective behind protecting and promoting small entrepreneurs? One is not aware of any official study to assess whether the existing collaborations are borne out of genuine felt need for technology or were intended to blunt the edge acquired by the competitors through foreign brand names and trademarks. Such competition would without doubt lead to increased dependence on external sources for technology, machinery and raw materials. It is debatable if the country ever really tried to restrict the operations of MNCs. While a feeble attempt has been made to restrict their operations to the so-called AppendixI industries, the Appendix itself has been expanding continuously. While the FERA companies number about one hundred, the restrictions on their trading activities has been relaxed on the plea of export promotion. It is no surprise that a number of the important FERA companies have turned themselves into Export/Trading Houses. To what extent the MNC exports comprise of the products manufactured by them? The plight of Third World countries in the present international context is aptly described by the South Commission when it said: A network of relationships has been built up among private entities -banks, investment houses, transnational companies -- in the leading developed countries. This has served to strengthen the influence of decisions made by private bodies on world economic activity, and to that extent to limit the effectiveness of governmental policy decisions. For the South the result is even further marginalization and greater powerlessness. India is no exception. Strengthening India's own administrative frame and building the capacities to pick what we need and at a price not only that India can afford but that is the lowest in the international market, is the first step in the right direction. It is only through a strong public system one can attempt to keep the MNCs under check.
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Organization structure of MNCs Multinational corporations can be divided into 3 broad groups according to the configuration of their production facilities: 1. Horizontally integrated multinational corporations manage production establishments located in different countries to produce the same or similar products. (example: McDonald's) 2. Vertically integrated multinational corporations manage production establishment in certain country/countries to produce products that serve as input to its production establishments in other country/countries. (example: Adidas or Nike, Inc.) 3. Diversified multinational corporations manage production establishments located in different countries that are neither horizontally nor vertically nor straight, nor nonstraight integrated. (example: Best Western or Hilton Hotels)
Factors influencing MNC’s Structure Company Factors Administrative heritage Company history Top management philosophy Nationality, primarily organizational differences associated with nationality Corporate strategy Degree of internationalization Number of overseas subsidiaries % of sales from overseas markets number of product lines marketed abroad
A progression parallels the product life cycle Stage 1, Introduction – Exporting domestic structure, international operations are treated as appendage Stage 2, Growth – Expansion to manufacturing in low-cost countries international division structure with little integration 25 | P a g e
Stage 3, Maturity – Global operations More sophisticated structures (product division, area division, global matrix/integrated network,etc) Stage 1 - Extension of the domestic structure: EMC (Export Management Company) Trading Company (Japanese Sogo Shosha)
International Manager
Figure 1: international Manager Division
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Export Manager with broad product line
Stage 2 - International Growth / Expansion International Division Structure Ethnocentric (domestic orientation) Centralized control of overseas businesses International Division Structure:
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Geographic (Area) Division Structure Polycentric High % sales from overseas markets Price / product differentiation Geographic (Area) Division Structure:
Product Division Structure Diverse product lines with high technological content Significant responsibility given to young product managers Coordination of different product activities in one country? Product Division Structure:
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International Functional Structure Narrow, standardized product lines Stable competitive environment International Functional Structure:
International Mixed Structure:
International Matrix Structure:
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Relationship between Headquarter and Subsidiary:
Headquarter
Subsidiary-4
Subsidiary-3
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Subsidiary-1
Subsidiary-2
MNCs in India
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Role of MNC’s in India Profit maximization. International network of marketing. Diversification policy. Concentration on consumer goods. Location of central control offices. Techniques to achieve public acceptability. Existence of mordern and sophisticated technology. Existence of modern and sophisticated technology. Business, but not social justice. No concern towards social responsibilities and business ethics. MNC‘s and process of planned economic development in INDIA. Cultural erosion. Unconcern for environmental pollution and ecological balance.
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Where MNC’s operate and the govt receptiveness in different sectors?
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sectors
Ceiling%
banking
49
insurance
26
telecom
74
petroleum
51-100
coal
74-100
Retail sector (single brand products)
51
power
100
trading
100
pharmaceuticals
100
advertising
74-100
E-commerce
100
Should MNC’s be favored or not? Mnc‘s should definitely be favored, as they HELP HOST COUNTRIES. They help in training of local labour with more sophisticated techniques which on the long run will bring external benefits to the host country when these techniques can be used in all economic sectors. They raise the growth rate of host nation by introducing new investment and new technology and also induce their local rivals to become more innovative and competitive. They contribute to taxes, plus provide the host country with foreign exchange that can be used to purchase vital imports. By initiating a higher level of investment, reducing the technological gap, The foreign exchange gap is reduced and The natural resources are utilized fully.
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 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.
A subsidiary, named as Microsoft Corporation India Private Limited, of the U. S. (United States) based Microsoft Corporation, one of the software giant‘s has got their headquarter in New Delhi. Starting its operation in the country from 1990, this company has got the following business units:
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Microsoft Corporation India (Pvt.) Limited (Marketing Division)
Microsoft Global Services India
Microsoft Global Technical Support Centre
Microsoft India Development Centre
Microsoft IT
Microsoft Research India
The net income of Microsoft Corporation grew from $ 14, 569 million in 2009 to $ 18, 760 million in 2010. Working in close association with all the stakeholders including the Government of India, the company is committed towards the development of the Indian software as well as I. T. (Information Technology) industry.
