Unit 3
International Factor Mobility
International labour migration is that the mobility of labour from one country to another for a period quite one year.
International labour migration covers the whole world: both the event part and therefore the underdeveloped periphery. Currently there are quite 214 million of international migrants. International migration of the population has played an increasingly significant role within the development of societies and has become a worldwide process that covered the majority the continents and countries, as well as various social strata. The entire number of international migrants increases continuously.
More than half of migrants come from developing countries and countries with economies in transition. From these countries over the past 5 years, industrialized nations have taken 12 million migrants, in other words, the annual inflow of migrants is a mean of two .3 million people, of whom 1.4 million went into the North America and 800 thousand - into the Europe.
International labour migration is one of the objective bases of becoming an integrated international system. At the same time, the matter of free migration is that the most dangerous for governments, both politically and within the social aspect. Ethnic and religious superstition and direct economic threat to the interests of particular groups who are scared of competition from immigrants make this problem too spicy. For politicians, the problem of migration may be a "hot potato that it's better to not remove of the fire. Therefore, during the migration policy implementation is very important to understand the nature and general economic and social implications.
Causes
The international labour migration is caused by both factors of internal economic development of every separate country and external factors: a condition of the international economy as whole and economic relations between the countries. During the certain periods as motive forces of the international labour mobility might be the political, military, religious, national, cultural, family and other social factors. The reasons of the international labour migration are often understood also only as concrete set of the named factors.
Traditionally (in the neoclassical theory) because the basic allocate the economic reason of the international labour migration connected with scales, rates and structure of accumulation of the capital.
1. Differences in rates of accumulation of the capital cause the differences between a beautiful and therefore the repulsive forces of labour in various regions of the world economy that finally defines directions of moving of this factor of production between the countries.
2. Level and scales of accumulation of the capital have direct influence on an occupation level of able-bodied population and, thus, on the sizes of a relative overpopulation (unemployment), which is that the basic source of labour migration.
3. Rates and therefore the sizes of accumulation of the capital, in turn, in certain degree depend upon migration level. This dependence means rather low salary of immigrants and possibility to reduce payment to domestic workers allows reducing the production costs and thereby increasing the accumulation of capital. The same purpose is reached by the organization of production within the countries with low-paid labour. Transnational corporations for the purpose of acceleration of accumulation of the capital use either the labour movement to the capital, or move the capital to the regions with excessive amount of labour.
4. The reason of the labour movement is changes within the pattern of requirements and therefore the production caused by scientific and technical progress. The production cutback or liquidation of some out-of-date branches release labour which searches for its applications in other countries.
So, the international labour migration, first of all, is that the kind of movement concerning surplus population from one centre of accumulation of the capital to another. It’s the economic nature of labour migration.
However, within the international labour migration not only the unemployed, but also a part of the working population is involved. In this case, the driving motive of migration is that the search of more favourable working conditions. The labour moves from the countries with a low standard of living and salaries to the countries with higher ones. So, an objective basis of labour migration is national distinctions within the level of wages.
Effects
Positive Impact
- Unemployment is reduced and people get better job opportunities.
- Migration helps in improving the quality of life of people.
- It helps to improve social life of people as they learn about new culture, customs, and languages which helps to improve brotherhood among people.
- Migration of skilled workers leads to a greater economic growth of the region.
- Children get better opportunities for higher education.
- The population density is reduced and the birth rate decreases.
Negative Impact
- The loss of a person from rural areas, impact on the level of output and development of rural areas.
- The influx of workers in urban areas increases competition for the job, houses, school facilities etc.
- Having large population puts too much pressure on natural resources, amenities and services.
- It is difficult for a villager to survive in urban areas because in urban areas there is no natural environment and pure air. They have to pay for each and everything.
- Migration changes the population of a place; therefore, the distribution of the population is uneven in India.
- Many migrants are completely illiterate and uneducated; therefore, they are not only unfit for most jobs, but also lack basic knowledge and life skills.
- Poverty makes them unable to live a normal and healthy life.
- Children growing up in poverty have no access to proper nutrition, education or health.
- Migration increased the slum areas in cities which increase many problems such as unhygienic conditions, crime, pollution etc.
- Sometimes migrants are exploited.
- Migration is one of the main causes of increasing nuclear family where children grow up without a wider family circle.
Brain drain can be described as the process in which a country loses its most educated and talented workers to other countries through migration. This trend is considered a problem, because the most highly skilled and competent individuals leave the country, and contribute their expertise to the economy of other countries. The country they leave can suffer economic hardships because those who remain don't have the 'know-how' to make a difference.
Brain drain can also be defined as the loss of the academic and technological labour force through the moving of human capital to more favourable geographic, economic, or professional environments. More often than not, the movement occurs from developing countries to developed countries or areas.
Causes of Brain Drain
There are various causes of brain drain, but they differ depending on the country that's experiencing it. The main causes include seeking employment or higher paying jobs, political instability, and to seek a better quality of life. Causes of brain drain can be categorized into push factors and pull factors.
The push factors are negative characteristics of the home country that form the impetus for intelligent people migrating from Lesser Developed Countries (LDC). In addition to unemployment and political instability, some other push factors are the absence of research facilities, employment discrimination, economic underdevelopment, lack of freedom, and poor working conditions.
Pull factors are the positive characteristics of the developed country from which the migrant would like to benefit. Higher paying jobs and a better quality of life are examples of pull factors. Other pull factors include superior economic outlook, the prestige of foreign training, relatively stable political environment, a modernized educational system to allow for superior training, intellectual freedom, and rich cultures. These lists are not complete; there may be other factors, some of which can be specific to countries or even to individuals.
Effects of Brain Drain on the Home Country
When brain drain is prevalent in a developing country, there may be some negative repercussions that can affect the economy. These effects include but are not limited to:
- Loss of tax revenue
- Loss of potential future entrepreneurs
- A shortage of important, skilled workers
- The exodus may lead to loss of confidence in the economy, which will cause persons to desire to leave rather than stay
- Loss of innovative ideas
- Loss of the country's investment in education
- The loss of critical health and education services
Brain drain is usually described as a problem that needs to be solved. However, there are benefits that can be derived from the phenomena. When people move from LDC countries to developed countries, they learn new skills and expertise, which they can utilize to the advantage of the home economy once they return. Another benefit is remittances; the migrants send the money they earn back to the home country, which can help to stimulate the home country's economy.
3.3.1 Foreign Direct Investment
International trade and foreign direct investment (FDI) are the two most important international economic activities integrating the world economy. With the rise within the mobility of factors of production across countries, FDI has become an integral a part of a firm’s strategy to expand international business.
FDI is that the largest source of external finance for developing countries. At the present, inward stock of FDI amounts to about one-third of the developing countries’ gross domestic product (GDP), compared to merely 10 per cent in 1980.
FDI plays an important role within the development process of host economies. It also includes a significant role in enhancing exports of the host country. It's estimated that the sales from foreign-owned facilities are about double the worth of world trade.
FDI not only is a source of capital inflow into host economies, but also helps to reinforce the competitiveness of the domestic economy through transferring technology, strengthening infrastructure, raising productivity, and generating new employment opportunities.
FDI has often been viewed as a threat by host countries because of the capacity of transnational investing firms to influence economic and political affairs. Many developing countries often fear FDI as a modern form of economic colonialism and exploitation, similar to their previous unpleasant experiences with colonial powers.
Yet, FDI flows are generally preferred to other sorts of external finance because these are non-debt creating, non-volatile, and the returns depend upon the performance of the project financed by the investors.
FDI IS CONSIDERED SUPERIOR TO OTHER KIND OF CAPITAL FLOWS BECAUSE OF VARIOUS REASONS:
i. Firms entering a number country through FDI have a long-term perspective in contrast to foreign lenders and portfolio investors. Therefore, FDI flows are less volatile and easier to sustain at the time of economic crisis.
Ii. Debt inflows may finance consumption whereas FDI is more likely to be wont to improve productivity.
Iii. Since FDI provides more than just capital by offering access to internationally available technologies, management know-how, and marketing skills, it's likely to have a strong impact on economic growth.
A firm must evaluate various options to cater to foreign markets and select the most appropriate mode of international business expansion.
Geographical distances of markets or resources, especially for low-value products, make it more attractive to get into manufacturing operations overseas. In addition, the firm must perform a risk benefit analysis of licensing vis-a-vis ownership for its international operations.
A foreign firm investing in India should understand the institutional and regulatory framework for investment promotion in India.
Concept of FDI:
In simple terms, FDI means acquiring ownership in an overseas business entity. It's the movement of capital across national frontiers, which gives the investor control over the assets acquired. FDI occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage it.
It is the management dimension that distinguishes FDI from portfolio investment in foreign stocks and other financial instruments. Conceptually, a firm becomes a multinational corporation (MNC) by way of FDI as its operations extend to multiple countries.
FDI is defined as an investment involving a long-term relationship and reflecting a lasting interest and control by a resident enterprise (foreign direct investor or parent enterprise) in one economy in an enterprise (FDI enterprise or affiliate enterprise or foreign affiliate) resident in an economy aside from that of the foreign direct investor.’
For acquiring substantial controlling interest, generally 10 per cent or more equity is to be acquired within the foreign firm. The ‘lasting interest’ implies the existence of a long- term relationship between the direct investor and therefore the enterprise wherein a significant degree of influence is exerted by the investor within the management of the direct investment enterprise.
Direct investment enterprise refers to an incorporated enterprise in which a foreign investor owns 10 per cent or more of the ordinary shares of voting power or an unincorporated enterprise during which a foreign investor has equivalent ownership.
Ownership of 10 per cent of the ordinary shares or voting stock is that the criterion for determining the existence of a direct investment relationship. These are either directly or indirectly owned by the direct investor. The definition of direct investment enterprise extends to the branches and subsidiaries of the direct investor.
FDI is characterized by decreased sensitivity to fluctuations in foreign exchange rates. Since FDI is that the results of a long-term perspective by the investor, it's much less volatile than foreign portfolio investment. It's been reported that most FDI (i.e., more than 90%) leads to intra-corporate trade at international level.
The returns of FDI are generally in sort of profit, i.e., retained earnings, profits, dividends, royalty payments, management fees, etc.
FOREIGN PORTFOLIO INVESTMENT IN COMPARISON TO FDI:
Foreign portfolio investment (FPI) is defined as an investment by individuals, firms, or a public body in foreign financial instruments, like foreign stocks, government bonds, etc. In FPl, the equity stake within the foreign business entity isn't significant enough to exert any management control.
Thus, FPI is that the passive holding of securities and other financial assets by a foreign firm, which doesn't entail internal control of the issuing firm. High rate of returns and mitigation of risks because of geographical diversification positively influence FPL Thus, FPI is passive whereas FDI is active.
