MNCs & TNCs: Emergence, Stakes & Strategy

Multinational corporations (MNCs) are large companies that conduct their business operations in several states. Although transnational corporations (TNCs) are commonly thought to be synonymous with MNCs, they are in fact different in several regards. The primary defining factor is that they keep their financial headquarters offshore to protect them from taxes. Thereby, they lack financial accountability to the states in which they conduct their primary operations. Ideally, MNCs would truly be global in nature; operating across borders with no single national emphasis. However, this is rarely the case. Generally, these corporations are dominated by a parent company, typically in the developed world, through which they conduct the bulk of their research and to which they often repatriate profits. Thus putting in simple words a multinational corporation (MNC) or multinational enterprise (MNE) or transnational corporation (TNC) or multinational organization (MNO) is a corporation/enterprise that manages production establishments or delivers services in more than one country.

This is however not a new phenomenon. The trade activities among various people and nations have been taking place since ages. A cycle of production, exchange of goods and trading across the borders of anything in need is as old as human being himself. The contemporary multinational corporation has its roots in the East and West Indies traders of the mercantilist era of the 16th-18th centuries. These were rarely multinational, and often instruments of colonialism. With the age of discovery and the development of accurate long distance navigation at sea these traders however led the expansion of trade.

The process has evolved and developed with modem ways and means adding to its significance as well as speed, scope and quantum.

Later the industrial revolution and resultant large scale production created the need and the opportunity to capture markets for an expanding output. Developments in means of communications and transportation and the increased emphasis on free trade as an element of political and economic freedom, also played an important role in giving greater role to the MNCs. By the end of the 20th century, and with many former government monopolies in telecommunication, power generation and transport expanding into international markets, the multinational corporations dominated world trade in goods and services. The emergence of media giants with increasing power and influence over human minds and their collaboration with other MNCs, driven by mutual interest of the two has in fact multiplied the phenomenon manifold in the recent past. AOL Time Warner, Disney, General Electric, News Corporation, Viacon, Vivendi, Sony Bertelsman are among the top multinationals ruling directly or indirectly the minds of the people of the world. They publish newspapers, magazines, and books; own TV and cable networks; produce movies and films, enjoy control over IT and online services, satellite networks and sports; own themes parks and even involved in retailing. From politics to economy, to culture and to literature they have an impact.

Keeping in view the historical background and the motivating factors behind the emergence and development of MNCs it need not be emphasized that the maximization of profit is the driving force for MNCs as they enjoy the economics of large scale production. They can negotiate on their own terms the required raw materials from all over the world, can use the latest available technologies and can invest large amounts of capitals to establish the infrastructure. Once they have ensured the production they in turn require larger markets to sell which is also not difficult with the amount of resources they own. But with geographical boundaries limiting their movement and access and the tariff and non tariff barriers restricting the movement of goods they need a global system allowing them and their products free movement.

It is important to note that how MNCs are using their economic power to push for trade rules that help them increase their business and not to help the poor countries. With huge resources they can employ lobbyists with highest expertise and influence. There are approximately 15000 lobbyists based in Brussels or roughly one for every staff member of the European Commission, the executive body which negotiates on the EUs behalf in the WTO. Seventy percent of these lobbyists represent business interests and the lobbying expenditure in Brussels alone is estimated to be between 750 million to one billion Euros. Same is the case with Washington DC where 17000 lobbyists are estimated to be working. The Pharmaceutical industry alone spent $ one billion in this regard in the US in 2004.

The powerful countries of the north influenced by such lobbying and with strong presence in the WTO headquarters in Geneva can manage to achieve whatever is in favor of MNCs or stop in not favor of them irrespective of the economic, social or cultural consequences for the poor of the world. The moves to ease restrictions on international trade (at WTO and other forums) should also be seen in this context.

At a different level the MNCs have to negotiate with the host countries to get entry into their lands. But here again they have no major problem. Being weak in economic infrastructure, deficient of capital and looking for investment resources the host countries’ governments do not have many options but to allow MNCs to operate rather freely. The production of unlicensed items and over production of licensed items, besides violation of import and export regulations of the countries of operation by MNCs are a phenomenon proven decades ago. There are issues like favorable legislation, infrastructure facilitation, tax incentives, labor exploitation, environment hazards and even corruption that are simply ignored by the host governments in order to avoid any threat from the MNCs leaving the country. The drive for privatization all over the world should also be seen in this context; the questions that who is pushing for privatization and liberalization and who is buying the privatized enterprises then become easy to understand.

Local producers of any product all over the world do enjoy certain advantages over the foreign competitors in many projects. MNCs have no problem in dealing with them by either buying them or simply pushing them out of markets by sustaining a calculated loss for some time. They further compete with these local producers using their capital through better presentation and aggressive marketing. This is directed to capture the markets with increase in demand and consumption at as much price as possible. In the interim period they can even provide their products free of cost in order to develop a habit of their products among the public. This ensures the MNCs objectives of getting maximum profits from the host country. While all effort is made to reduce the cost of production, the benefit is seldom passed to the consumer by lowering the selling price.

In order to induce buyers to buy their products the MNCs have a variety of strategies and tools. These include social and market research, opinion building, developing interest groups, lobbying, sponsorship and so on. The objective is finally achieved by a transformation in the ways of thinking and ultimately changing the habits leading to changes in the overall life style in the society. They portray the products they are marketing as a necessity of the people, while the products in use are presented as unnecessary and/or of a lesser standard and unattractive.

The above mentioned ways to capture a market do require a lot of capital. This is available in abundance with the MNCs. The marketing campaigns are conducted through the help of media. With ever increasing power of media the required changes in the society are targeted and achieved in a number of ways. That is why we see a global culture is being promoted with same habits and life styles all over the world. All this can not be imagined without fast and effective means of communication for quick exchange and delivery of information, capital and expertise. Only large scale corporations can afford these resources at that higher level.

While local producers of a certain product may be helpless against the MNCs, the large corporations do have competitions among themselves. Most of the time this competition is however managed either through mergers, or by settling for a share in the markets. It nonetheless gives the impetus to the innovation and creativity and leads to initiatives in developing new technologies, new ways of production and in some cases less costs to the ultimate buyers. The competition has also led to the emergence of specialized MNCs for different fields. Therefore we find MNCs in all areas of human life including media, IT, transportation, banking and finance, automobile, telecommunications, household goods, tourism, transport and hotels, pharmaceuticals, food, clothing, cosmetics, construction, oil and gas, natural and mineral resources, publication, distribution and even education and health.

Producing several brands of a single consumer item by the same company is another important element of the MNC’s strategy. While this satisfies the human psyche of having choices to make a decision, the market remains in control of the MNCs. The success of these corporations depends upon a close mutual interaction and collaboration and further shrinking of the world in terms of distances and restrictions.

If we ponder over this scenario, the process of globalization starts from and ends at MNCs. Large corporations represent the ongoing economic globalization, protect it and promote it. If we imagine a scenario where there are no MNCs or large corporations, it would mean the current process of globalization will loose the foremost and the ultimate stakeholder and it will also loose the speed and scope it is now demonstrating.

Khalid Rahman

Source: Essays on Muslims and the Challenges of Globalisation, Institute of Policy Studies, Islamabad. Republished with permission.