Nokia Corporation was started in the year 1865. Being one of the leading mobile companies in India, their stylish product range includes the following:
Normal mobile handsets
Smart phone
Touch screen phones
Dual sim phones
Business phone
The net sales of the company increased by 4 % in the last financial year with sales of EUR 42.4 billion as compared to 2009's EUR 41 billion. Over the past few years, this company in India has been acquiring companies, which have got new and interesting competencies and technologies so as to enhance their ability of creating the mobile world. Besides new developments to fight against mineral conflicts, they are even to set up Bridge Centers in the country for supporting reemployment. Their first onsite for the installation of renewable power generation are already in place.
PepsiCo. Inc. entered the Indian market with the name of PepsiCo India from the year 1989. Within a short time span of 20 years, this company has emerged as one of the fast growing as well as largest beverage and food manufacturer. As per the annual report of the company in the last business year, the net revenue of PepsiCo grew by 33 %. By the year 2020, this food manufacturing company intends to triple their portfolio of enjoyable and wholesome offerings. The expansion of their Good-For-You portfolio is believed to be assisting the company in 35 | P a g e
attaining the competitive advantage of the growing packaged nutrition market in the world, which is presently valued at $ 500 billion. 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 sale of the company was US $ 1, 868. Successful development of business forms the key component of their trading strategy. Apart from overseas acquisitions, this company is making a continuous Endeavour to enter the new global markets, which have got high potential. For this, they are offering value adding products as well. Reebok International Limited: This global brand is a famous name in the field of sports as well as lifestyle products. Reebok International Limited, a subsidiary of Adidas AG, is based in U. S. A. (United States of America) started its operation in 1890s. During the last financial year, Adidas's currency neutralized group sales increased by 9 %. Apart from their alliance with Cross Fit that is among the largest contemporary fitness movements, in the current year, Reebok's announcement of its partnership with artist, designer and producer Swizz Beatz reflects its long term future growth. Sony: Sony India is a part of the renowned brand name Sony Corporation, which started their business operation in the year 1946 in Japan. Established in India in November 1994, this company has captured one of the leading positions in the field of consumer electronics goods. By the end of the business year 2010 on 31st March, 2011, the company showed a remarkable increase in the share related to numerous categories. Sony India is planning to invest around INR. 150 crore for the marketing of the activities related to ATL and BTL. As far as Bravia TVs are concerned, they are looking forward to hold their market share of 30 %. In between the last and the current financial year, the number of their outlets in the country increased by 1, 000. 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 centre 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 INR. 94 crore deal 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.
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Vodafone: Vodafone Group Plc is an international telecommunication company, which has got it's headquarter based in London in the United Kingdom (U. K.). Earlier known as Vodafone Essar and Hutchison Essar, Vodafone India is among the largest operators of mobile networking in the country. The parent company Hutchison started its business in the year 1992 along with the Max Group, which was its business partner in India. Much later in 2011, Vodafone Group Plc decided to buy out mobile operating business of Essar Group, its partner. The turnover of the Vodafone Group Plc after the completion of the last financial year grew to £ 44, 472 m from £ 41, 017 m that was the turnover of the business year 2009. 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 Defence Security Vehicles Homeland Security Vehicles Passenger Vehicles
Multinational businesses (also called MNCs or multinational corporations) are large companies that are located and/or operate in several countries. While an MNC can be very beneficial to its home country and host country, it can also include drawbacks. The topic of the advantages and disadvantages of MNCs has been an ongoing debate in business circles. Labour MNCs increase the productivity of labour by supplying foreign technology and employing better training methods. The negative aspect of this is that unemployment will increase due to laborsaving technology used by these MNCs. Wages also are often higher than average jobs, but the jobs generated and goods produced often benefit only the richest portions of society, thereby increasing income inequality. Technology MNCs have large amounts of capital; they indulge in huge amounts of research and develop new technologies. At the same time, the transfer of technology to host countries limits the technical knowledge of local subsidiaries. Though domestic industries in the host countries are developed, 37 | P a g e
they rarely know the technical aspects of the technology they are using, which creates a handicap. Tax Benefit In the host countries in which these MNCs operate, they end up paying taxes; this can lead to the MNCs being favoured by the government. The MNCs use this government leverage to receive subsidies and tax benefits; they can also evade taxes by increasing the price of imports and decreasing the price of exports of the products they manufacture. Though they increase the employment and revenue in the host countries, their unfair influence with government can stifle other local businesses. Growth MNCs promote growth in the field of their specialization; they make exports profitable and markets competitive. This increases the national income and the profits of the MNCs. Many MNCs have several fields of operation in which they promote development and research. The disadvantage of this is that the growth is concentrated as the investment in small- and mediumsized industries is often neglected. The MNCs can also promote the growth of local businesses and enhance competition, but their local subsidiaries end up purchasing goods from the parent company at higher prices, thereby increasing the prices in the local markets. MNCs are such companies or institutions that meet out the services and the productions to many countries and there institutions. They serve the customers and the institution best and simultaneously the magnetic chemistry between the country and the foreign MNCs has shown some fruitful results too. Off late the scope of international's performance in India has widened and these influxes in the flourishing on the varied scope are due to the talent and the cost factor that brings the MNCs here. These are not the sole prior causes of the Nokia, Vodafone, Fiat, Ford Motors and as the list moves onto flourish in India. As the basic economic data suggest that after the liberalization in 1991, it has brought in hosts of foreign companies in India and the share of U.S shows the highest. They account about 37% of the turnover from top 20 companies that function in India. Keeping the 'Big Boss' apart there are certain other companies hailing from Britain, France, Netherlands, Italy, Germany, Belgium and Finland that have made a strong footing in India too. They are well flourishing and earning there share of maximum profit too.