The returns within the case of FPI are generally within the form of non-voting dividends or interest payments. Portfolio investment, like FDI, is part of the capital account of balance of payment (BOP) statistics.
REASONS FOR FDI:
It is important to understand why a firm takes a decision to invest in foreign countries when low-risk alternatives to cater to foreign markets, like exporting and licensing, are already available. Because the firm invests its own resources during a foreign country, the firm is exposed to greater risks. Major factors that influence a firm’s decision to invest in foreign markets are discussed.
Cost of transportation:
Higher costs of transportation between the production facilities and geographically distant markets make it economically unviable for firms to compete or enter such markets. Substantial costs of transportation need to be incurred for marketing products in countries located at larger geographical distances.
For a product with low unit value, i.e., value to weight ratio, like steel, fast food, cement, etc., the cost of transportation has much larger impact on its competitiveness in foreign markets compared to a high-unit value product, like watches, jewellery, computer processors, hard-disks, etc.
Therefore, for low-unit value products, it becomes more attractive to manufacture the products within the foreign country itself either by way of licensing or FDI.
Liability of foreignness:
A firm’s unfamiliarity with the host country and lack of adaptation of business practices during a foreign country often result in a competitive disadvantage vis-a-vis indigenous firm. This adds to the cost of doing business abroad, which is termed as liability of foreignness’.
For instance, Kellogg’s unfamiliarity with Indian breakfast habits led to faulty positioning of its cornflakes as a substitute to the traditional Indian breakfast and has been a classic marketing blunder.
It took several years for Kellogg’s to know the centrality of its traditional food in India’s lifestyle before repositioning its cornflakes as a complementary instead of a substitute to the Indian breakfast. In another instance, Disneyland failed miserably in its French venture primarily thanks to lack of product adaptation in view of significant differences in customers’ preferences in Europe vis-a-vis the US market.
It has to reach a trade-off between scale benefits from concentrating production at a single location and exporting or benefits of FDI, such as proximity of production locations, higher level of control, and gaining better access to the market.
BENEFITS OF FDI:
Potential benefits of FDI to host countries include the following:
Access to superior technology:
Foreign firms bring superior technology to the host countries while investing. The extent of benefits depends upon the technology spill-over to other firms based within the host country.
Increased competition:
The investing foreign firm increases industry output, resulting in overall reduction in domestic prices, improved product or services quality, and greater availability. This intensifies competition in host economies, leading to net improvement in consumer welfare.
Increase in domestic investment:
It is found that capital inflows within the form of FDI increase domestic investment so on survive and effectively answer the increased competition.
Bridging host countries foreign exchange gaps:
In most developing countries, the levels of domestic savings are often insufficient to support capital accumulation to realize growth targets. Besides, the level of foreign exchange could also be insufficient to purchase imported inputs. Under such situations, the FDI helps in making available foreign exchange for imports.
3.3.2 Foreign Institutional Investments
A foreign institutional investor (FII) is an investor or investment fund investing during a country outside of the one during which it's registered or headquartered. The term foreign institutional investor is probably most commonly used in India, where it refers to outside entities investing within the nation's financial markets. The term is also used officially in China.
FOREIGN INSTITUTIONAL INVESTOR (FII)
FIIs can include hedge funds, insurance companies, pension funds, investment banks, and mutual funds. FIIs are often important sources of capital in developing economies, yet many developing nations, like India, have placed limits on the total value of assets an FII can purchase and therefore the number of equities shares it can buy, particularly during a single company. This helps limit the influence of FIIs on individual companies and therefore the nation's financial markets, and therefore the potential damage which may occur if FIIs fled end masse during a crisis.
FOREIGN INSTITUTIONAL INVESTORS (FIIS) IN INDIA
Some of the countries with the highest volume of foreign institutional investments are those with developing economies, which generally provide investors with higher growth potential than mature economies. This is one reason FIIs are commonly found in India, which includes a high-growth economy and attractive individual corporations to invest in. All FIIs in India must register with the Securities and Exchange Board of India (SEBI) to participate within the market.
Example of a foreign Institutional Investor (FII)
If a mutual fund within the United States sees a high-growth investment opportunity in an India-listed company, it can take an extended position by purchasing shares in an Indian stock market. This type of arrangement also benefits private U.S. Investors who might not be able to buy Indian stocks directly. Instead, they will invest within the mutual fund and take part within the high-growth potential.
REGULATIONS ON INVESTING IN INDIAN COMPANIES
FIIs are allowed to invest in India's primary and secondary capital markets only through the country's portfolio investment scheme. This scheme allows FIIs to get shares and debentures of Indian companies on the nation's public exchanges.
However, there are many regulations. For instance, FIIs are generally limited to a maximum investment of 24% of the paid-up capital of the Indian company receiving the investment. However, FIIs can invest more than 24% if the investment is approved by the company's board and a special resolution is passed. The ceiling on FIIs' investments in Indian public-sector banks is just 20% of the banks' paid-up capital.
The reserve bank of India monitors compliance with these limits daily by implementing cut off points 2% below the utmost investment. This provides it an opportunity to caution the Indian company receiving the investment before allowing the final 2% to be purchased.
FOREIGN INSTITUTIONAL INVESTORS (FII)
Foreign Institutional Investors (FII) is an investment fund or a gathering of investors. Such a fund is registered in a foreign country, i.e., not in the country it's investing in. Such institutional investors mostly involve hedge funds, mutual funds, pension funds, insurance bonds, high-value debentures, investment banks etc.
We use this term FII for foreign players investing funds within the financial market of India. They play a big role within the development of our economy. The quantity of funds they invest is very considerable.
So, when such FII’s buy shares and securities the market is bullish and trends upwards. The other can also happen when they withdraw their funds from the markets. So, they have considerable sway over the market.
ADVANTAGES OF FII’S
• FII’s will enhance the flow of capital into the country
• These investors generally prefer equity over debt. So, this may also help maintain and even improve the capital structures of the companies they're investing in.
• They have a positive effect on the competition within the financial markets
• FII helps with the financial innovation of capital markets
• These institutions are professionally managed by asset managers and analysts. They often improve the capital markets of the country.
DISADVANTAGES OF FII’S
• The demand for the local currency (rupee) increases. This can cause severe inflation within the economy.
• These FII’s drive the fortune of huge companies during which they invest. But their buying and selling of securities have a large impact on the stock market. The smaller companies are taken along for the ride.
• Sometimes these FII’s seek only short-term returns. Once they pull their investments banks can face a shortage of funds.
1. Distort of the Pattern of Development of the Economy:
It is not suitable for countries who have adopted a scheme of planned development, while deciding about the investment projects the foreign capitalists will be guided by the maximization of profit criteria and not the plan priorities of the country. In other words, it always invests in low priorities of the economy.
2. Adverse Effect on Domestic Savings:
This sort of investment should be expected to have an income effect which will lead to a higher level of domestic savings. But at the same moment if private foreign investment reduces profits in domestic industries, it will adversely affect the income of profit earning and further will tend to reduce domestic savings.
3. Adverse Effect on Balance of Payments of the Recipient Country:
Foreign investors may earn huge profits which are to be repatriated in due course of time. The repatriation of these profits may turn into serious imbalances in the balance of payments of the recipient nation.
4. Not Useful on Political Grounds:
Private foreign investment in under developed countries is feared not only for economic reasons but also on political grounds. There is a great fear that it may lead to loss of independence of the recipient country. In the opinion of Prof. Lewis, “The loss of independence may be partial or complete; partial if the capitalists confine themselves to bribing politicians or backing one political group against another or complete if the debtor country is reduced to colonial status”.
These fears are quite widespread. They are mainly responsible for the reluctance on the part of developing countries to accept private foreign capital. In this connection Prof. WA. Lewis holds the view that, “These fears are one of the strongest reasons as to why the less developed countries are anxious that the United Nations should create adequate institutions for transferring capital so that they should not become dependent upon receiving capital from any one of the great powers”.
5. Limited Coverage:
Private capital usually restricts itself to certain limited spheres of economic life. For example, it chooses those industries where it can make large and quick profits, irrespective of the fact whether the development of those industries is in the development interest. Such industries are largely consumer goods industries or those industries in which the gestation period is not too long. It is for these reasons that in India before Independence, foreign capital mostly British, was directed to such industries as plantations, etc.
6. More Dependence:
The use of private capital often increases dependence on foreign sources. This happens at least on two counts. One is that the use of foreign technology appropriate to the resource-endowments of advanced countries does not permit the development of indigenous technology appropriate to the conditions of the recipient country.
On the contrary, it positively discourages the development of such a technology in competition with itself. This means the country in question will continue to depend upon the import of foreign technology. Two, the foreign technology used requires import of goods for replacement and maintenance, thereby creating balance of payments difficulties.
We have taken so much from the foreign technical know-how that we have not yet developed what may be described, as an appropriate technology suited to our resources and needs. Further, imports of replacement and maintenance goods are costing us a lot.
7. Restrictive Conditions:
In many cases foreign collaboration agreements contain restrictive clauses in respect of such things as exports. For example, foreign collaborators make investments to exploit the Indian market because they find it difficult to approach this market from outside.
But these collaborators do not want the Indian concern to export its goods to other countries which are already being supplied by the foreign collaborators from their concerns operating in other countries. Obviously, such agreements are of limited value for the country.
8. Remittance of Large Amounts:
Remittance of profits of course is a normal facility which the foreign investor expects. But often the profits earned in the early stages are high, involving big remittances. In many collaboration agreements, for example, the initial foreign capital is confined to the foreign exchange component of the project.
The rest of the resources are made available through internal sources. Since the rate of return on initial investment is usually very high, it makes it possible for the foreign collaborator to recover his amount in a relatively short time. Yet the payment on account of such things as technical services, royalty payments, etc., continues.
From the above cited discussion, it can easily be concluded that private foreign capital is not very safe for less developed countries, it does not fit into their planned development. Again, it does not provide hope for their rapid industrialization and economic growth.
Meaning of Multinational Companies (MNCS):
A multinational company is one which is incorporated in one country (called the home country); but whose operations extend beyond the home country and which carries on business in other countries (called the host countries) in addition to the home country.
It must be emphasized that the headquarters of a multinational company are located within the home country.
Neil H. Jacoby defines a multinational company as follows:
“A multinational corporation owns and manages business in two or more countries.”
Point of comment:
A multinational corporation is known by various names such as: global enterprise, international enterprise, world enterprise, transnational corporation etc.
Features of Multinational Corporations (MNCS):
Following are the salient features of MNCs:
(i) Huge Assets and Turnover:
Because of operations on a global basis, MNCs have huge physical and financial assets. This also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many MNCs are bigger than national economies of several countries.
(ii) International Operations Through a Network of Branches:
MNCs have production and marketing operations in several countries; operating through a network of branches, subsidiaries and affiliates in host countries.
(iii) Unity of Control:
MNCs are characterized by unity of control. MNCs control business activities of their branches in foreign countries through head office located within the home country. Managements of branches operate within the policy framework of the parent corporation.
(iv) Mighty Economic Power:
MNCs are powerful economic entities. They keep on adding to their economic power through constant mergers and acquisitions of companies, in host countries.
(v) Advanced and sophisticated Technology:
Generally, a MNC has at its command advanced and sophisticated technology. It employs capital intensive technology in manufacturing and marketing.
(vi) Professional Management:
A MNC employs professionally trained managers to handle huge funds, advanced technology and international business operations.
(vii)Aggressive Advertising and Marketing:
MNCs spend huge sums of money on advertising and marketing to secure international business. This is, perhaps, the biggest strategy of success of MNCs. Due to this strategy, they're able to sell whatever products/services, and they produce/generate.
(viii) Better Quality of Products:
A MNC has got to compete on the world level. It, therefore, has got to pay special attention to the quality of its products.
Advantages and limitations of MNCS:
Advantages of MNCs from the viewpoint of Host Country:
We propose to examine the advantages and limitations of MNCs from the viewpoint of the host country. In fact, advantages of MNCs make for the case in favour of MNCs; while limitations of MNCs become the case against MNCs.
(i) Employment Generation:
MNCs create large scale employment opportunities in host countries. This is often a big advantage of MNCs for countries; where there's a lot of unemployment.
(ii) Automatic Inflow of Foreign Capital:
MNCs bring in much needed capital for the rapid development of developing countries. In fact, with the entry of MNCs, inflow of foreign capital is automatic. As a results of the entry of MNCs, India e.g., has attracted foreign investment with several million dollars.
(iii) Proper Use of Idle Resources:
Because of their advanced technical knowledge, MNCs are during a position to properly utilise idle physical and human resources of the host country. This results in an increase within the national income of the host country.
(iv) Improvement in Balance of Payment Position:
MNCs help the host countries to increase their exports. As such, they help the host country to improve upon its Balance of Payment position.
(vi) Technical Development:
MNCs carry the advantages of technical development 10 host countries. In fact, MNCs are a vehicle for transference of technical development from one country to another. Due to MNCs poor host countries also begin to develop technically.
(vii) Managerial Development:
MNCs employ latest management techniques. People employed by MNCs do a lot of research in management. In a way, they assist to professionalize management along latest lines of management theory and practice. This leads to managerial development in host countries.
(viii) End of Local Monopolies:
The entry of MNCs leads to competition within the host countries. Local monopolies of host countries either start improving their products or reduce their prices. Thus, MNCs put an end to exploitative practices of local monopolists. As a matter of fact, MNCs compel domestic companies to enhance their efficiency and quality.
In India, many Indian companies acquired ISO-9000 quality certificates, due to fear of competition posed by MNCs.
(ix) Improvement in Standard of Living:
By providing super quality products and services, MNCs help to improve the standard of living of people of host countries.
(x) Promotion of international brotherhood and culture:
MNCs integrate economies of various nations with the world economy. Through their international dealings, MNCs promote international brotherhood and culture; and pave way for world peace and prosperity.
LIMITATIONS OF MNCS FROM THE VIEWPOINT OF HOST COUNTRY:
(i) Danger for Domestic Industries:
MNCs, due to their vast economic power, pose a danger to domestic industries; which are still within the process of development. Domestic industries cannot face challenges posed by MNCs. Many domestic industries need to wind up, as a result of threat from MNCs. Thus, MNCs give a setback to the economic growth of host countries.
(ii) Repatriation of Profits:
(Repatriation of profits means sending profits to their country).
MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign exchange reserves of the host country; which means that a large amount of foreign exchange goes out of the host country.
(iii) No Benefit to Poor People:
MNCs produce only those things, which are used by the rich. Therefore, poor people of host countries don't get, generally, any benefit, out of MNCs.
(iv) Danger to Independence:
Initially MNCs help the government of the host country, in a number of ways; then gradually start interfering within the political affairs of the host country. There is, then, an implicit danger to the independence of the host country, within the long-run.
(v) Disregard of the National Interests of the Host Country:
MNCs invest in most profitable sectors; and disregard the national goals and priorities of the host country. They do not look after the development of backward regions; and never care to solve chronic problems of the host country like unemployment and poverty.
(vi) Misuse of Mighty Status:
MNCs are powerful economic entities. They can afford to bear losses for a long while, within the hope of earning huge profits-once they need ended local competition and achieved monopoly. This might be the dirties strategy of MNCs to wipe off local competitors from the host country.
(vii) Careless Exploitation of Natural Resources:
MNCs tend to use the natural resources of the host country carelessly. They cause rapid depletion of some of the non-renewable natural resources of the host country. In this way, MNCs cause a permanent damage to the economic development of the host country.
(viii) Selfish Promotion of Alien Culture:
MNCs tend to promote alien culture in host country to sell their products. They make people forget about their own cultural heritage. In India, e.g., MNCs have created a taste for synthetic food, soft drinks etc. This promotion of foreign culture by MNCs is injurious to the health of people also.
(ix) Exploitation of people, during a Systematic Manner:
MNCs join hands with business houses of host country and emerge as powerful monopolies. This results in concentration of economic power only during a few hands. Gradually these monopolies make it their birth right to exploit poor people and enrich themselves at the cost of the poor working class.
ADVANTAGES FROM THE POINT OF VIEW OF THE HOME COUNTRY:
Some of the advantages of the MNCs from the point of view of the home country are:
(i) MNCs usually get raw-materials and labour supplies from host countries at lower prices; especially when host countries are backward or developing economies.
(ii) MNCs can widen their market for goods by selling in host countries; and increase their profits. They usually have good earnings by way of dividends earned from operations in host countries.
(iii) Through operating in many countries and providing quality services, MNCs increase their international goodwill on which they will capitalize, within the long-run.
LIMITATIONS FROM THE POINT OF VIEW OF THE HOME COUNTRY:
Some of the limitations of MNCs from the point of view of home country may be:
(i) There could also be loss of employment within the home country, because of spreading manufacturing and marketing operations in other countries.
(ii) MNCs face severe problems of managing cultural diversity. This might distract managements’ attention from main business issues, causing loss to the home country.
(iii) MNCs may face severe competition from bigger MNCs in international markets. Their attention and finances could be more devoted to wasteful counter and competitive advertising; resulting in higher marketing costs and lesser profits for the house country.
References:
1. Dr.D.M.Mithani – International Economics (Himalaya Publishing house ltd)
2. Bo Sodersten, Geoffirey Reed, International Economics (3rd Edition) Publisher Red Globe Press
3. Z.M.Jhingan : International Economics (Vrinda Publication)
4. Robert Feenstra, Alan M Taylor, International Trade (5th Edition) Publisher Worth
5. Dr.Mrs.NirmalBhalerao&S.S.M.Desai – International Economics (Himalaya Publishing house ltd)
Unit 3
International Factor Mobility
International labour migration is that the mobility of labour from one country to another for a period quite one year.
International labour migration covers the whole world: both the event part and therefore the underdeveloped periphery. Currently there are quite 214 million of international migrants. International migration of the population has played an increasingly significant role within the development of societies and has become a worldwide process that covered the majority the continents and countries, as well as various social strata. The entire number of international migrants increases continuously.
More than half of migrants come from developing countries and countries with economies in transition. From these countries over the past 5 years, industrialized nations have taken 12 million migrants, in other words, the annual inflow of migrants is a mean of two .3 million people, of whom 1.4 million went into the North America and 800 thousand - into the Europe.
International labour migration is one of the objective bases of becoming an integrated international system. At the same time, the matter of free migration is that the most dangerous for governments, both politically and within the social aspect. Ethnic and religious superstition and direct economic threat to the interests of particular groups who are scared of competition from immigrants make this problem too spicy. For politicians, the problem of migration may be a "hot potato that it's better to not remove of the fire. Therefore, during the migration policy implementation is very important to understand the nature and general economic and social implications.
Causes
The international labour migration is caused by both factors of internal economic development of every separate country and external factors: a condition of the international economy as whole and economic relations between the countries. During the certain periods as motive forces of the international labour mobility might be the political, military, religious, national, cultural, family and other social factors. The reasons of the international labour migration are often understood also only as concrete set of the named factors.
Traditionally (in the neoclassical theory) because the basic allocate the economic reason of the international labour migration connected with scales, rates and structure of accumulation of the capital.
1. Differences in rates of accumulation of the capital cause the differences between a beautiful and therefore the repulsive forces of labour in various regions of the world economy that finally defines directions of moving of this factor of production between the countries.
2. Level and scales of accumulation of the capital have direct influence on an occupation level of able-bodied population and, thus, on the sizes of a relative overpopulation (unemployment), which is that the basic source of labour migration.
3. Rates and therefore the sizes of accumulation of the capital, in turn, in certain degree depend upon migration level. This dependence means rather low salary of immigrants and possibility to reduce payment to domestic workers allows reducing the production costs and thereby increasing the accumulation of capital. The same purpose is reached by the organization of production within the countries with low-paid labour. Transnational corporations for the purpose of acceleration of accumulation of the capital use either the labour movement to the capital, or move the capital to the regions with excessive amount of labour.
4. The reason of the labour movement is changes within the pattern of requirements and therefore the production caused by scientific and technical progress. The production cutback or liquidation of some out-of-date branches release labour which searches for its applications in other countries.
So, the international labour migration, first of all, is that the kind of movement concerning surplus population from one centre of accumulation of the capital to another. It’s the economic nature of labour migration.
However, within the international labour migration not only the unemployed, but also a part of the working population is involved. In this case, the driving motive of migration is that the search of more favourable working conditions. The labour moves from the countries with a low standard of living and salaries to the countries with higher ones. So, an objective basis of labour migration is national distinctions within the level of wages.
Effects
Positive Impact
- Unemployment is reduced and people get better job opportunities.
- Migration helps in improving the quality of life of people.
- It helps to improve social life of people as they learn about new culture, customs, and languages which helps to improve brotherhood among people.
- Migration of skilled workers leads to a greater economic growth of the region.
- Children get better opportunities for higher education.
- The population density is reduced and the birth rate decreases.
Negative Impact
- The loss of a person from rural areas, impact on the level of output and development of rural areas.
- The influx of workers in urban areas increases competition for the job, houses, school facilities etc.
- Having large population puts too much pressure on natural resources, amenities and services.