Why are Multinational Companies in India? There are a number of reasons why the multinational companies are coming down to India. India has got a huge market. It has also got one of the fastest growing economies in the world. Besides, the policy of the government towards FDI has also played a major role in attracting the multinational companies in India. 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, 38 | P a g e
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.
Profit of MNCs in India 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 some how benefited them and drawn their attention too. The restrictive policies that stopped the company's inflow are however withdrawn and the country has shown much interest to bring in foreign investment here. Besides the foreign directive policies the labour competitive market, market competition and the macroeconomic 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: There are certain advantages that the underdeveloped countries like and the developing countries like India derive from the foreign MNCs that establishes. They are as under:
Initiating a higher level of investment. Reducing the technological gap The natural resources are utilized in true sense. The foreign exchange gap is reduced Boosts up the basic economic structure.
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THE WORLD’S LARGEST MNCs COUNTRYWISE IN 2007:
Rank
Country
No of MNCs
1
European Union
163
2
United States
162
3
Japan
67
4
France
38
5
Germany
37
6
United Kingdome
34
7
China
24
8
Canada
16
9
Netherlands
16
10
South Korea
14
11
Switzerland
13
12
Italy
10
13
Spain
9
14
Australia
9
15
Taiwan
8
16
India
6
17
Sweden
6
18
Brazil
5
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The Indianisation of Transnational’s The story so far: Multinational companies came to India armed with their smug self-belief of many market conquests under their belt. Ran their Made-in-New York strategies, only to run into serious consumer indifference. Are today suitably chastened and are looking to Indianise their brands. Kellogg‘s, MTV, McDonald‘s… the list is impressive. Instead of running over the same ground, let us focus on the underlying conceptual issues that emerge from what we have seen in the last few years. The most fundamental question that arises from this is the validity of the very idea of global brands. In becoming Indian, are these brands becoming less global? If Reebok is available at a very low price point in India, will it compromise the brand in the long run? Is MTV in India a different brand from MTV worldwide?
The Pillsbury Doughboy, for instance cannot possibly evoke the same set of associations in India as it does in England, just as a Gattu would leave a lot of Westerners cold. So, what are the principles that govern successful localisation? What would make a brand global and local at the same time? The first principle of successful localisation would be to understand the core essence of the global brand. The more upstream the definition of what is it that makes Nike the brand it is (answering the human desire for limitlessness), the greater its ability to navigate cultures. The more specific and downstream the definition (worn by the world‘s best athletes), the less its ability to travel across cultures. This is because the relevance of the specific benefit offered may be highly contextual. A brand of cereal aimed at children rooted in a sports setting may be relevant in some markets but in a culture like India, where sports are still seen as eating into studying time, that definition will be a burden. It would be much better to define the brand in terms of the underlying idea that led it to associate with sports (striving for perfection) than try and take on the mantle of promoting sports in order to promote the brand. The problem becomes much more tangible when the brand‘s meaning is expressed in terms of a brand icon (Pillsbury Doughboy, The Cheetos Cheetah). Symbols are powerful because they communicate at many subterranean levels effortlessly. However, when culturally adrift symbols like these are used, brands spend an inordinate amount of time and money trying to breathe some meaning into these lifeless creatures, diverting their energies from their main task of communicating the underlying intent behind the symbols. The symbols become ends by themselves, in the mistaken belief that marketing these symbols is part of ensuring that the brand presents a consistent face across markets. The Pillsbury Doughboy, for instance cannot possibly evoke the same set of associations in India as it does in England, just as a Gattu would leave a lot of Westerners cold. At a conceptual level, for a brand to travel across cultures, it must express what it stands for in human terms. What makes brands global is that they manage to reach beyond individual personalities, beyond filters imposed by cultures into that stratum of human beings that is universal. If a brand desires universal acceptance, then it must define itself in human terms rather than in terms of what the product delivers or even in terms of how the brand is different from competition. Product benefits and competitive advantages can be contextual; primary human 41 | P a g e
motivations are likelier to be universal. If brands do appeal to universal human emotions, why then localise? Why not try really hard to arrive at that universal brand core and communicate that everywhere in the same way? Because that universal core is mediated by an intermediate lens: that of culture. Culture, in the sense of what anthropologist Clifford Geertz called ―a set of control mechanisms – plans, recipes, rules, instructions (what computer engineers call ‗programs‘) for the governing of behaviour.‖ This is the lens of our mind, through which we comprehend reality. At a collective level, bound by a common past and a shared value system, people belonging to a culture share a similarity of perspective. Every culture particularises a universal emotion, converting it from an abstract value into real life actions in the form of rituals, beliefs, etiquette, language etc., thereby making it its own. Take the universal need for families. Every culture values families, but the expression of that varies vastly. To illustrate, the word ‗nephew‘ is borrowed from French, since the English had no need to give that relationship a specific name. In India, we have a specific word describing all relationships, whereas the English language bands all of these together under ‗Uncle‘ or ‗Aunt‘. Like wise the ritual of Raksha Bandhan, for instance magnifies the brother-sister relation in a distinctively Indian way. Overall, the meaning of a family, the priority accorded to it over the considerations of any one individual and the way it is represented is very different from the West. For a global brand to communicate what it stands for in human terms, therefore, it must translate that universal human emotion into its specific cultural counterpart. It is only then that it can truly resonate with the local ethos. For this to happen, brands must understand how the local cultural filter works. Localisation is not about ‗ethnic‘ representations. Being ‗Indian‘ in a self-conscious coffee-table way is nothing but an advertisement of one‘s foreignness. Nor is it about using local celebrities and associating with cricket. These might help, but these are