- It is difficult for a villager to survive in urban areas because in urban areas there is no natural environment and pure air. They have to pay for each and everything.
- Migration changes the population of a place; therefore, the distribution of the population is uneven in India.
- Many migrants are completely illiterate and uneducated; therefore, they are not only unfit for most jobs, but also lack basic knowledge and life skills.
- Poverty makes them unable to live a normal and healthy life.
- Children growing up in poverty have no access to proper nutrition, education or health.
- Migration increased the slum areas in cities which increase many problems such as unhygienic conditions, crime, pollution etc.
- Sometimes migrants are exploited.
- Migration is one of the main causes of increasing nuclear family where children grow up without a wider family circle.
Brain drain can be described as the process in which a country loses its most educated and talented workers to other countries through migration. This trend is considered a problem, because the most highly skilled and competent individuals leave the country, and contribute their expertise to the economy of other countries. The country they leave can suffer economic hardships because those who remain don't have the 'know-how' to make a difference.
Brain drain can also be defined as the loss of the academic and technological labour force through the moving of human capital to more favourable geographic, economic, or professional environments. More often than not, the movement occurs from developing countries to developed countries or areas.
Causes of Brain Drain
There are various causes of brain drain, but they differ depending on the country that's experiencing it. The main causes include seeking employment or higher paying jobs, political instability, and to seek a better quality of life. Causes of brain drain can be categorized into push factors and pull factors.
The push factors are negative characteristics of the home country that form the impetus for intelligent people migrating from Lesser Developed Countries (LDC). In addition to unemployment and political instability, some other push factors are the absence of research facilities, employment discrimination, economic underdevelopment, lack of freedom, and poor working conditions.
Pull factors are the positive characteristics of the developed country from which the migrant would like to benefit. Higher paying jobs and a better quality of life are examples of pull factors. Other pull factors include superior economic outlook, the prestige of foreign training, relatively stable political environment, a modernized educational system to allow for superior training, intellectual freedom, and rich cultures. These lists are not complete; there may be other factors, some of which can be specific to countries or even to individuals.
Effects of Brain Drain on the Home Country
When brain drain is prevalent in a developing country, there may be some negative repercussions that can affect the economy. These effects include but are not limited to:
- Loss of tax revenue
- Loss of potential future entrepreneurs
- A shortage of important, skilled workers
- The exodus may lead to loss of confidence in the economy, which will cause persons to desire to leave rather than stay
- Loss of innovative ideas
- Loss of the country's investment in education
- The loss of critical health and education services
Brain drain is usually described as a problem that needs to be solved. However, there are benefits that can be derived from the phenomena. When people move from LDC countries to developed countries, they learn new skills and expertise, which they can utilize to the advantage of the home economy once they return. Another benefit is remittances; the migrants send the money they earn back to the home country, which can help to stimulate the home country's economy.
3.3.1 Foreign Direct Investment
International trade and foreign direct investment (FDI) are the two most important international economic activities integrating the world economy. With the rise within the mobility of factors of production across countries, FDI has become an integral a part of a firm’s strategy to expand international business.
FDI is that the largest source of external finance for developing countries. At the present, inward stock of FDI amounts to about one-third of the developing countries’ gross domestic product (GDP), compared to merely 10 per cent in 1980.
FDI plays an important role within the development process of host economies. It also includes a significant role in enhancing exports of the host country. It's estimated that the sales from foreign-owned facilities are about double the worth of world trade.
FDI not only is a source of capital inflow into host economies, but also helps to reinforce the competitiveness of the domestic economy through transferring technology, strengthening infrastructure, raising productivity, and generating new employment opportunities.
FDI has often been viewed as a threat by host countries because of the capacity of transnational investing firms to influence economic and political affairs. Many developing countries often fear FDI as a modern form of economic colonialism and exploitation, similar to their previous unpleasant experiences with colonial powers.
Yet, FDI flows are generally preferred to other sorts of external finance because these are non-debt creating, non-volatile, and the returns depend upon the performance of the project financed by the investors.
FDI IS CONSIDERED SUPERIOR TO OTHER KIND OF CAPITAL FLOWS BECAUSE OF VARIOUS REASONS:
i. Firms entering a number country through FDI have a long-term perspective in contrast to foreign lenders and portfolio investors. Therefore, FDI flows are less volatile and easier to sustain at the time of economic crisis.
Ii. Debt inflows may finance consumption whereas FDI is more likely to be wont to improve productivity.
Iii. Since FDI provides more than just capital by offering access to internationally available technologies, management know-how, and marketing skills, it's likely to have a strong impact on economic growth.
A firm must evaluate various options to cater to foreign markets and select the most appropriate mode of international business expansion.
Geographical distances of markets or resources, especially for low-value products, make it more attractive to get into manufacturing operations overseas. In addition, the firm must perform a risk benefit analysis of licensing vis-a-vis ownership for its international operations.
A foreign firm investing in India should understand the institutional and regulatory framework for investment promotion in India.
Concept of FDI:
In simple terms, FDI means acquiring ownership in an overseas business entity. It's the movement of capital across national frontiers, which gives the investor control over the assets acquired. FDI occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage it.
It is the management dimension that distinguishes FDI from portfolio investment in foreign stocks and other financial instruments. Conceptually, a firm becomes a multinational corporation (MNC) by way of FDI as its operations extend to multiple countries.
FDI is defined as an investment involving a long-term relationship and reflecting a lasting interest and control by a resident enterprise (foreign direct investor or parent enterprise) in one economy in an enterprise (FDI enterprise or affiliate enterprise or foreign affiliate) resident in an economy aside from that of the foreign direct investor.’
For acquiring substantial controlling interest, generally 10 per cent or more equity is to be acquired within the foreign firm. The ‘lasting interest’ implies the existence of a long- term relationship between the direct investor and therefore the enterprise wherein a significant degree of influence is exerted by the investor within the management of the direct investment enterprise.
Direct investment enterprise refers to an incorporated enterprise in which a foreign investor owns 10 per cent or more of the ordinary shares of voting power or an unincorporated enterprise during which a foreign investor has equivalent ownership.
Ownership of 10 per cent of the ordinary shares or voting stock is that the criterion for determining the existence of a direct investment relationship. These are either directly or indirectly owned by the direct investor. The definition of direct investment enterprise extends to the branches and subsidiaries of the direct investor.
FDI is characterized by decreased sensitivity to fluctuations in foreign exchange rates. Since FDI is that the results of a long-term perspective by the investor, it's much less volatile than foreign portfolio investment. It's been reported that most FDI (i.e., more than 90%) leads to intra-corporate trade at international level.
The returns of FDI are generally in sort of profit, i.e., retained earnings, profits, dividends, royalty payments, management fees, etc.
FOREIGN PORTFOLIO INVESTMENT IN COMPARISON TO FDI:
Foreign portfolio investment (FPI) is defined as an investment by individuals, firms, or a public body in foreign financial instruments, like foreign stocks, government bonds, etc. In FPl, the equity stake within the foreign business entity isn't significant enough to exert any management control.
Thus, FPI is that the passive holding of securities and other financial assets by a foreign firm, which doesn't entail internal control of the issuing firm. High rate of returns and mitigation of risks because of geographical diversification positively influence FPL Thus, FPI is passive whereas FDI is active.
The returns within the case of FPI are generally within the form of non-voting dividends or interest payments. Portfolio investment, like FDI, is part of the capital account of balance of payment (BOP) statistics.
REASONS FOR FDI:
It is important to understand why a firm takes a decision to invest in foreign countries when low-risk alternatives to cater to foreign markets, like exporting and licensing, are already available. Because the firm invests its own resources during a foreign country, the firm is exposed to greater risks. Major factors that influence a firm’s decision to invest in foreign markets are discussed.
Cost of transportation:
Higher costs of transportation between the production facilities and geographically distant markets make it economically unviable for firms to compete or enter such markets. Substantial costs of transportation need to be incurred for marketing products in countries located at larger geographical distances.
For a product with low unit value, i.e., value to weight ratio, like steel, fast food, cement, etc., the cost of transportation has much larger impact on its competitiveness in foreign markets compared to a high-unit value product, like watches, jewellery, computer processors, hard-disks, etc.
Therefore, for low-unit value products, it becomes more attractive to manufacture the products within the foreign country itself either by way of licensing or FDI.
Liability of foreignness:
A firm’s unfamiliarity with the host country and lack of adaptation of business practices during a foreign country often result in a competitive disadvantage vis-a-vis indigenous firm. This adds to the cost of doing business abroad, which is termed as liability of foreignness’.
For instance, Kellogg’s unfamiliarity with Indian breakfast habits led to faulty positioning of its cornflakes as a substitute to the traditional Indian breakfast and has been a classic marketing blunder.
It took several years for Kellogg’s to know the centrality of its traditional food in India’s lifestyle before repositioning its cornflakes as a complementary instead of a substitute to the Indian breakfast. In another instance, Disneyland failed miserably in its French venture primarily thanks to lack of product adaptation in view of significant differences in customers’ preferences in Europe vis-a-vis the US market.
It has to reach a trade-off between scale benefits from concentrating production at a single location and exporting or benefits of FDI, such as proximity of production locations, higher level of control, and gaining better access to the market.
BENEFITS OF FDI:
Potential benefits of FDI to host countries include the following:
Access to superior technology:
Foreign firms bring superior technology to the host countries while investing. The extent of benefits depends upon the technology spill-over to other firms based within the host country.
Increased competition:
The investing foreign firm increases industry output, resulting in overall reduction in domestic prices, improved product or services quality, and greater availability. This intensifies competition in host economies, leading to net improvement in consumer welfare.
Increase in domestic investment:
It is found that capital inflows within the form of FDI increase domestic investment so on survive and effectively answer the increased competition.
Bridging host countries foreign exchange gaps:
In most developing countries, the levels of domestic savings are often insufficient to support capital accumulation to realize growth targets. Besides, the level of foreign exchange could also be insufficient to purchase imported inputs. Under such situations, the FDI helps in making available foreign exchange for imports.
3.3.2 Foreign Institutional Investments
A foreign institutional investor (FII) is an investor or investment fund investing during a country outside of the one during which it's registered or headquartered. The term foreign institutional investor is probably most commonly used in India, where it refers to outside entities investing within the nation's financial markets. The term is also used officially in China.
FOREIGN INSTITUTIONAL INVESTOR (FII)
FIIs can include hedge funds, insurance companies, pension funds, investment banks, and mutual funds. FIIs are often important sources of capital in developing economies, yet many developing nations, like India, have placed limits on the total value of assets an FII can purchase and therefore the number of equities shares it can buy, particularly during a single company. This helps limit the influence of FIIs on individual companies and therefore the nation's financial markets, and therefore the potential damage which may occur if FIIs fled end masse during a crisis.
FOREIGN INSTITUTIONAL INVESTORS (FIIS) IN INDIA
Some of the countries with the highest volume of foreign institutional investments are those with developing economies, which generally provide investors with higher growth potential than mature economies. This is one reason FIIs are commonly found in India, which includes a high-growth economy and attractive individual corporations to invest in. All FIIs in India must register with the Securities and Exchange Board of India (SEBI) to participate within the market.
Example of a foreign Institutional Investor (FII)
If a mutual fund within the United States sees a high-growth investment opportunity in an India-listed company, it can take an extended position by purchasing shares in an Indian stock market. This type of arrangement also benefits private U.S. Investors who might not be able to buy Indian stocks directly. Instead, they will invest within the mutual fund and take part within the high-growth potential.
REGULATIONS ON INVESTING IN INDIAN COMPANIES
FIIs are allowed to invest in India's primary and secondary capital markets only through the country's portfolio investment scheme. This scheme allows FIIs to get shares and debentures of Indian companies on the nation's public exchanges.
However, there are many regulations. For instance, FIIs are generally limited to a maximum investment of 24% of the paid-up capital of the Indian company receiving the investment. However, FIIs can invest more than 24% if the investment is approved by the company's board and a special resolution is passed. The ceiling on FIIs' investments in Indian public-sector banks is just 20% of the banks' paid-up capital.
The reserve bank of India monitors compliance with these limits daily by implementing cut off points 2% below the utmost investment. This provides it an opportunity to caution the Indian company receiving the investment before allowing the final 2% to be purchased.
FOREIGN INSTITUTIONAL INVESTORS (FII)
Foreign Institutional Investors (FII) is an investment fund or a gathering of investors. Such a fund is registered in a foreign country, i.e., not in the country it's investing in. Such institutional investors mostly involve hedge funds, mutual funds, pension funds, insurance bonds, high-value debentures, investment banks etc.
We use this term FII for foreign players investing funds within the financial market of India. They play a big role within the development of our economy. The quantity of funds they invest is very considerable.
So, when such FII’s buy shares and securities the market is bullish and trends upwards. The other can also happen when they withdraw their funds from the markets. So, they have considerable sway over the market.
ADVANTAGES OF FII’S
• FII’s will enhance the flow of capital into the country
• These investors generally prefer equity over debt. So, this may also help maintain and even improve the capital structures of the companies they're investing in.
• They have a positive effect on the competition within the financial markets
• FII helps with the financial innovation of capital markets
• These institutions are professionally managed by asset managers and analysts. They often improve the capital markets of the country.
DISADVANTAGES OF FII’S
• The demand for the local currency (rupee) increases. This can cause severe inflation within the economy.
• These FII’s drive the fortune of huge companies during which they invest. But their buying and selling of securities have a large impact on the stock market. The smaller companies are taken along for the ride.
• Sometimes these FII’s seek only short-term returns. Once they pull their investments banks can face a shortage of funds.
1. Distort of the Pattern of Development of the Economy:
It is not suitable for countries who have adopted a scheme of planned development, while deciding about the investment projects the foreign capitalists will be guided by the maximization of profit criteria and not the plan priorities of the country. In other words, it always invests in low priorities of the economy.
2. Adverse Effect on Domestic Savings:
This sort of investment should be expected to have an income effect which will lead to a higher level of domestic savings. But at the same moment if private foreign investment reduces profits in domestic industries, it will adversely affect the income of profit earning and further will tend to reduce domestic savings.
3. Adverse Effect on Balance of Payments of the Recipient Country:
Foreign investors may earn huge profits which are to be repatriated in due course of time. The repatriation of these profits may turn into serious imbalances in the balance of payments of the recipient nation.
4. Not Useful on Political Grounds:
Private foreign investment in under developed countries is feared not only for economic reasons but also on political grounds. There is a great fear that it may lead to loss of independence of the recipient country. In the opinion of Prof. Lewis, “The loss of independence may be partial or complete; partial if the capitalists confine themselves to bribing politicians or backing one political group against another or complete if the debtor country is reduced to colonial status”.
These fears are quite widespread. They are mainly responsible for the reluctance on the part of developing countries to accept private foreign capital. In this connection Prof. WA. Lewis holds the view that, “These fears are one of the strongest reasons as to why the less developed countries are anxious that the United Nations should create adequate institutions for transferring capital so that they should not become dependent upon receiving capital from any one of the great powers”.
5. Limited Coverage:
Private capital usually restricts itself to certain limited spheres of economic life. For example, it chooses those industries where it can make large and quick profits, irrespective of the fact whether the development of those industries is in the development interest. Such industries are largely consumer goods industries or those industries in which the gestation period is not too long. It is for these reasons that in India before Independence, foreign capital mostly British, was directed to such industries as plantations, etc.
6. More Dependence:
The use of private capital often increases dependence on foreign sources. This happens at least on two counts. One is that the use of foreign technology appropriate to the resource-endowments of advanced countries does not permit the development of indigenous technology appropriate to the conditions of the recipient country.
On the contrary, it positively discourages the development of such a technology in competition with itself. This means the country in question will continue to depend upon the import of foreign technology. Two, the foreign technology used requires import of goods for replacement and maintenance, thereby creating balance of payments difficulties.
We have taken so much from the foreign technical know-how that we have not yet developed what may be described, as an appropriate technology suited to our resources and needs. Further, imports of replacement and maintenance goods are costing us a lot.
7. Restrictive Conditions:
In many cases foreign collaboration agreements contain restrictive clauses in respect of such things as exports. For example, foreign collaborators make investments to exploit the Indian market because they find it difficult to approach this market from outside.
But these collaborators do not want the Indian concern to export its goods to other countries which are already being supplied by the foreign collaborators from their concerns operating in other countries. Obviously, such agreements are of limited value for the country.
8. Remittance of Large Amounts:
Remittance of profits of course is a normal facility which the foreign investor expects. But often the profits earned in the early stages are high, involving big remittances. In many collaboration agreements, for example, the initial foreign capital is confined to the foreign exchange component of the project.
The rest of the resources are made available through internal sources. Since the rate of return on initial investment is usually very high, it makes it possible for the foreign collaborator to recover his amount in a relatively short time. Yet the payment on account of such things as technical services, royalty payments, etc., continues.
From the above cited discussion, it can easily be concluded that private foreign capital is not very safe for less developed countries, it does not fit into their planned development. Again, it does not provide hope for their rapid industrialization and economic growth.
Meaning of Multinational Companies (MNCS):
A multinational company is one which is incorporated in one country (called the home country); but whose operations extend beyond the home country and which carries on business in other countries (called the host countries) in addition to the home country.
It must be emphasized that the headquarters of a multinational company are located within the home country.
Neil H. Jacoby defines a multinational company as follows:
“A multinational corporation owns and manages business in two or more countries.”
Point of comment:
A multinational corporation is known by various names such as: global enterprise, international enterprise, world enterprise, transnational corporation etc.
Features of Multinational Corporations (MNCS):
Following are the salient features of MNCs:
(i) Huge Assets and Turnover:
Because of operations on a global basis, MNCs have huge physical and financial assets. This also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many MNCs are bigger than national economies of several countries.
(ii) International Operations Through a Network of Branches:
MNCs have production and marketing operations in several countries; operating through a network of branches, subsidiaries and affiliates in host countries.
(iii) Unity of Control:
MNCs are characterized by unity of control. MNCs control business activities of their branches in foreign countries through head office located within the home country. Managements of branches operate within the policy framework of the parent corporation.
(iv) Mighty Economic Power:
MNCs are powerful economic entities. They keep on adding to their economic power through constant mergers and acquisitions of companies, in host countries.
(v) Advanced and sophisticated Technology:
Generally, a MNC has at its command advanced and sophisticated technology. It employs capital intensive technology in manufacturing and marketing.
(vi) Professional Management:
A MNC employs professionally trained managers to handle huge funds, advanced technology and international business operations.
(vii)Aggressive Advertising and Marketing:
MNCs spend huge sums of money on advertising and marketing to secure international business. This is, perhaps, the biggest strategy of success of MNCs. Due to this strategy, they're able to sell whatever products/services, and they produce/generate.
(viii) Better Quality of Products:
A MNC has got to compete on the world level. It, therefore, has got to pay special attention to the quality of its products.
Advantages and limitations of MNCS:
Advantages of MNCs from the viewpoint of Host Country:
We propose to examine the advantages and limitations of MNCs from the viewpoint of the host country. In fact, advantages of MNCs make for the case in favour of MNCs; while limitations of MNCs become the case against MNCs.
(i) Employment Generation:
MNCs create large scale employment opportunities in host countries. This is often a big advantage of MNCs for countries; where there's a lot of unemployment.
(ii) Automatic Inflow of Foreign Capital:
MNCs bring in much needed capital for the rapid development of developing countries. In fact, with the entry of MNCs, inflow of foreign capital is automatic. As a results of the entry of MNCs, India e.g., has attracted foreign investment with several million dollars.
(iii) Proper Use of Idle Resources:
Because of their advanced technical knowledge, MNCs are during a position to properly utilise idle physical and human resources of the host country. This results in an increase within the national income of the host country.
(iv) Improvement in Balance of Payment Position:
MNCs help the host countries to increase their exports. As such, they help the host country to improve upon its Balance of Payment position.
(vi) Technical Development:
MNCs carry the advantages of technical development 10 host countries. In fact, MNCs are a vehicle for transference of technical development from one country to another. Due to MNCs poor host countries also begin to develop technically.
(vii) Managerial Development:
MNCs employ latest management techniques. People employed by MNCs do a lot of research in management. In a way, they assist to professionalize management along latest lines of management theory and practice. This leads to managerial development in host countries.
(viii) End of Local Monopolies:
The entry of MNCs leads to competition within the host countries. Local monopolies of host countries either start improving their products or reduce their prices. Thus, MNCs put an end to exploitative practices of local monopolists. As a matter of fact, MNCs compel domestic companies to enhance their efficiency and quality.
In India, many Indian companies acquired ISO-9000 quality certificates, due to fear of competition posed by MNCs.
(ix) Improvement in Standard of Living:
By providing super quality products and services, MNCs help to improve the standard of living of people of host countries.
(x) Promotion of international brotherhood and culture:
MNCs integrate economies of various nations with the world economy. Through their international dealings, MNCs promote international brotherhood and culture; and pave way for world peace and prosperity.
LIMITATIONS OF MNCS FROM THE VIEWPOINT OF HOST COUNTRY:
(i) Danger for Domestic Industries:
MNCs, due to their vast economic power, pose a danger to domestic industries; which are still within the process of development. Domestic industries cannot face challenges posed by MNCs. Many domestic industries need to wind up, as a result of threat from MNCs. Thus, MNCs give a setback to the economic growth of host countries.