first level connections. The more critical questions exist at the value level. The meaning of MTV is the same the world over (hip, irreverent exuberance), but the role it plays in India is more specific (helped make what is ‗local‘ cool) Take the example of health and hygiene. The desire to protect oneself from the hostile external environment is perhaps a universal one. However, the Western concern with germs is not shared in precisely the same way by the Indian consumer. The Indian notion of hygiene is closer to that of symbolic purification. The Indian need for cleanliness, and the insistence on taking a bath everyday, comes not so much from a desire for hygiene defined in a clinical way, but by way of feeling cleansed and purified. Which is why we have the paradox of excellent personal hygiene co-existing with terrible civic sanitation. Which is why we clean the house twice a day but dump the garbage right outside our doors: the cleaning was symbolic, and outside the door, symbolically lies the outside world. For a brand that is rooted in the idea of hygiene, an understanding of this cultural interpretation is critical. In the absence of this understanding, the brand is in serious danger of talking at crosspurposes with the consumer.
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If a brand does take note of this difference, will the meaning of the brand not get altered? Will the understanding of what the brand stands for not be different than in other parts of the world? If a brand stands for hygiene in the west and for symbolic purification in India, is it really the same brand? It is perhaps unrealistic to expect that the brand is decoded in an exactly similar way the world over. We can control what we emit, but in any case, have little control over what is received. What is received is determined by the specific characteristics of the receiver as well as the larger culture she belongs to. It is perhaps useful to instead allow for this difference in the framework itself. Brands stand for the same thing the world over, but the role they play in the consumer‘s life varies by time and place. The meaning of MTV is the same the world over (hip, irreverent exuberance), but the role it plays in India is more specific (helped make what is ‗local‘ cool). This role is unique to India and comes as a result of the interaction of the global brand meaning with the local context. What this splitting of the brand meaning and the brand role allows us to do is to reconcile the seeming contradiction of a universal meaning and a local expression. It allows us to factor in local imperatives while keeping the ‗globalness‘ of the brand idea intact. The implicit model of a global brand then becomes one with a universal core, but that plays different roles in different cultures as the core meaning gets filtered through the refractory lens of local context. This is pretty much what we have seen in India; the global brands that have successfully Indianised have managed to hold on to their global character at the core essence level, but have not been shy of playing a typically ―Indian‖ role in the lives of the consumer here. Michael Perry, ex-head of Unilever once said, ―The only way to build a global brand is to build a local brand many times over‖. Multinationals in India would certainly nod in agreement.
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Effect of MNCs on Indian Economy 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 worldpopular suppliers and are recruiting staff cutting across nationalities. While an Asian Paints 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. Some instances:
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 comes 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 global software development centres in the US, Canada, Australia, the UK and Japan. Sundram Fasteners is not merely a nuts and bolts company. It believes in thinking out of the box. Probably that is why it decided to acquire a plant in China. The plant in Jiaxin city in the Haiyan economic zone has ensured one fact: that its customers who were earlier buying Sundram products in Europe and the US, did not have to go far from home to access the product.
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Impact of MNCs on Indian Industrial Sectors So far, we have analyzed the Indian Economy and the way in which multinational have added more value and increased the exports, GDP and productivity, resulting in all round development. Further more, we have the actual analysis of the effect of MNCs on various Indian Industrial Sectors. Certain important sectors are considered and the actual effect of MNCs i.e. the practical way in which they are affected are studied viz. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
Aviation Automobiles Auto Components Biotechnology Financial Services Food Industry Gems and Jewellery Healthcare Information Technology IT enabled Services Media & Entertainment Oil & Gas Pharmaceuticals Real Estate Retail Research & Development Science & Technology Steel Textiles Telecommunications Tourism & Hospitality Training & Education
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Impact Of MNCs on Automobile industry The present scenario is a highly transformed one. Multinational giants are vying with one other to launch their models. Big names of the vehicle industry like the Korean giant, Hyundai, General Motors, Mitsubishi etc. have already opened their account. In other vehicle segments too, Volvo, Mercedes Benz, Audi etc. have carved out their niche. In the two-wheeler segment besides the other major MNC brands made available to the Indian consumers. As a result conducting business in the Automotive Industry has become more competitive and sophisticated, which increases the demand for multi skilled personnel. Employment opportunities are emerging with Manufacturers, Dealership Operations including Parts, Sales, Service, Leasing & Financing, as well as in the fast developing Automotive Aftermarket sector. On the other hand, Manufacturing in India has also come of age. The post liberation economical scenario has resulted in all the big names such as General Motors, Ford, Toyota, Honda, Suzuki, Mitsubishi, Mercedes-Benz, Fiat to come up with plants in India. The Indian automotive giants like Telco, Mahindra, Ashok Leyland, Bajaj are revamping their production strategies and launching new models designed and developed indigenously. This has opened up numerous opportunities or employment in this sector for trained and skilled professionals who are well versed in the latest manufacturing process. The growth curve of India Auto Inc. has been on an upswing for the past few years. The high growth observed since 2001-02 in automobile production continued in the first three quarters of the 2004-05. Annual growth was 16.0 per cent in April-December, 2004; the growth rate in 2003-04 was 15.1 percent. Consequent to liberalisation, the arrival of new and contemporary models, easy availability of finance at relatively low rate of interest and price discounts offered by the dealers and manufacturers appear to have stimulated the demand for vehicles and a strong growth of the industry. The automotive industry is the barometer of any major economy and the same holds true for India as well. There has been a phenomenal growth in the automotive manufacturing sector in our economy.