(ii) Repatriation of Profits:
(Repatriation of profits means sending profits to their country).
MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign exchange reserves of the host country; which means that a large amount of foreign exchange goes out of the host country.
(iii) No Benefit to Poor People:
MNCs produce only those things, which are used by the rich. Therefore, poor people of host countries don't get, generally, any benefit, out of MNCs.
(iv) Danger to Independence:
Initially MNCs help the government of the host country, in a number of ways; then gradually start interfering within the political affairs of the host country. There is, then, an implicit danger to the independence of the host country, within the long-run.
(v) Disregard of the National Interests of the Host Country:
MNCs invest in most profitable sectors; and disregard the national goals and priorities of the host country. They do not look after the development of backward regions; and never care to solve chronic problems of the host country like unemployment and poverty.
(vi) Misuse of Mighty Status:
MNCs are powerful economic entities. They can afford to bear losses for a long while, within the hope of earning huge profits-once they need ended local competition and achieved monopoly. This might be the dirties strategy of MNCs to wipe off local competitors from the host country.
(vii) Careless Exploitation of Natural Resources:
MNCs tend to use the natural resources of the host country carelessly. They cause rapid depletion of some of the non-renewable natural resources of the host country. In this way, MNCs cause a permanent damage to the economic development of the host country.
(viii) Selfish Promotion of Alien Culture:
MNCs tend to promote alien culture in host country to sell their products. They make people forget about their own cultural heritage. In India, e.g., MNCs have created a taste for synthetic food, soft drinks etc. This promotion of foreign culture by MNCs is injurious to the health of people also.
(ix) Exploitation of people, during a Systematic Manner:
MNCs join hands with business houses of host country and emerge as powerful monopolies. This results in concentration of economic power only during a few hands. Gradually these monopolies make it their birth right to exploit poor people and enrich themselves at the cost of the poor working class.
ADVANTAGES FROM THE POINT OF VIEW OF THE HOME COUNTRY:
Some of the advantages of the MNCs from the point of view of the home country are:
(i) MNCs usually get raw-materials and labour supplies from host countries at lower prices; especially when host countries are backward or developing economies.
(ii) MNCs can widen their market for goods by selling in host countries; and increase their profits. They usually have good earnings by way of dividends earned from operations in host countries.
(iii) Through operating in many countries and providing quality services, MNCs increase their international goodwill on which they will capitalize, within the long-run.
LIMITATIONS FROM THE POINT OF VIEW OF THE HOME COUNTRY:
Some of the limitations of MNCs from the point of view of home country may be:
(i) There could also be loss of employment within the home country, because of spreading manufacturing and marketing operations in other countries.
(ii) MNCs face severe problems of managing cultural diversity. This might distract managements’ attention from main business issues, causing loss to the home country.
(iii) MNCs may face severe competition from bigger MNCs in international markets. Their attention and finances could be more devoted to wasteful counter and competitive advertising; resulting in higher marketing costs and lesser profits for the house country.
References:
1. Dr.D.M.Mithani – International Economics (Himalaya Publishing house ltd)
2. Bo Sodersten, Geoffirey Reed, International Economics (3rd Edition) Publisher Red Globe Press
3. Z.M.Jhingan : International Economics (Vrinda Publication)
4. Robert Feenstra, Alan M Taylor, International Trade (5th Edition) Publisher Worth
5. Dr.Mrs.NirmalBhalerao&S.S.M.Desai – International Economics (Himalaya Publishing house ltd)
Unit 3
International Factor Mobility
International labour migration is that the mobility of labour from one country to another for a period quite one year.
International labour migration covers the whole world: both the event part and therefore the underdeveloped periphery. Currently there are quite 214 million of international migrants. International migration of the population has played an increasingly significant role within the development of societies and has become a worldwide process that covered the majority the continents and countries, as well as various social strata. The entire number of international migrants increases continuously.
More than half of migrants come from developing countries and countries with economies in transition. From these countries over the past 5 years, industrialized nations have taken 12 million migrants, in other words, the annual inflow of migrants is a mean of two .3 million people, of whom 1.4 million went into the North America and 800 thousand - into the Europe.
International labour migration is one of the objective bases of becoming an integrated international system. At the same time, the matter of free migration is that the most dangerous for governments, both politically and within the social aspect. Ethnic and religious superstition and direct economic threat to the interests of particular groups who are scared of competition from immigrants make this problem too spicy. For politicians, the problem of migration may be a "hot potato that it's better to not remove of the fire. Therefore, during the migration policy implementation is very important to understand the nature and general economic and social implications.
Causes
The international labour migration is caused by both factors of internal economic development of every separate country and external factors: a condition of the international economy as whole and economic relations between the countries. During the certain periods as motive forces of the international labour mobility might be the political, military, religious, national, cultural, family and other social factors. The reasons of the international labour migration are often understood also only as concrete set of the named factors.
Traditionally (in the neoclassical theory) because the basic allocate the economic reason of the international labour migration connected with scales, rates and structure of accumulation of the capital.
1. Differences in rates of accumulation of the capital cause the differences between a beautiful and therefore the repulsive forces of labour in various regions of the world economy that finally defines directions of moving of this factor of production between the countries.
2. Level and scales of accumulation of the capital have direct influence on an occupation level of able-bodied population and, thus, on the sizes of a relative overpopulation (unemployment), which is that the basic source of labour migration.
3. Rates and therefore the sizes of accumulation of the capital, in turn, in certain degree depend upon migration level. This dependence means rather low salary of immigrants and possibility to reduce payment to domestic workers allows reducing the production costs and thereby increasing the accumulation of capital. The same purpose is reached by the organization of production within the countries with low-paid labour. Transnational corporations for the purpose of acceleration of accumulation of the capital use either the labour movement to the capital, or move the capital to the regions with excessive amount of labour.
4. The reason of the labour movement is changes within the pattern of requirements and therefore the production caused by scientific and technical progress. The production cutback or liquidation of some out-of-date branches release labour which searches for its applications in other countries.
So, the international labour migration, first of all, is that the kind of movement concerning surplus population from one centre of accumulation of the capital to another. It’s the economic nature of labour migration.
However, within the international labour migration not only the unemployed, but also a part of the working population is involved. In this case, the driving motive of migration is that the search of more favourable working conditions. The labour moves from the countries with a low standard of living and salaries to the countries with higher ones. So, an objective basis of labour migration is national distinctions within the level of wages.
Effects
Positive Impact
- Unemployment is reduced and people get better job opportunities.
- Migration helps in improving the quality of life of people.
- It helps to improve social life of people as they learn about new culture, customs, and languages which helps to improve brotherhood among people.
- Migration of skilled workers leads to a greater economic growth of the region.
- Children get better opportunities for higher education.
- The population density is reduced and the birth rate decreases.
Negative Impact
- The loss of a person from rural areas, impact on the level of output and development of rural areas.
- The influx of workers in urban areas increases competition for the job, houses, school facilities etc.
- Having large population puts too much pressure on natural resources, amenities and services.
- It is difficult for a villager to survive in urban areas because in urban areas there is no natural environment and pure air. They have to pay for each and everything.
- Migration changes the population of a place; therefore, the distribution of the population is uneven in India.
- Many migrants are completely illiterate and uneducated; therefore, they are not only unfit for most jobs, but also lack basic knowledge and life skills.
- Poverty makes them unable to live a normal and healthy life.
- Children growing up in poverty have no access to proper nutrition, education or health.
- Migration increased the slum areas in cities which increase many problems such as unhygienic conditions, crime, pollution etc.
- Sometimes migrants are exploited.
- Migration is one of the main causes of increasing nuclear family where children grow up without a wider family circle.
Brain drain can be described as the process in which a country loses its most educated and talented workers to other countries through migration. This trend is considered a problem, because the most highly skilled and competent individuals leave the country, and contribute their expertise to the economy of other countries. The country they leave can suffer economic hardships because those who remain don't have the 'know-how' to make a difference.
Brain drain can also be defined as the loss of the academic and technological labour force through the moving of human capital to more favourable geographic, economic, or professional environments. More often than not, the movement occurs from developing countries to developed countries or areas.
Causes of Brain Drain
There are various causes of brain drain, but they differ depending on the country that's experiencing it. The main causes include seeking employment or higher paying jobs, political instability, and to seek a better quality of life. Causes of brain drain can be categorized into push factors and pull factors.
The push factors are negative characteristics of the home country that form the impetus for intelligent people migrating from Lesser Developed Countries (LDC). In addition to unemployment and political instability, some other push factors are the absence of research facilities, employment discrimination, economic underdevelopment, lack of freedom, and poor working conditions.
Pull factors are the positive characteristics of the developed country from which the migrant would like to benefit. Higher paying jobs and a better quality of life are examples of pull factors. Other pull factors include superior economic outlook, the prestige of foreign training, relatively stable political environment, a modernized educational system to allow for superior training, intellectual freedom, and rich cultures. These lists are not complete; there may be other factors, some of which can be specific to countries or even to individuals.
Effects of Brain Drain on the Home Country
When brain drain is prevalent in a developing country, there may be some negative repercussions that can affect the economy. These effects include but are not limited to:
- Loss of tax revenue
- Loss of potential future entrepreneurs
- A shortage of important, skilled workers
- The exodus may lead to loss of confidence in the economy, which will cause persons to desire to leave rather than stay
- Loss of innovative ideas
- Loss of the country's investment in education
- The loss of critical health and education services
Brain drain is usually described as a problem that needs to be solved. However, there are benefits that can be derived from the phenomena. When people move from LDC countries to developed countries, they learn new skills and expertise, which they can utilize to the advantage of the home economy once they return. Another benefit is remittances; the migrants send the money they earn back to the home country, which can help to stimulate the home country's economy.
3.3.1 Foreign Direct Investment
International trade and foreign direct investment (FDI) are the two most important international economic activities integrating the world economy. With the rise within the mobility of factors of production across countries, FDI has become an integral a part of a firm’s strategy to expand international business.
FDI is that the largest source of external finance for developing countries. At the present, inward stock of FDI amounts to about one-third of the developing countries’ gross domestic product (GDP), compared to merely 10 per cent in 1980.
FDI plays an important role within the development process of host economies. It also includes a significant role in enhancing exports of the host country. It's estimated that the sales from foreign-owned facilities are about double the worth of world trade.
FDI not only is a source of capital inflow into host economies, but also helps to reinforce the competitiveness of the domestic economy through transferring technology, strengthening infrastructure, raising productivity, and generating new employment opportunities.