India has become a launch pad Rising sales and strong growth prospects heightened the popularity of auto stocks in July 2004 as foreign institutional investors (FIIs) increased their stakes in key automobile companies like Mahindra & Mahindra, Ashok Leyland, Maruti Udyog, TVS Motors and Hero Honda. Global names such as Daimler Chrysler and Porsche have begun introducing their new offerings in India. DaimlerChrysler plans to launch the new Mercedes SLK roadster, which has just hit European roads, in India by October-November 2004. Porsche is bringing in the Cayenne and Toyota is planning a simultaneous release of its IMV.
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Impact on the Indian Manufacturing sector The resurgence of India's manufacturing sector has been quite magical. Not only are profits soaring, the sector is fast spreading its tentacles abroad as many Indian manufacturing firms inch close to becoming true blue multinationals. The Indian economy grew by 7.4 percent in the April-to-June quarter, FY2005, buoyed by growth in manufacturing and services. Manufacturing grew 8 percent in the quarter, compared with 7.6 percent in the previous quarter. The picture is about to brighten further.
According to a CII-McKinsey report, manufacturing exports from India are likely to grow to $300 billion in 2015 from $48 billion in 2003. The country would then have a 3.5 per cent share of the world manufacturing trade. To reach the $300 billion target, the industry has to clock a growth of 17 per cent every year as against the 11 per cent rate at which it is growing at present. Manufacturing exports from India grew 20 per cent in 2003 over the previous year. Of the total $300 billion, $70- $90 billion is expected to come from just four sectors apparel, auto components, speciality chemicals and electricals and electronic products. India's exports in these sectors were $10 billion in 2002.
Manufacturing firms on expansion binge Manufacturing companies are planning to invest as much as Rs 200,000 crore over the next two years.
Of Rs 200,000 cr, Rs 100,000 cr will come from internal generation Half of this debt may come through the ECB route Most corporates are going for brownfield expansion Rising interest rates won't impact India Inc's investments
With annual outflows averaging at $1 billion, the country's ranking in UNCTAD's outward FDI performance index has already shot up from the 107th position in 1999 to the 61st spot in 2003.
The two most important destinations for Indian FDI last year were the US and the Russian Federation, accounting for around 37 per cent of the total Indian overseas investments during last year, while Europe accounted for 40 per cent of the total outflow. Some large Indian investments
ONGC's 25 per cent stake buy-out in a Sudan oil firm from Talisman Energy of Canada for $720 million (around Rs 3,312 crore) The Hinduja's purchase of controlling interest in C3, a call centre in the Philippines Msource's Spanish language centre in Tijuanna, Mexico
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Manufacturing Outsourcing India is fast developing into a manufacturing hub for world corporations wanting to leverage the sector's proven skills in product design, reconfiguration and customisation with creativity, assured quality and value addition. About 20 percent of Indian automotive production in 2004 is exported to developed countries. While some MNCs enter into OEM deals to source components, others have Indian arms to supply to global markets.
GE has entered into an OEM deal with Thermax India to supply chillers for the latter's power systems. South Korean two-wheeler major Hyosung is making India the manufacturing hub for its 250cc cruiser bike, Aquila through a technical tie-up with Pune-based Kinetic Engineering. Ford Motor Company is aiming to source US$ 120-160 million worth of auto components from Indian manufacturers over the next two years under its India Sourcing Program. Global consumer electronics giant Matsushita of Japan has decided to source Panasonic colour television sets from India for its international market. Colgate is setting up a brand new toothpaste facility in western India which will be one of 15 such facilities across the world.
Impact on Telecom Industry One of the fastest growing sectors in the country, telecommunications has been growing at a feverish pace in the past few years. The speed of growth can be gauged by the fact that in 2004, ten years after private telephony was introduced in India, the mobile subscriber base had crossed the number of fixed line connections.
While fixed lines touched 44 million at the end of 2004, the cellular user base registered a 68 per cent growth to touch the 48-million mark. More than a third of these subscribers were added during 2004. The total telecom subscriber base, consisting of fixed as well as mobile users, registered a growth of 31.42 per cent to touch 92.76 million at the end of 2004. The gross telecom user base stood at 70.58 million at the end of 2003. (According to the Telecom Regulatory Authority of India (TRAI), the growth in the mobile subscriber segment picked up in December 2004 after remaining at around 1.5 million per month for the previous two months.) The year 2004 ended with the tele-density reaching an all-time high of 8.62, as compared to 6.65 at the end of 2003, an increase of over 30 per cent. In the mobile segment, additions consisted of 1.42 million GSM subscribers and 0.53 million CDMA subscribers. The total of 19.51 million mobile users in 2004 marks an increase of 11.5 per cent over the 17.49 million additions made in 2003.