FDI has often been viewed as a threat by host countries because of the capacity of transnational investing firms to influence economic and political affairs. Many developing countries often fear FDI as a modern form of economic colonialism and exploitation, similar to their previous unpleasant experiences with colonial powers.
Yet, FDI flows are generally preferred to other sorts of external finance because these are non-debt creating, non-volatile, and the returns depend upon the performance of the project financed by the investors.
FDI IS CONSIDERED SUPERIOR TO OTHER KIND OF CAPITAL FLOWS BECAUSE OF VARIOUS REASONS:
i. Firms entering a number country through FDI have a long-term perspective in contrast to foreign lenders and portfolio investors. Therefore, FDI flows are less volatile and easier to sustain at the time of economic crisis.
Ii. Debt inflows may finance consumption whereas FDI is more likely to be wont to improve productivity.
Iii. Since FDI provides more than just capital by offering access to internationally available technologies, management know-how, and marketing skills, it's likely to have a strong impact on economic growth.
A firm must evaluate various options to cater to foreign markets and select the most appropriate mode of international business expansion.
Geographical distances of markets or resources, especially for low-value products, make it more attractive to get into manufacturing operations overseas. In addition, the firm must perform a risk benefit analysis of licensing vis-a-vis ownership for its international operations.
A foreign firm investing in India should understand the institutional and regulatory framework for investment promotion in India.
Concept of FDI:
In simple terms, FDI means acquiring ownership in an overseas business entity. It's the movement of capital across national frontiers, which gives the investor control over the assets acquired. FDI occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage it.
It is the management dimension that distinguishes FDI from portfolio investment in foreign stocks and other financial instruments. Conceptually, a firm becomes a multinational corporation (MNC) by way of FDI as its operations extend to multiple countries.
FDI is defined as an investment involving a long-term relationship and reflecting a lasting interest and control by a resident enterprise (foreign direct investor or parent enterprise) in one economy in an enterprise (FDI enterprise or affiliate enterprise or foreign affiliate) resident in an economy aside from that of the foreign direct investor.’
For acquiring substantial controlling interest, generally 10 per cent or more equity is to be acquired within the foreign firm. The ‘lasting interest’ implies the existence of a long- term relationship between the direct investor and therefore the enterprise wherein a significant degree of influence is exerted by the investor within the management of the direct investment enterprise.
Direct investment enterprise refers to an incorporated enterprise in which a foreign investor owns 10 per cent or more of the ordinary shares of voting power or an unincorporated enterprise during which a foreign investor has equivalent ownership.
Ownership of 10 per cent of the ordinary shares or voting stock is that the criterion for determining the existence of a direct investment relationship. These are either directly or indirectly owned by the direct investor. The definition of direct investment enterprise extends to the branches and subsidiaries of the direct investor.
FDI is characterized by decreased sensitivity to fluctuations in foreign exchange rates. Since FDI is that the results of a long-term perspective by the investor, it's much less volatile than foreign portfolio investment. It's been reported that most FDI (i.e., more than 90%) leads to intra-corporate trade at international level.
The returns of FDI are generally in sort of profit, i.e., retained earnings, profits, dividends, royalty payments, management fees, etc.
FOREIGN PORTFOLIO INVESTMENT IN COMPARISON TO FDI:
Foreign portfolio investment (FPI) is defined as an investment by individuals, firms, or a public body in foreign financial instruments, like foreign stocks, government bonds, etc. In FPl, the equity stake within the foreign business entity isn't significant enough to exert any management control.
Thus, FPI is that the passive holding of securities and other financial assets by a foreign firm, which doesn't entail internal control of the issuing firm. High rate of returns and mitigation of risks because of geographical diversification positively influence FPL Thus, FPI is passive whereas FDI is active.
The returns within the case of FPI are generally within the form of non-voting dividends or interest payments. Portfolio investment, like FDI, is part of the capital account of balance of payment (BOP) statistics.
REASONS FOR FDI:
It is important to understand why a firm takes a decision to invest in foreign countries when low-risk alternatives to cater to foreign markets, like exporting and licensing, are already available. Because the firm invests its own resources during a foreign country, the firm is exposed to greater risks. Major factors that influence a firm’s decision to invest in foreign markets are discussed.
Cost of transportation:
Higher costs of transportation between the production facilities and geographically distant markets make it economically unviable for firms to compete or enter such markets. Substantial costs of transportation need to be incurred for marketing products in countries located at larger geographical distances.
For a product with low unit value, i.e., value to weight ratio, like steel, fast food, cement, etc., the cost of transportation has much larger impact on its competitiveness in foreign markets compared to a high-unit value product, like watches, jewellery, computer processors, hard-disks, etc.
Therefore, for low-unit value products, it becomes more attractive to manufacture the products within the foreign country itself either by way of licensing or FDI.
Liability of foreignness:
A firm’s unfamiliarity with the host country and lack of adaptation of business practices during a foreign country often result in a competitive disadvantage vis-a-vis indigenous firm. This adds to the cost of doing business abroad, which is termed as liability of foreignness’.
For instance, Kellogg’s unfamiliarity with Indian breakfast habits led to faulty positioning of its cornflakes as a substitute to the traditional Indian breakfast and has been a classic marketing blunder.
It took several years for Kellogg’s to know the centrality of its traditional food in India’s lifestyle before repositioning its cornflakes as a complementary instead of a substitute to the Indian breakfast. In another instance, Disneyland failed miserably in its French venture primarily thanks to lack of product adaptation in view of significant differences in customers’ preferences in Europe vis-a-vis the US market.
It has to reach a trade-off between scale benefits from concentrating production at a single location and exporting or benefits of FDI, such as proximity of production locations, higher level of control, and gaining better access to the market.
BENEFITS OF FDI:
Potential benefits of FDI to host countries include the following:
Access to superior technology:
Foreign firms bring superior technology to the host countries while investing. The extent of benefits depends upon the technology spill-over to other firms based within the host country.
Increased competition:
The investing foreign firm increases industry output, resulting in overall reduction in domestic prices, improved product or services quality, and greater availability. This intensifies competition in host economies, leading to net improvement in consumer welfare.
Increase in domestic investment:
It is found that capital inflows within the form of FDI increase domestic investment so on survive and effectively answer the increased competition.
Bridging host countries foreign exchange gaps:
In most developing countries, the levels of domestic savings are often insufficient to support capital accumulation to realize growth targets. Besides, the level of foreign exchange could also be insufficient to purchase imported inputs. Under such situations, the FDI helps in making available foreign exchange for imports.
3.3.2 Foreign Institutional Investments
A foreign institutional investor (FII) is an investor or investment fund investing during a country outside of the one during which it's registered or headquartered. The term foreign institutional investor is probably most commonly used in India, where it refers to outside entities investing within the nation's financial markets. The term is also used officially in China.
FOREIGN INSTITUTIONAL INVESTOR (FII)
FIIs can include hedge funds, insurance companies, pension funds, investment banks, and mutual funds. FIIs are often important sources of capital in developing economies, yet many developing nations, like India, have placed limits on the total value of assets an FII can purchase and therefore the number of equities shares it can buy, particularly during a single company. This helps limit the influence of FIIs on individual companies and therefore the nation's financial markets, and therefore the potential damage which may occur if FIIs fled end masse during a crisis.
FOREIGN INSTITUTIONAL INVESTORS (FIIS) IN INDIA
Some of the countries with the highest volume of foreign institutional investments are those with developing economies, which generally provide investors with higher growth potential than mature economies. This is one reason FIIs are commonly found in India, which includes a high-growth economy and attractive individual corporations to invest in. All FIIs in India must register with the Securities and Exchange Board of India (SEBI) to participate within the market.
Example of a foreign Institutional Investor (FII)
If a mutual fund within the United States sees a high-growth investment opportunity in an India-listed company, it can take an extended position by purchasing shares in an Indian stock market. This type of arrangement also benefits private U.S. Investors who might not be able to buy Indian stocks directly. Instead, they will invest within the mutual fund and take part within the high-growth potential.
REGULATIONS ON INVESTING IN INDIAN COMPANIES
FIIs are allowed to invest in India's primary and secondary capital markets only through the country's portfolio investment scheme. This scheme allows FIIs to get shares and debentures of Indian companies on the nation's public exchanges.
However, there are many regulations. For instance, FIIs are generally limited to a maximum investment of 24% of the paid-up capital of the Indian company receiving the investment. However, FIIs can invest more than 24% if the investment is approved by the company's board and a special resolution is passed. The ceiling on FIIs' investments in Indian public-sector banks is just 20% of the banks' paid-up capital.
The reserve bank of India monitors compliance with these limits daily by implementing cut off points 2% below the utmost investment. This provides it an opportunity to caution the Indian company receiving the investment before allowing the final 2% to be purchased.
FOREIGN INSTITUTIONAL INVESTORS (FII)
Foreign Institutional Investors (FII) is an investment fund or a gathering of investors. Such a fund is registered in a foreign country, i.e., not in the country it's investing in. Such institutional investors mostly involve hedge funds, mutual funds, pension funds, insurance bonds, high-value debentures, investment banks etc.
We use this term FII for foreign players investing funds within the financial market of India. They play a big role within the development of our economy. The quantity of funds they invest is very considerable.
So, when such FII’s buy shares and securities the market is bullish and trends upwards. The other can also happen when they withdraw their funds from the markets. So, they have considerable sway over the market.
ADVANTAGES OF FII’S
• FII’s will enhance the flow of capital into the country
• These investors generally prefer equity over debt. So, this may also help maintain and even improve the capital structures of the companies they're investing in.
• They have a positive effect on the competition within the financial markets
• FII helps with the financial innovation of capital markets
• These institutions are professionally managed by asset managers and analysts. They often improve the capital markets of the country.
DISADVANTAGES OF FII’S
• The demand for the local currency (rupee) increases. This can cause severe inflation within the economy.
• These FII’s drive the fortune of huge companies during which they invest. But their buying and selling of securities have a large impact on the stock market. The smaller companies are taken along for the ride.
• Sometimes these FII’s seek only short-term returns. Once they pull their investments banks can face a shortage of funds.
1. Distort of the Pattern of Development of the Economy:
It is not suitable for countries who have adopted a scheme of planned development, while deciding about the investment projects the foreign capitalists will be guided by the maximization of profit criteria and not the plan priorities of the country. In other words, it always invests in low priorities of the economy.
2. Adverse Effect on Domestic Savings:
This sort of investment should be expected to have an income effect which will lead to a higher level of domestic savings. But at the same moment if private foreign investment reduces profits in domestic industries, it will adversely affect the income of profit earning and further will tend to reduce domestic savings.