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Even in fixed line, 2.67 million subscribers were added as compared to 2.15 million new users during 2003, registering an increase of 24 per cent.
The non-voice market (message and data services) for mobile operators has also registered tremendous growth in 2004. According to a study by IDC, it had a growth of 139 per cent year on year in 2004. At present non-voice revenue contributes around 4.7 per cent to the total mobile services revenue, which is around Rs. 14,560 crore (US$ 3.3 billion). Analysts believe that if the current rate of growth is maintained, it could add up to amazing figures in the next few years. A study released by Ernst and Young says revenues from the sector could touch US$ 25 billion by 2007.
Telecom statistics January' 05
February'05
March'05
Total subscribers
94.92mn
97.03mn
98.08mn
Tele-density
8.80
9.0
9.08
Fixed line
45.15mn
45.54mn
45.90mn
Additions during the month
0.39mn
0.39mn
0.36mn
Mobile
49.77mn
51.49mn
52.17mn
Total additions during 1.77mn the month
1.67mn
0.73mn
GSM additions
1.27mn
1.13mn
1.24mn
CDMA additions
0.5mn
0.54mn
0.52 mn
Source: TRAI
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Foreign interest The growth statistics combined with the government's decision to increase the foreign direct investment cap in the sector to 74 per cent is generating interest among global investors. While the government expects over US$ 800 million investment from foreign telecom companies in the coming year, a number of them are already here.
Japanese conglomerate Kyocera, which has acquired the mobile equipment division of CDMA technology pioneer Qualcomm, is setting up a mobile phone manufacturing plant in India, and expects to ship phones to Africa by the end of the year. It plans to start shipping to countries in South East Asia, Australia and New Zealand next year. Alcatel wants to make GSM mobile phones in India. The French major is planning a cell phone manufacturing facility in India with an annual capacity of 2.5-5m units to cater to the Asia-Pacific markets. LG recently started assembling phones in India and Nokia plans to set up a manufacturing plant with an investment of US$ 100-150 million. Global handset major Siemens India Ltd is planning to invest over US$ 500 million in India in the next three to four years for setting up new factories and expanding its existing capacities.
Indian companies going global India offers an unprecedented opportunity for telecom service operators, infrastructure vendors, manufacturers and associated services companies. As the sector has been performing well, the bulging bottom lines of Indian telecom companies are making them invest in assets.
The Tata group's Videsh Sanchar Nigam Ltd. (VSNL) struck a $130-million deal to pick up Tyco Global Network's (TGN) 37,208-mile (60,000 kilometre) submarine fibre optic network that connects northern Asia, America and Europe. As part of the TGN deal, VSNL also received a dark (uncommissioned) fibre that links Japan to Singapore and 200 employees of TGN. The Tyco cable has the largest capacity globally. It is of the order of 7 terabits on the Pacific route. Within days of bagging TGN, VSNL inaugurated its own 3,175-kilometre, 5.12-terabit Chennai-Singapore submarine link. Tyco has supplied the optic fibre for the Chennai-Singapore link. VSNL's was the second submarine cable deal struck by an Indian company in 2004. Reliance Infocomm had also picked up FLAG Telecom for $210 million a few months before VSNL bought TGN. The Tata Group has also won a bid to acquire 26 per cent stake in South Africa's second network operator (SNO) that gives the company a mandate to develop and operate both national long distance (NLD) and fixed-line networks in the country. The development helped Tata gain a foothold in the South African market.
Technology advancements Among other tidings in the telecom sector are the technology upgradations being effected in Delhi and Mumbai. India will soon join the elite club of countries that have 3G mobile services. The Mahanagar Telephone Nigam Limited (MTNL), the state-run telecom services provider, is
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setting up India's first 3G network in Delhi and Mumbai. The network, which will have a capacity of 4m lines, will require a total investment of Rs 4,000 crore (US$ 914.9 million).
Impact on IT Sector Information Technology enabled Services (ITES) by MNCs has probably generated the maximum number of sunshine stories in the Indian industry in the last few years. According to Nasscom, the software industry has overtaken the gems and jewellery as well as textiles industries, to become the number one exporter in the country. Currently India is the Power House, The world software Arena. IT is now an industry, which is growing by leaps and bounds both through participation by captive units of multinationals and third party providers of Indian origin. Some of them are the big home-grown IT Services companies like Infosys, Wipro and Tata Consultancy Services (TCS).
The Top Five The top five Indian IT companies based on FY04 revenues-TCS, Wipro, Infosys, Satyam and HCL Technologies-are the prime contenders in the race to the Fortune 500. While the first three have made it to the billion-dollar club, the remaining two are already half way through to that mark. According to Karnik, the way things are shaping up the companies that are most likely to make it are going to be the ones from the current top 10 because the dip-offs in size are sharp beyond the top 10. Experts feel that even within the top 10 the dip-offs start getting sharper after the top three to five companies. As a result, the likelihood is restricted to only the top five and, more specifically, to the top three. The top companies are indeed rapidly expanding their global outlook and reach, setting up centers across the world and competing with the top tier global IT companies. TCS is located across over 30 countries and serves clients in around 60. The global locations for Infosys, Wipro and HCL Technologies range between 10-20 countries. These companies serve some of the top clients globally including the likes of GE, American Express, Ericsson, Ford, Transco, Prudential, Deutsche Bank, and the Standard Chartered Bank. In the last two to three years, these companies have also been open to foreign acquisitions and JVs, to expand their global footprint. And the acquisition list is very long: TCS acquired Phoenix Global Services (technology solution 51 | P a g e
provider); Wipro acquired Nervewire, a US-based financial services consultant and utilities' practice of consultancy AMS; Infosys acquired Expert Information Services of Australia and USbased Trade IQ product division of IQ Financial Systems, a Deutsche Bank-owned outfit; HCL Tech has acquired majority stake in Aalayance, a business integration firm with offices in San Jose, US.