3. Adverse Effect on Balance of Payments of the Recipient Country:
Foreign investors may earn huge profits which are to be repatriated in due course of time. The repatriation of these profits may turn into serious imbalances in the balance of payments of the recipient nation.
4. Not Useful on Political Grounds:
Private foreign investment in under developed countries is feared not only for economic reasons but also on political grounds. There is a great fear that it may lead to loss of independence of the recipient country. In the opinion of Prof. Lewis, “The loss of independence may be partial or complete; partial if the capitalists confine themselves to bribing politicians or backing one political group against another or complete if the debtor country is reduced to colonial status”.
These fears are quite widespread. They are mainly responsible for the reluctance on the part of developing countries to accept private foreign capital. In this connection Prof. WA. Lewis holds the view that, “These fears are one of the strongest reasons as to why the less developed countries are anxious that the United Nations should create adequate institutions for transferring capital so that they should not become dependent upon receiving capital from any one of the great powers”.
5. Limited Coverage:
Private capital usually restricts itself to certain limited spheres of economic life. For example, it chooses those industries where it can make large and quick profits, irrespective of the fact whether the development of those industries is in the development interest. Such industries are largely consumer goods industries or those industries in which the gestation period is not too long. It is for these reasons that in India before Independence, foreign capital mostly British, was directed to such industries as plantations, etc.
6. More Dependence:
The use of private capital often increases dependence on foreign sources. This happens at least on two counts. One is that the use of foreign technology appropriate to the resource-endowments of advanced countries does not permit the development of indigenous technology appropriate to the conditions of the recipient country.
On the contrary, it positively discourages the development of such a technology in competition with itself. This means the country in question will continue to depend upon the import of foreign technology. Two, the foreign technology used requires import of goods for replacement and maintenance, thereby creating balance of payments difficulties.
We have taken so much from the foreign technical know-how that we have not yet developed what may be described, as an appropriate technology suited to our resources and needs. Further, imports of replacement and maintenance goods are costing us a lot.
7. Restrictive Conditions:
In many cases foreign collaboration agreements contain restrictive clauses in respect of such things as exports. For example, foreign collaborators make investments to exploit the Indian market because they find it difficult to approach this market from outside.
But these collaborators do not want the Indian concern to export its goods to other countries which are already being supplied by the foreign collaborators from their concerns operating in other countries. Obviously, such agreements are of limited value for the country.
8. Remittance of Large Amounts:
Remittance of profits of course is a normal facility which the foreign investor expects. But often the profits earned in the early stages are high, involving big remittances. In many collaboration agreements, for example, the initial foreign capital is confined to the foreign exchange component of the project.
The rest of the resources are made available through internal sources. Since the rate of return on initial investment is usually very high, it makes it possible for the foreign collaborator to recover his amount in a relatively short time. Yet the payment on account of such things as technical services, royalty payments, etc., continues.
From the above cited discussion, it can easily be concluded that private foreign capital is not very safe for less developed countries, it does not fit into their planned development. Again, it does not provide hope for their rapid industrialization and economic growth.
Meaning of Multinational Companies (MNCS):
A multinational company is one which is incorporated in one country (called the home country); but whose operations extend beyond the home country and which carries on business in other countries (called the host countries) in addition to the home country.
It must be emphasized that the headquarters of a multinational company are located within the home country.
Neil H. Jacoby defines a multinational company as follows:
“A multinational corporation owns and manages business in two or more countries.”
Point of comment:
A multinational corporation is known by various names such as: global enterprise, international enterprise, world enterprise, transnational corporation etc.
Features of Multinational Corporations (MNCS):
Following are the salient features of MNCs:
(i) Huge Assets and Turnover:
Because of operations on a global basis, MNCs have huge physical and financial assets. This also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many MNCs are bigger than national economies of several countries.
(ii) International Operations Through a Network of Branches:
MNCs have production and marketing operations in several countries; operating through a network of branches, subsidiaries and affiliates in host countries.
(iii) Unity of Control:
MNCs are characterized by unity of control. MNCs control business activities of their branches in foreign countries through head office located within the home country. Managements of branches operate within the policy framework of the parent corporation.
(iv) Mighty Economic Power:
MNCs are powerful economic entities. They keep on adding to their economic power through constant mergers and acquisitions of companies, in host countries.
(v) Advanced and sophisticated Technology:
Generally, a MNC has at its command advanced and sophisticated technology. It employs capital intensive technology in manufacturing and marketing.
(vi) Professional Management:
A MNC employs professionally trained managers to handle huge funds, advanced technology and international business operations.
(vii)Aggressive Advertising and Marketing:
MNCs spend huge sums of money on advertising and marketing to secure international business. This is, perhaps, the biggest strategy of success of MNCs. Due to this strategy, they're able to sell whatever products/services, and they produce/generate.
(viii) Better Quality of Products:
A MNC has got to compete on the world level. It, therefore, has got to pay special attention to the quality of its products.
Advantages and limitations of MNCS:
Advantages of MNCs from the viewpoint of Host Country:
We propose to examine the advantages and limitations of MNCs from the viewpoint of the host country. In fact, advantages of MNCs make for the case in favour of MNCs; while limitations of MNCs become the case against MNCs.
(i) Employment Generation:
MNCs create large scale employment opportunities in host countries. This is often a big advantage of MNCs for countries; where there's a lot of unemployment.
(ii) Automatic Inflow of Foreign Capital:
MNCs bring in much needed capital for the rapid development of developing countries. In fact, with the entry of MNCs, inflow of foreign capital is automatic. As a results of the entry of MNCs, India e.g., has attracted foreign investment with several million dollars.
(iii) Proper Use of Idle Resources:
Because of their advanced technical knowledge, MNCs are during a position to properly utilise idle physical and human resources of the host country. This results in an increase within the national income of the host country.
(iv) Improvement in Balance of Payment Position:
MNCs help the host countries to increase their exports. As such, they help the host country to improve upon its Balance of Payment position.
(vi) Technical Development:
MNCs carry the advantages of technical development 10 host countries. In fact, MNCs are a vehicle for transference of technical development from one country to another. Due to MNCs poor host countries also begin to develop technically.
(vii) Managerial Development:
MNCs employ latest management techniques. People employed by MNCs do a lot of research in management. In a way, they assist to professionalize management along latest lines of management theory and practice. This leads to managerial development in host countries.
(viii) End of Local Monopolies:
The entry of MNCs leads to competition within the host countries. Local monopolies of host countries either start improving their products or reduce their prices. Thus, MNCs put an end to exploitative practices of local monopolists. As a matter of fact, MNCs compel domestic companies to enhance their efficiency and quality.
In India, many Indian companies acquired ISO-9000 quality certificates, due to fear of competition posed by MNCs.
(ix) Improvement in Standard of Living:
By providing super quality products and services, MNCs help to improve the standard of living of people of host countries.
(x) Promotion of international brotherhood and culture:
MNCs integrate economies of various nations with the world economy. Through their international dealings, MNCs promote international brotherhood and culture; and pave way for world peace and prosperity.
LIMITATIONS OF MNCS FROM THE VIEWPOINT OF HOST COUNTRY:
(i) Danger for Domestic Industries:
MNCs, due to their vast economic power, pose a danger to domestic industries; which are still within the process of development. Domestic industries cannot face challenges posed by MNCs. Many domestic industries need to wind up, as a result of threat from MNCs. Thus, MNCs give a setback to the economic growth of host countries.
(ii) Repatriation of Profits:
(Repatriation of profits means sending profits to their country).
MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign exchange reserves of the host country; which means that a large amount of foreign exchange goes out of the host country.
(iii) No Benefit to Poor People:
MNCs produce only those things, which are used by the rich. Therefore, poor people of host countries don't get, generally, any benefit, out of MNCs.
(iv) Danger to Independence:
Initially MNCs help the government of the host country, in a number of ways; then gradually start interfering within the political affairs of the host country. There is, then, an implicit danger to the independence of the host country, within the long-run.
(v) Disregard of the National Interests of the Host Country:
MNCs invest in most profitable sectors; and disregard the national goals and priorities of the host country. They do not look after the development of backward regions; and never care to solve chronic problems of the host country like unemployment and poverty.
(vi) Misuse of Mighty Status:
MNCs are powerful economic entities. They can afford to bear losses for a long while, within the hope of earning huge profits-once they need ended local competition and achieved monopoly. This might be the dirties strategy of MNCs to wipe off local competitors from the host country.
(vii) Careless Exploitation of Natural Resources:
MNCs tend to use the natural resources of the host country carelessly. They cause rapid depletion of some of the non-renewable natural resources of the host country. In this way, MNCs cause a permanent damage to the economic development of the host country.
(viii) Selfish Promotion of Alien Culture:
MNCs tend to promote alien culture in host country to sell their products. They make people forget about their own cultural heritage. In India, e.g., MNCs have created a taste for synthetic food, soft drinks etc. This promotion of foreign culture by MNCs is injurious to the health of people also.
(ix) Exploitation of people, during a Systematic Manner:
MNCs join hands with business houses of host country and emerge as powerful monopolies. This results in concentration of economic power only during a few hands. Gradually these monopolies make it their birth right to exploit poor people and enrich themselves at the cost of the poor working class.
ADVANTAGES FROM THE POINT OF VIEW OF THE HOME COUNTRY:
Some of the advantages of the MNCs from the point of view of the home country are:
(i) MNCs usually get raw-materials and labour supplies from host countries at lower prices; especially when host countries are backward or developing economies.
(ii) MNCs can widen their market for goods by selling in host countries; and increase their profits. They usually have good earnings by way of dividends earned from operations in host countries.
(iii) Through operating in many countries and providing quality services, MNCs increase their international goodwill on which they will capitalize, within the long-run.
LIMITATIONS FROM THE POINT OF VIEW OF THE HOME COUNTRY:
Some of the limitations of MNCs from the point of view of home country may be:
(i) There could also be loss of employment within the home country, because of spreading manufacturing and marketing operations in other countries.
(ii) MNCs face severe problems of managing cultural diversity. This might distract managements’ attention from main business issues, causing loss to the home country.
(iii) MNCs may face severe competition from bigger MNCs in international markets. Their attention and finances could be more devoted to wasteful counter and competitive advertising; resulting in higher marketing costs and lesser profits for the house country.
References:
1. Dr.D.M.Mithani – International Economics (Himalaya Publishing house ltd)
2. Bo Sodersten, Geoffirey Reed, International Economics (3rd Edition) Publisher Red Globe Press
3. Z.M.Jhingan : International Economics (Vrinda Publication)
4. Robert Feenstra, Alan M Taylor, International Trade (5th Edition) Publisher Worth
5. Dr.Mrs.NirmalBhalerao&S.S.M.Desai – International Economics (Himalaya Publishing house ltd)