Leading the Charge 2004 S Ramadorai
Azim Premji
Nandan Nilekani
TCS
Wipro
Infosys Technologies
Ranking: 1
Ranking: 2
Ranking: 3
Revenue: $1.6 bn
Revenue: $1.3 bn
Revenue: $1.1 bn
Head Count: 43,000
Head Count: 39,000+6300
Head Count: 35,000+
Market Cap*: $21 bn
Market Cap: $14.4 bn
Market Cap: $19.84 bn
Some IT MNCs in 2004 Global Fortune 500 Name Revenues ($ bn)
Market Cap ($ bn)
IBM
96.23
149
HP
79.9
63
EDS
20.6
10.7
Accenture
15.1
23
CSC
14.7
8.6
Rules of the game But, will this be enough for our top three to join the ranks of the likes of Wal-Mart Stores, BP, Shell Group, Citigroup, General Motors, BMW, IBM, HP, etc. While TCS, Wipro and Infosys may have crossed the psychological billion-dollar barrier, achieving the next few billion dollars is going to be a tough task, warranting a much more rapid growth. Karnik points out that along 52 | P a g e
with organic growth these companies will have to go in for acquisitions to be able to achieve the required rapid growth. "The organic growth will continue to happen but that is not going to be good enough for rapid growth. Acquisitions will help these companies to add expertise in terms of both new markets and technologies,"
Impact of Glaxo, SmithKline merger on India Economy The merger of Glaxo India and SmithKline Beecham Pharma will create the second largest pharmaceutical company in India, based on the results for the year ended 31 December 1998, after Ranbaxy Laboratories, with its sales of Rs 1,382.06 crore. The new entity will have combined net sales of Rs 1,278.26 crore (not counting the sales of SmithKline Beecham Consumer Healthcare). Glaxo Wellcome holds 51 per cent in Glaxo India and Burroughs Wellcome India, while SmithKline Beecham is a 40 per cent affiliate of the UK-based parent. Nutritional products will stay out SmithKline Beecham Consumer Healthcare, or SBCH, is unlikely to be a part of the merger in India. This is because the parent companies have decided to sell their worldwide nutritional business as part of their merger plan. SBCH India is a 40 per cent subsidiary of SmithKline Beecham plc. Glaxo India has already sold its consumer business to Heinz India, which comprised popular brands such as Complan and Glucon-D. SmithKline's consumer business in India comprises of nutrition drinks (Horlicks, and Boost, which together account for a 63 per cent share of this market); oral care products Aqua Fresh toothpaste and tooth brushes; and over-the-counter products Crocin and Eno. Large market share In terms of retail drug sales, the merger of Glaxo, Burroughs Wellcome and SmithKline Pharma would further widen the gap between the number one company and the rest of the top five drug companies in India. According to the IMS 1999 audit (Dec 98 to Nov 99), the merged entity will have combined annual sales of Rs 1,084.87 crore and a 7.92 per cent share of the Indian pharmaceuticals market. Market leader Glaxo's IMS audited sales were Rs 879.36 crore, while SmithKline recorded a retail turnover of Rs 205.51 crore. SmithKline Beecham Pharma is ranked 20 in terms of retail sales. The emerging entity will have a combined annual prescription base of 23.5 million (IMS medical audit Dec 98 to Nov 99). Glaxo, along with its affiliate companies Burroughs Wellcome and Biddle Sawyer have a prescription base of 19 million, while SmithKline products generate 4.5 million prescriptions per year. The two companies complement each other very well in terms of therapeutic classes. Glaxo is the market leader in therapeutic categories such as cephalosporins, plain corticosteroids, antiulcerants and topical corticosteroids. SmithKline is the market leader in pure vaccines and has a 53 | P a g e
sizeable presence in broad spectrum penicillins, anti-infective antidiarrhoeals and iron preparations. Problems to be overcome The amalgamation of the two entities is likely to pose some problems for Glaxo, which is in the midst of a major restructuring excercise. Glaxo has split the product portfolio of Glaxo, Burroughs Wellcome and Biddle Sawyer into seven business units, based on therapeutic categories. "The existing imbroglio between the Burroughs Wellcome union and the Glaxo management is yet to be resolved before Burroughs Wellcome can be integrated with Glaxo. This may cause some delays," says Devinder Pal, chief executive of Mumbai-based Catalyst Pharma consulting. Glaxo spokesperson declined to comment on the merger, but a company source says that a board meeting was held today for preliminary discussions. Another important aspect of the merger is SmithKline Beecham's 100 per cent subsidiary in India – SmithKline Beecham Asia. While SmithKline Pharma has already announced its intentions to launch research products through this subsidiary, Glaxo products too may use this subsidiary to launch certain new products, analysts feel. Glaxo is also not averse to setting up another 100 per cent arm in India. Its chairman Sir Richard Sykes has already conveyed this during his recent visit to the subcontinent.
Pepsi Co. Case Study Pepsico has been an early starter in engaging farmers in India. With an elaborate contractfarming programme underway for the last 15 years, there have been learnings along the way for the cola and foods major. Pepsico‘s Worldwide President and CFO, Indra Nooyi shares some of them with Chaitali Chakravarty & Bhanu Pande. An excerpt. Has Pepsi’s contract farming model changed in India? It hasn‘t changed but evolved over time. In 1989, when Pepsi came into India, we set up a potato processing plant for our snacks business and a tomato processing plant in Punjab for exports. The latter was primarily set up to meet our export obligations. Pepsi‘s entry into contract farming was triggered by the need to make available sufficient quantities of tomatoes & potatoes of the right quality for our domestic plant. To start with, there was no blueprint available either in India or internationally of an appropriate model which could be emulated to structure our contract farming initiative. In that scenario, starting from the basics of application research, we created a model which has evolved to its current form. However, when you take up contract farming for different crops in different areas, suitable modifications and adjustments have to be made to ensure it‘s relevant to local conditions.
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Have the objectives changed? The objective of contract farming is to backward integrate the supply chain to ensure timely availability of right quality and quantity of materials. This basic objective has not undergone any change. Contract farming models rarely generate profits. Why then should an MNC expend so much time and energy on them? What are the collateral benefits of entering the rural economy? Contract farming in itself is not a business. It is an integral part of a business model which ensures that raw material is available at the right time conforming to the quality standards in required quantity at competitive prices. All this to ensure the profitability of the business. Our snacks business requires low sugar potatoes to produce the right quality of potato chips as such varieties weren‘t grown in India. So we had to introduce the suitable varieties via contract farming. Our efforts were also made to increase productivity to ensure higher income for the farmer and to reduce our procurement costs. In order to succeed we had to undertake extensive trials of various varieties and evolve agronomic practices suited to local areas. We then put in place an extension team to transfer these learning‘s to the farmers. Efforts to increase agricultural productivity also go a long way in improving farm incomes, thereby bringing our efforts in sync with the national priorities. Why has Pepsi not been able to scale up contract farming of various crops? The latest seaweed project started out with a different objective. But it suffered delays and is now being touted as a liquid fertiliser project. Doesn’t this show the lack of clarity with which MNCs enter contract farming in India? The contract farming programme gets scaled up in line with business needs. Our potato programme starting from Punjab has a footprint across the country to support manufacturing capacities established in Maharashtra and West Bengal. Today, the number of farmers who participate in our contract farming programme is higher than what we started with, and many of the pioneers are still with us. Close to 50% of the potatoes processed by us come from our contract farming programmes. Do MNCs face any special hurdle entering the rural areas in contract farming? The seaweed contract farming project is a path breaking initiative as cultivation of seaweed in the open sea had never been undertaken before in India. Initially, effectiveness of the technology to deliver a viable and sustainable income model for the growers had to be established. Its efficacy had to be demonstrated to the funding and partnering institutions, who would manage the Self Help Groups undertaking this activity. Last, being a new activity, regulatory clearances were required, which could be granted only after due evaluation and observation of the trials. Only last month, due to the efforts of the CM of Tamil Nadu and her team, Self Help Groups have been given the go ahead to take up this activity. Very soon it will work on a commercial scale. CSMCRI, which provided the technology for this while working on the process optimisation discovered an additional application of the weed. They discovered that it could also 55 | P a g e
deliver a by product — a liquid plant growth nutrient. It made sense for us to acquire this technology for which CSMCRI had taken a global patent. We hope to now make available this organic and cost effective growth nutrient to the Indian farmers and we believe this will have a significant impact on the yields and their incomes. What kind of challenges, if at all, do you see in partnering with farm workers? Any successful initiative requires clear understanding of the ground realities of the terrain and the needs of its people; their resource base and their constraints. Any corporate, Indian or multinational entering this field has to make the effort and spend time and money to learn in order to build a successful partnership with the farmers. Indian farmers have no bias against the multinationals and our 10 years of successful partnership with the Punjab farmers is a testimony of the same.
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Conclusion Multinational companies are like double-edged sword. The sword can harm if not handled properly. Similarly the Multinational companies have their own pros and cons. The extent of technology and management of know-how transfer by the MNCs depend to a large extent on their corporate strategy; for example, firms desiring to have a longer-term relationship with the suppliers (rather than those simply using the host country as a marketing/export base) will be more inclined to effect transfer technology.
As pointed out in the World Investment Report, 2000, MNCs may restrict the access of particular affiliates to technology in order to minimise inter-affiliate competition. It is noted that MNCs are more likely to licence older technologies from which they have already derived significant rents than newer technologies on which there are still relying for market leadership. Further, they may hold back the upgrading of the affiliate technology or invest insufficiently in host-country training and R&D in accordance with their global corporate strategies. Therefore, arguing that FDI inflows and economic liberalization automatically facilitates technology transfer is being extremely naïve.
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Webliography www.ibef.org www.google.com www.cii.com www.ficci.com www.indoinfoline.com
Bibliography International Marketing Management - M.V. Kulkarni
International Marketing - Francis Cherunilam
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